Q3 2023 Inseego Corp Earnings Call
Hello, and welcome to M. C Go Corp, third quarter 2023 financial results Conference call. Please.
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On the call today are Ashish Sharma, CEO, Steven Gate Us Chief Financial Officer.
During this call non-GAAP financial measures will be discussed.
A reconciliation to the most directly comparable GAAP financial measures is included in the earnings release, which is available on the investors section of the company's website.
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Please also be advised that todays discussion will contain forward looking statements.
These forward looking statements are not historical facts, but rather are based on the company's current expectations and beliefs.
For a discussion on factors that could cause actual results to differ materially from expectations. Please refer to the risk factors described in our forms 10-K, 10-Q, and other S E SEC filings, which are available on our website.
Please also refer to the cautionary note regarding forward looking statements section contained in today's press release.
I would now like to turn the call over to Ashish Sharma CEO. Please go ahead.
Thank you operator, Hello, everyone and thanks for joining US today Q3 was a mixed quarter for US we continue to see the effects of our supply chain challenges. In addition to legacy product declines, which impacted our revenue in Q3 and will extend into Q4 as you will see in our results we are managing or Apis.
And as tightly we will continue to be laser focused on profitability and cash while continuing to invest in areas that will drive growth.
During the past several weeks, we made three meaningful additions to the CECO team they'll brace joined our board of directors and brings a terrific background as a seasoned CEO and wireless industry expert Steven gate off joined us as CFO and thinks that terrific profile and skill set of driving growth and managing operations and Steve Harmon.
And this week and our.
Newly created role of Chief revenue Officer, I'm excited about the incremental leadership around the table and what its helping US do as he finished out 2023 with that I'd like to cover three topics with you today on the call first I'll give a quick summary of our Q3 businesses those second I'd like to provide an update on the <unk>.
Less of our transformation to a full solution after the company and third I'd like to provide some insights into the current Q4 as he goes out Dear bust, let's talk about our Q3 results.
Q3 revenue of $48 6 million and adjusted EBITDA of $4 million.
The results were below our expectations, mainly due to supply chain challenges that impacted several large customers and the run off of legacy forged product revenues.
This quarter demand was better than expected for our new five G products and worse than expected, while our legacy products earlier in the year, we moved to a build to order model to be disciplined with our cash and the downside of this model is limited ability to respond to increases in demand that are shorter than our lead time.
Given the underestimated the demand for our new five gene products, we could not fulfill several million dollars of sales.
While we must a Spanish mobile demand a positive note is that we came back and deliver the product in the second half of the quarter to realize some of the missed revenue opportunity.
We were late to respond to the demand we shipped more at the end of the quarter, which will be consumed in Q4 suppressing over as those as customers digest that inventory.
In summary, the demand for both our five G hotspots as well as five G of tubular products was good this quarter, but due to supply chain challenges and a delayed our February launch with a large customer we couldn't hit our targets this quarter.
For my second discussion topic.
Like to update you on our progress towards migrating to become a full solution. After Blair company, both in terms of the market and our product portfolio.
Today in Siegel has a comprehensive portfolio of five G hotspots, but you have to do a and cloud solutions that enable several types of deployment use cases, including mobile indoor and outdoor scenarios as five G networks have evolved over the last couple of years with a lot more network capacity driven by new.
Mid band spectrum investments by the carriers there is a new after market evolving for enterprises to adopt five G. As a primary broadband solution for distributed locations and on the go use cases.
While we have seen good traction with early customers. The market is taking time to develop mainly due to carriers network coverage and capacity on their new spectrum.
The most pronounced aspect of this dynamic is the anticipated, but rapid decline in legacy Fujian hotspot revenue.
The address the challenge of growing our new five G F to blend products and deceptive revenue streams against the backdrop of this declining legacy technology revenue streams, we have been working through a focused two part plan for multiple quarters and we have made good progress first we wanted to make sure our cost.
