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Inseego Corp. (NASDAQ:INSG) Q4 2023 Earnings Call Transcript

Inseego Corp. (NASDAQ:INSG) Q4 2023 Earnings Call Transcript February 21, 2024

Inseego Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to Inseego Corporation's Fourth Quarter 2023 Financial Results Conference Call. Please note that today's event is being recorded. And all participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity for analysts to ask questions. [Operator Instructions] On the call today are Phil Brace, Executive Chairman of Inseego's Board of Directors; and Steven Gatoff, the company's Chief Financial Officer. During this call, certain 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 Investor section of the company's website.

An audio replay of this call will also be archived there. Please also be advised that today's discussion will contain forward-looking statements. These forward-looking statements are not historical facts, but are rather 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 the company's form 10-K, 10-Q, and other SEC filings, which are available on the company's website. Please also refer to the cautionary note regarding forward-looking statements section contained in today's press release. And with that, I would now like to turn the call over to Phil Brace, Executive Chairman of Inseego. Please go ahead sir.

Philip Brace: Thank you. Good afternoon, everyone. It's a pleasure to be with you today. My prepared remarks will cover three topics. First, I'd like to start by sharing a brief perspective on why I joined the Board of Directors of Inseego some six months ago. Second, I'd like to share some thoughts on the leadership change that was announced today and my focus going forward. And third, I'll provide some high-level view of the current quarter. I'll then turn the call over to Steven and we'll wrap up with some Q&A. Let me first address why I joined the board. First off, I'm very optimistic on the wireless industry. 5G technology is still in the relatively early stages of deployment, and I see that technology is having potential to change the way people and machines work.

Second, from my time at Sierra Wireless, I was familiar with Inseego and its great products. I was bullish on the opportunity for Inseego to offer leading 5G mobile and fixed wireless access solutions, the strong market relationships that existed, and the investments in FWA to drive future growth. All of these things remain true today. By now you have seen the news of the change in leadership we just announced. The board felt that the time was right to make a change to ensure we had the right leadership going forward. With that, I took on the newly created Executive Chairman role to help lead the company through this critical time, while we search for a new CEO. We have already engaged a top tier recruiting firm and I will be actively involved in the search process.

I'll also be spending time reviewing and addressing some of the changes that need to be made in our business, our capital structure, and our portfolio of investments. It is important to note that I'm not doing this alone. We have a very strong and engaged Board of Directors and we're glad to have added some key leadership in finance and sales to the company recently to complement the strong skills of the Inseego engineering product team that's on the front line of developing all of our products and technology. Finally, let me offer some high-level summary of the quarter we just completed. Both the revenue and adjusted EBITDA came in slightly better than we expected. Revenue for Q4 2023 was $42.8 million. Full year 2023 revenue was $195.7 million.

Adjusted EBITDA for Q4 2023 was $4.1 million, full year 2023 adjusted EBITDA was $16.7 million. From a reporting perspective, you will notice a change in our financial reporting to clearly break out revenues in our business of mobile and fixed wireless access solutions. Steven will review these changes momentarily. Going forward throughout 2024, we are going to be focused on keeping the momentum on the revenue side, while increasing our full year adjusted EBITDA. Before taking questions, I'll now turn the call over to Steven who will review the financials in detail.

Steven Gatoff: Thanks, Phil. Good afternoon, everyone. I look forward to covering three things today. First, I'll share some color on changes that we've made as Phil mentioned in our reporting of the business in order to drive greater transparency and better align with what we believe is important for creating stockholder value. Second, I'll take you through our Q4 and 2023 financial results. And third, I'll provide some color on the business as we move into 2024 and our financial guidance for Q1. As Phil noted, we'll of course wrap up by opening the call to your questions. Diving right into things, as you saw in our earnings press release today and as you'll see in our 2023 10-K that we're filing tonight, we've changed the reporting categories for the company's revenue streams.

Where we use the [bucket] (ph) revenue into two categories of IoT & Mobile and Enterprise SaaS. We're providing more visibility to our offerings and are now reporting revenue categories that align with what we're fundamentally delivering to customers, our growth drivers, and the investments that we're making. We're now showing revenue in the two categories of product revenue and services and other revenue. We're further breaking out product revenue into the two core product offerings of mobile hotspot revenue and fixed wireless access or FWA revenue, the center point for our growth strategy. In this regard, we believe that you'll be able to clearly see the results of our initiatives and success in focusing on driving FWA revenue growth, the overall profitability profile of our product business, and the contribution from our SaaS offerings.

In making the change, it was important to us to make sure that you had the needed history and comparative numbers, so we've provided the historical quarterly results for the previous eight quarters under the new reporting constructs so that you have the apple’s to apple's info on gauging performance. As you'll see in the data, the hotspot product has sequentially declined in revenue as we've expected and communicated, primarily as a result of the anticipated runoff of 4G technology products in the market. Our FWA business has shown overall growth in terms of both aggregate dollars and growth rate over the past two years. And has grown from essentially nothing three years ago to be a $55 million business in 2023 that grew approximately 26% year-over-year.

And looking at the metrics in the supplemental tables, you'll also see there are product gross margin percentage, which is the total product gross margin number that includes both FWA and mobile, has continued to increase over the past two years as our higher margin FWA products gained traction and became a larger portion of total product revenue. In looking at our services and other revenue, this new category combines our non-core telematics and DMS subscriber management SaaS offerings. These revenue streams operate fairly independently, and you'll see a pretty consistent aggregate revenue result and a consistent contribution to gross margin, both on a dollar and a percentage basis. The final change we wanted to flag for you is that, we reclassified all depreciation and amortization expense that has historically been recorded in the OpEx line items of R&D, sales and marketing, and G&A expenses into one separate line labeled depreciation and amortization.