Structure was sized appropriately and so we've worked diligently over the last 18 months to significantly reduce our spend we have removed over $50 million of annual run rate costs from the company.
Our goal is to continue operating with increasing levels of proficiency with a cost structure that will enable us to stay profitable as measured by adjusted EBITDA and generate free cash flow.
They're going to build on this progress by driving profitable growth with five do you have to do it.
And they happen to have Stephen joined the team as our new CFO to help drive our profitability and growth profile as we manage the transition the second component of our transition plan is to maximize initial customer opportunities for five G. F. W. E. So we can stay ahead in the market to accomplish this.
As we align ourselves with the leading carriers who are driving the initial five do you have to be a market. We are able to leverage our long standing carrier relationships to get to the end customers as the enterprise. After blue market is expanding we are looking to strengthen our go to market approach. So we can create scale.
And I'm very happy to have Steve Harmon joined our team as our new CFO, who drive a strategic change in our go to market and growth profile.
He comes from a great sales and marketing background. Most recently as our global head of sales have Sierra wireless and has helped companies ramp up sales in major markets I'm looking forward to partnering with him to significantly evolved our go to market efforts. So we can accelerate our business, especially in enterprise.
As a final thought on our evolution to a full stack five do you have to live wider I'd like to share. Some positive news at what we are seeing in terms of early customer engagements and some of the deliverables of the business.
Or five G F tablet customer base continues to build nicely within several enterprise and SMB market segments.
<unk> on boarded over 56000, new enterprise and SMB customers over the last four quarters on our primary five G. Van solutions. The majority of these customers are also using a cloud the manage the five G connections, which is part of our strategy and provides the high margin high growth revenue streams to our portfolio.
Some examples.
Most of the latest deployments include real estate companies nationwide retailers U S government agencies and insurance companies utilizing our indoor and outdoor after Louis solutions to connect their distributed sites and employees reduce cost and enhance productivity.
We believe the market will continue to build as more and more Mcmahon network coverage and capacity comes online.
However, until these early customer engagements down into large deployments the revenue being generated from these customers will be modest.
With that I'd like to move on to my third topic on the call today and provide some insights on Q4 and some of the challenges that we're facing.
We are seeing bullish signs on five G. After Blair customer engagement, but in the near term we're facing some headwinds in Q4 revenue driven by the following three factors.
First the Fuji hotspot revenue is declining meaningfully in Q4.
We knew this was going to happen for quite some time now and we've been working hard to backfill it with five G. Revenue. However, the five G revenue, while strong hasnt been able to fully cover the full dollar impact of the decline.
Second there was a delay in launching a new five G F new product with a large customer in Q3, resulting in later revenue ramp than we expected.
The delay is caused by new customer requirements that came in very late as you prepare for the launch.
The product was soft launched a couple of weeks ago. After we got through the Apple iPhone frozen launch window of latter part of September.
So while this impacts our sales in Q4, we feel confident we will be back on track in Q1 in terms of our five G revenue as the initial feedback from the customers on the new product is quite positive.
The third friction point on Q4 is that due to shipments in late Q3. Some large customers are starting Q4 with higher inventories that need to be sold before they will reorder.
So, but these challenges Q4 looks to be meaningfully below our expectations. This is obviously disappointing, but we continue to be responsive and have taken additional cost reduction actions. This past month, we ensure we keep the company profitable while the business comes back up by early next year Steve.
Steven will provide some more insights on this in a moment.
Despite these near term challenges I'm optimistic about the growth of our five G <unk> solutions business, which.
Which we believe is still in the infancy, we have signed up a lot of enterprise and SMB customers over last four quarters. Another five G. After blew it and cloud platforms, we have gone through a lot of learning with our carrier customers. They get five G. After blue prepare for primary band deployments in many enterprise segment as we had.
Forefront of creating this market.
I will now turn it over to Steven.
Thanks, Good afternoon, everyone I'd like to cover four things with you today I'd like to start by sharing a brief perspective on my positive view of the opportunity here in Chicago, and what I'm focused on to help ensure that we capitalize on it.
That covers three core aspects of the business first financial details and insights on our Q3 results.
You can share with you what we're doing right now to protect shareholder value and third provide guidance on Q4.
The operator noted we'll of course wrap up by opening the call to your questions.
First off I'm really glad to have joined Ashish.
And so you go after six weeks or so on the job I'm bullish on the opportunity that sits in front of us see clear path and the ability to help make an impact and monetizing it and so you go in a very strong technology prowess and unique product related capabilities, where I've already seen industry leader seek out our engineering input.
And advice.
This is one of the assets that uniquely positions and so you're going to penetrate a $50 billion Tam that's starting to unfold and that should translate into meaningful stockholder value as we move forward to execute on this I'm focusing my time and efforts on three areas across the company.
Our overall capital structure management, and addressing our near term stock price level and the reverse stock split working through our convert overhang and evaluating our portfolio of businesses.
Second and focus on our business strategy and driving our profitable growth profile and roadmap from our Q4 execution to our 2020 for an intermediate term plan.
And third I'm focused on our operational execution and driving a metrics and performance management construct for results.
I'm, particularly looking forward to working with Steve Harmon and having him as a strong partner to now drive the evolution of our sales execution.
Metrics and inspection cadence that we're fiercely focusing on together as we look to drive improvements in our SWA ramp and that I think will make a big difference going forward.
With that let's look at Q3 results.
Q3 total revenue came in at $48 $6 million with two thirds of the year over year decline from 'twenty to 'twenty, two being driven by the legacy for G run off.
While there were some positive dynamics on the top line with our <unk> products, increasing to 54% of total revenue in the quarter and five G. M. W. A growing 29% year over year Q3 was a challenging quarter for the bulk of our revenue portfolio.
The positive is that other than the record <unk> revenue in the prior Q2 quarter or F. W. E business generated the most revenue in Q3 since its inception nearly two years ago.
Fortunately it was just not enough to offset the supply chain and inventory issues and the impact of the decline in for Jamie.
Beyond the core mobile hotspot in F. W. A business, our telematics business delivered steady revenue growth and gross margin in Q3.
11% year over year, and non-GAAP gross margin of 46% on an organic basis, respectively.
Our mobile solutions software revenue was down modestly in Q3 as one of our carrier partners had a customer loss that reduced the number of subscriptions for us that's had a small revenue effect, but a larger impact on gross margin that I'll get to in a moment.
Our var channel business. Unfortunately continued at a tepid level in Q3 and has not scaled this year as Ashish discussed this intended growth driver will benefit meaningfully from a rebalancing our resources and from Steve Harmon's leadership, we believe our var business should be multiples of what it is now.
From a revenue perspective and in relatively short order.
Moving onto gross margin in prior earnings calls we've highlighted the gross margin percentage may move around from quarter to quarter, but that the low to mid 30% area on a non-GAAP basis should be the new higher baseline in 2023 versus 2022, the trajectory is expected to be higher.
<unk> longer term.
For Q3, while there was a decline sequentially from <unk> 30 in the first half of the year due to Q3 product mix.
Excuse me, 33% non-GAAP gross margin was a respectable improvement from the prior year's 26%.
At a macro level as a result of the reduced low margin <unk> revenue, we see non-GAAP gross margin percentage lifting and again in the current Q4 quarter.
Spending a moment on GAAP gross margin, we wanted to talk to the large inventory reserve that we booked in Q3.
In total we recorded a $14 9 million dollar reserve in Q3 as a result of updated estimates and sales forecast for some of the older products in our portfolio and related to the Q4 2023 end of life of our <unk> mobile hotspot product by our largest carrier customer.
The reserve was based on a combination of the carrying values of inventories and capitalized costs on finished goods raw materials on hand and materials at our contract manufacturer partners.
Dollar amounts of these elements are discussed in our 10-Q, that's been filed Tonight and these charges are excluded from the calculation of Q3 adjusted EBITDA.