A close-up of the latest 5G wireless equipment, capturing the lightning-fast speed of the technology.
A close-up of the latest 5G wireless equipment, capturing the lightning-fast speed of the technology.

We believe this provides helpful transparency to the fundamental operating expense amounts, our cash spend, and the trends in the business. All prior periods have been reclassified to conform to this presentation. With that, I'd like to turn to the second topic and go through our Q4 2023 results. Overall, for the quarter, Q4 total revenue came in modestly above guidance, as Phil noted, at $42.8 million, and adjusted EBITDA came in at $4.1 million as cost savings initiatives, a favorable product mix, and some one-time benefits resulted in a higher adjusted EBITDA than anticipated. Looking at the revenue dynamics, as we talked about on the previous call in November, Q4 was expected to be a down quarter with nearly all of the revenue decline coming in hotspot product revenue.

This was due to the anticipated runoff of legacy 4G-based product revenue from the announced end of life of a 4G hotspot product line at a large carrier customer. On the FWA side, as I noted a moment ago, FWA revenue grew on a sequential basis and now constitutes 29% of total revenue. Looking at our services and other revenue, the telematics business reported modestly lower revenue in Q4 on a booked adjustment that related to the elimination of prior period intercompany revenue. Q4 DMS revenue came in about 2% sequentially lower, reflecting the runoff of prior year COVID-driven fled subscriber increases at our carrier customer. And so as far as gross margin, Q4 gross margin percentage came in at 39.7% on a non-GAAP basis or about 650 basis points higher than the prior quarter.

This favorable performance was the result of three primary factors. First, there was a favorable product mix shift where our higher margin FWA offerings made up a greater proportion of revenue in Q4. Second, there was a benefit from some one-time adjustments in the telematics business that I just mentioned. And third, FWA margins returned to the mid-20s in Q4. Spending a moment on GAAP gross margin, we recorded a reserve of $3.4 million in Q4 as a result of our continued rigor and scrubbing of sales forecasts and demand estimates on some of the older finished goods and raw materials in inventory and at our contract manufacturers. These charges are excluded from the calculation of adjusted EBITDA. As I mentioned on my first earnings call at Inseego in November, as we manage the revenue dynamics of the business and the evolution of our product portfolio, we're taking a very disciplined approach to managing our spend across the organization.

The outcome of this focus was that Q4 adjusted EBITDA came in at $4.1 million, higher than anticipated, and at a margin of nearly 10%. Even considering that some of the positive performance was due to one-time items, the outcome was still that we generated $17 million in positive adjusted EBITDA for 2023. That was versus a loss of $10 million of adjusted EBITDA in 2022. Let me turn to the GAAP accounts for a moment as there were a few additional charges in the quarter that are excluded in the definition and calculation of adjust EBITDA that we wanted to give you visibility to. In Q4, we recorded a charge of approximately $1.5 million for the correction of a functional currency designation in the telematics business. The charge was recorded in other income with an offset to other comprehensive income on the balance sheet.

It was non-cash and it did not impact any of our key metrics such as revenue, gross margin, adjusted EBITDA or cash. In Q4, we also booked a reserve associated with our telematics business of approximately $4.1 million against the capitalized software development costs from the past several years in building what was originally designed to be a next-gen platform for the telematics offering. We came to the conclusion that it made sense to reserve against this historical spend after conducting an intensive review of our telematics business in the past several months. This included evaluating the product and service needs of our customers and an assessment of the likelihood that the development would be included in future product releases. Wrapping up our Q4 results with the balance sheet, cash was fairly consistent year-over-year, coming in at $7.5 million.

And we had a modest amount drawn on our credit facility of $4.1 million at year end. I'll talk more about capital structure in a moment. Let's turn to the third topic in so far as our trajectory into 2024 that we're focused on and what we think Q1 looks like. As Phil highlighted, we've begun a strategic assessment in evaluation of our product portfolio and focus going forward, how that translates to growth in our core FWA business, and how that drives continued increases in profitability. Another important focus for us now as we head into 2024 is right-sizing our capital structure. As I mentioned on the last call and we spoke about, we have a small group of bondholders of our convertible notes. We're engaged with the right parties and we anticipate that it can take several months to work this through and develop an optimal capital structure solution.

In the near term, we've been improving our short-term borrowing dynamics. As you may have seen in today's filings, we amended our ABL facility to ease the covenants and improve our liquidity and borrowing capacity, all done by our lender at no cost to the company and based upon the improving execution and relationship that we've had with them over the past few months. Similar to our bondholder discussions, we're engaged with them in the various ways that they might be helpful in our overall capital structure solution. Moving on to provide some color on Q1 2024, we expect total product revenue to be roughly flat with Q4 2023 with anticipated growth in FWA offset by a decline in mobile hotspot. For services and other revenue, we expect reasonably consistent revenue contribution for Q1 over Q4.

On Q1 gross margin, you saw that there were some one-time items that resulted in the relatively higher non-GAAP gross margin percentage in Q4 2023. For Q1 2024, we expect non-GAAP total gross margin percentage to be in the mid-30% area. And so, considering all this, we'd like to provide the following financial guidance for the first quarter of 2024. Total revenue in a range of $40 million to $42 million and adjusted EBITDA in a range of $2.5 million to $3 million. In closing, we're thrilled that Phil has taken on the Executive Chairman role, and we're already benefiting from his involvement, deep product knowledge, and focus on addressing our go-to-market execution and performance quickly and effectively as we move into 2024. With that, we appreciate your time and support, and we're glad to open the call for any questions.

Operator?

Operator: We will now begin the question-and-answer session. [Operator Instructions] At this time, we will take our first question, which will come from Lance Vitanza with Cowen. Please go ahead.

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