As we continue to manage revenue dynamics of the business. We're also taking a disciplined approach to managing our spend with that perspective looking at our Q3 non-GAAP operating expenses total spend in Q3 was at the lowest aggregate dollar amount and more than two years.
The actions that the company took in the first part of 2023 drove lower aggregate and relative spend across all cost areas in Q3.
From Cogs to sales and marketing to R&D.
That helped us deliver another quarter of positive adjusted EBITDA coming in at $4 million.
With that I'd like to move on to my second topic today, and so far as what we're doing now to protect stockholder value.
As we were addressing our go to market at gross needs are continuing to take cost out of the business to make sure. We head into 2024 from a position of strength. So that we continue to deliver on profitability in the form of adjusted EBITDA and free cash flow.
In addition to the previous cost structure actions that the company made in 2022 and the first part of 2023.
The last 30 days, we've further reduced spend and have further aligned investments with near term customer focus and revenue generation.
You'll see this going forward across the board, but predominantly and improved efficiencies in R&D spend where we have a strong team at production capability and we were able to trim a combination of outside program and internal costs. In total we just removed about $2 million of quarterly spend.
While this will be only marginally helpful. In the current Q4, given the timing of the implementation it will very much sure up our profitability and cash generation profile going into 2024.
With that let's turn to our third topic and so far as the current path in Q4 that is presenting its financial challenges.
As we've talked about today, one of our largest carrier customers transitioned off buying <unk> mobile hotspots effective this quarter and so that product line is now essentially end of life.
Well, we know I've known about the legacy <unk> decline.
We have been planning around it our new five G. SWA product revenue has been growing nicely in the past few quarters, but it's just not large enough dollars yet to offset the legacy <unk> decline in aggregate.
This is seen squarely in the mobile hotspot portfolio, where our revenue in the not so distant past was in excess of $40 million per quarter.
It is now a fraction of that in Q4.
And so considering all of this Q4, it looks to be meaningfully below our internal expectations.
Such an boarding to drive transparency with our investors around what we're seeing we'd like to provide some guidance for the current fourth quarter.
Starting with the top line Q4, 2023 total revenue is anticipated to be in the range of $40 million to $42 million with this being the first quarter of no <unk> hotspot revenue.
And managing through inventory restocking issues.
For Q4 2023, adjusted EBITDA, we see our recent cost savings initiative, helping alleviate some of the revenue pressure so that we can maintain profitability.
Be it in the one $5 million to $2 million range for the quarter.
In closing we're focused on addressing our go to market execution performance quickly and effectively as we plan for 2024 oriented around driving the business and managing our spend responsibly and to deliver profitability and we continue to have confidence and monetizing the <unk> opportunity in front of us.
With that we appreciate your time and support and we're glad to open the call for any questions operator.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Lance Vitanza with Cowen. Please go ahead.
Thank you thanks, gentlemen, let.
Let me start with I guess I just wanted to try to understand a couple of things. Stephen then I think you said did I did you say that you expect zero four G hotspot revenue in the fourth quarter.
Oh very de Minimis amount for a de Minimis amount yeah yeah.
Okay. Okay. So so then the I guess the so the runoff that's been ongoing I get it is that and does that suggest then that that we've come to an end or is there was there sort of like a glitch and then maybe we get you know a couple more quarters in 2024 of additional four G hotspot contribution.
No like this or that.
Okay. Okay, Okay, well, okay. So then okay. So then we can just focus on the five G business. So I guess the question. There is you know and I don't know Stephen if you I know you've only been there six weeks, so I get it but do you have a sense yet for really kind of like what the the fixed costs are.
So she did with the five G kind of platform and then as you get beyond those fixed costs, what kind of variable cost contribution you know contribution margin from the incremental revenues do you expect I'm just trying to get a sense for the basic kind of economic proposition as we look ahead.
Yeah, It's a great question and it is one of the exact things that we've been spending time on and I have as I have been on boarding.
The good news is that the crux of what you're saying should pan out in other words, there's a there's a decent amount of variable costs and controllable costs that we have in that part of the business. So that for example, when we were facing revenue pressure now we can reduce spend a fairly.
Lately, so there's a labor costs that are variable, there's outside contractor and programmatic costs that we have such that we can control their near term profitability of that product a and b to your second point from a long term perspective, it should be more of a step function.
And cost structure, so that as you start to scale out and grow revenues more exponentially youll see a steeper curve in revenue than you will in cost structure. So you should get an expansion and profitability.
And then I guess for Ashish. Thank you Stephen and I guess for Ashish you know did the did.
The delays you know one of the things that we we routinely hear is that the the product technology is very high and very good but I guess you know did the product delays that you discussed you know the unfortunate as they are today sort of create a situation where your customers are kind of.
Forced to make other plans or are you or how does that sort of I guess just from a competitive standpoint, how stable would you see them what kind of relationships. How would you describe the level of the relationships you have with some of your key your key customers.
Yeah. Good question last so I would say that that Oh.
Our product is really preferred at the slots here and during this quarter I would say it was basically two different dynamics. One was the inability to supply the product you do supply chain challenges because of the massive add up very quickly in late June so we couldn't supply.
In the first half of the quarter and then we shipped a lot of product between from mid to late in the quarter and that's creating some headwinds for or the next quarter or just Q4. So that's one dynamic there as you know some perishable demand there because especially on hotspots Oh, you know what we couldn't ship the product.
There are other products that our customers have the second dynamic is is it delayed launch with one customer.
And that again is impacting Q4 and that got delayed because some new requirements came in at the 11th hour. They are working so diligently with our customer and in fact, we have soft launched it I mean, the initial feedback from the customers is very positive. So so yeah I would say it did to sum it up we have the preferred product in the slots here.
And but like you know the demand is perishable.
But I guess really what I'm trying to get at it it doesn't sound like you are losing market share as a result of this it sounds like some of the delays are actually driven by the customers and then the other ones. The customers are they are hanging with you, they're they're not saying like Oh, you're three weeks late so we're going to another supplier.
That's correct.
Okay and then just maybe my last question before I hand over the baton here, but just to touch on the balance sheet and I I don't know if the 10-Q is out yet, but I'm wondering I guess a couple of things number one you know will there be any sort of warning around you know possible liquidity.
Short falls over the coming 12 months, you know either in the liquidity section of the MD&A or do we have to worry about anything along those lines and then just sort of thinking about the debt obligations.
The a b L. You know it doesn't expire until next December but that does mean that you'll have to start recording the balances as current liabilities. You know early next year unless you extend that maturity and I'm wondering if you have a prognosis for that end and then you know and I know you mentioned this briefly Stephen but then the converts obviously.
Sure you know not until May of 'twenty twenty-five, which gives you at least some time. So is the plan with respect to the converts to kind of wait until spring when presumably you know the momentum and the operating momentum, there's a little bit better or you know how should we think about that thanks.
Yeah really good questions and we're glad you asked because it's a it's obviously meaningfully important and material to equity value. So thank you. The short answer on your last question is we are not waiting until spring to manage the situation are we on the convert we have a relatively small group of old.
There is on on the convert.
Some of them are on our board some have been and its a group with whom we are engaged.
And we're actively looking.
Looking to manage that through so we are not waiting where we're taking care of that now and it is an important aspect of our cap structure.
To your earlier points, which are really good around liquidity.
And in the short term facility are we I guess the nutshell is we we have ample capacity. So we do not feel a constraint on our ability to borrow it really it really is a true working capital facility or your very large carrier customers that sometimes they pay really awesome like they did this quarter.
Lots of cash sometimes they take longer and so that's where that working capital facility comes in place are really well.
Our review is that that facility is not really an issue for the company either short term or longer term are the bigger not to focus on is the convert which we are focused on and we are not waiting.
For that.
So let me so much yeah. It does and thanks very much and best of luck.
Oculus thanks Les.
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The next question comes from tore Svanberg from Stifel. Please go ahead.
Hi, Yes. Good afternoon. This is Jeremy calling for Torrey I guess, maybe the first question digging in a little bit more deeply into the delay on the fixed wireless access side.
You know the new requirements or the product are there is there any indication that it's a change in strategy on the behalf of the carrier you know whether the upside into the you know maybe that's.
Smaller and larger.
Potential say after you got it.
Or are there any I'm just trying to get a clearer picture for you.
Any any ship and possible for them.
This delay.
Yeah, John even though it's not the case I mean, it's a very specific requirement is as it relates to to do that.
That broke out this this particular customer so.
That's that's very pointed in that fashion it doesn't really change the broader market for us.
Great and I guess, maybe moving to the.
Financial I I know you know as you mentioned I guess gross margins of 33%, but it. So this is the inventory adjustment.
And then the $1 million write off of inventory water theme.
So if we take that out and get the 33% non-GAAP is there any reason why this isn't just won't show up in the non-GAAP net income.
Because it looks like.
Costs are excluded from they're not.
Added back I guess, when you show the non-GAAP net income.
Yeah, we made it a point of pulling it out of EBITDA for that purpose.
And it's as you said it'll come out of the Cogs line, specifically to mobile solutions.
To get to the 34.6.
But that's that's where that's how we recorded it.
Got it okay.
And is there you know theres is there going to be any impact going forward.
When these charges or is there a potential for any kind of.
That benefit on the on the back end of it.
I couldn't hear the first part is there any benefit on onboard is that what was the sorry, I I look back and I guess you know if you can take a charge now there's some chance that some of this could be the cover.
Yeah, Yeah, absolutely I mean, the the charge is a P&L charge, it's not a disposition of inventory is not a destruction of inventory. It's it's just based on how much inventory is in raw materials, we have today and what we sold in the last 12 months and what the sales forecast is now going forward and so you said.
Okay. It looks like we will.
We'll not be able to clear that amount. So you take a reserve and to your good point, if something happens and there's a bluebird or things break really well and positively then we'll see some upside, but we're obviously not planning on making things with with a bluebird or upside and that's essentially why there was a reserve.
Got it great and then maybe two more quick questions one would be on the north of 2 million Opex, that's coming out.
Can we see that fully realized in Q1 of next year and maybe you know it would it be fair to say, it's something like that.
At a fraction of that in Q4.
Yes, that's exactly right.
Part of it will be in Q4, just based on the fact that as you know early November and then the full benefit in Q1 spot on.
Got it.
Last question would be just.
Looking at the the you know your working capital went down quite a bit which is nice on the cash flow side I was surprised to see you know accounts receivable drop you know $8 million and you know how many reconcile that with you know late shipments in the quarter, where you're able to collect really quickly.
Are those shipments that that kind of what happened there.
That's exactly what happened we are as we said before on the other side of the table, we have large carrier customers that we sell to and through and this quarter. We had one or two that are paid very quickly on a lot of stuff and so our dsos are improved tremendous.
We have very large cash collections.
Awesome right, we'd much rather have cash earlier, it's a it's a nice dynamic to have but it's obviously not a its a bit of a anomaly to have that improvement in a short period of time and so you see a huge pop in cash.
Got it.
Sorry, one last question if I could squeeze it in do you have you don't need breakeven targets, whether or adjusted EBITDA or on a.
Free cash flow basis.
Well, our our our commitment and our focus is on maintaining profitability in the form of adjusted EBITDA. So that's an important metric for US are just you know it would be EBITDA just EBITDA positive.
We're also focused on the cash burn in and particularly as we exit this quarter and head into next year of generating free cash flow. So that's a that's a target for <unk> for us as we play it out and set ourselves up for Q1.
Very good thank you very much.
Yeah Ryan Good question. Thank you. Thank you Jeremy.
This concludes our question and answer session and concludes the conference call.
Thank you for attending today's presentation you may now disconnect.
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