Hello, and welcome to Inseego Corp.’s Third Quarter 2017 Financial Results Conference Call. Please note that today’s event is being recorded. 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 Dan Mondor, President and Chief Executive Officer; Steve Smith, Chief Financial Officer; Chris Lytle, Chief Strategy Officer and Executive Vice President of Enterprise SaaS Solutions; and Ashish Sharma, Chief Marketing Officer and Executive Vice President of IoT and Mobile Solutions. 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. 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 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 Form 10-K, 10-Q and other 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 Dan Mondor, President and Chief Executive Officer of Inseego. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining today’s call. I’ll start my remarks with the progress report on the transformation of Inseego. The goal is clear. We are increasing shareholder value by repositioning Inseego to become an innovative leader in IoT, mobile and enterprise SaaS solutions and driving efficiencies to deliver profitable growth. In the third quarter, the new management team continued to implement corrective actions to address issues inherited from prior management. In June, we provided financial targets for expense reduction, adjusted EBITDA and free cash flow. I am pleased to report that we implemented expense reductions over the $15 million target we set. This has begun to strengthen our financials as seen by the reduction of over $21 million in annualized OpEx since the first quarter of 2017. The long-term benefit to our financials are obviously significant. Additionally, we’ve identified more expense reduction, with the largest expense reduction opportunity in G&A. To reduce G&A we have launched a company-wide business process improvement project led by Steve Smith, which he will discuss in his prepared remarks. We have also focused on reducing cost of goods sold, with improving MiFi gross margins as the top priority. MiFi has great technology and is highly differentiated in the market. But to state the obvious, MiFi gross margins are completely unacceptable and reflect the lack of attention to margins previously. The 2018 target is a minimum adjusted EBITDA of 10% for the MiFi product portfolio. We are underway implementing a detailed action plan to reach these objectives. But before I provide comments on the gross margin improvement plans, it’s important to note that we faced shortfalls due to supply issues we encountered with our contract manufacturer. This was a significant issue when I joined as CEO in late Q2 and…

Thanks, Dan. Before I get into the results, I want to elaborate on a couple of the things Dan said in his remarks. First, the new management team. Dan joined the company in late second quarter. Chris, Ashish and I joined during the third quarter. Our restructuring actions and charges and recent inventory reserves that you’ll see in these financial statements are a result of decisions made by prior management. Second, business process improvements. Dan points out that the G&A spend relative to revenue is higher than the norm. Inseego is a combination of multiple companies brought together to form a multi-disciplined entity. There was no integration of Inseego’s acquisitions. The goal of the BPI project Dan alluded to is to complete the integration of business systems into an effective platform, eliminating the waste and inefficiencies associated with multiple and disparate systems and processes. I won’t try to hide the fact that we have a lot of hard work ahead of us. This work will take multiple quarters. Now on with the results of the quarter. As noted last quarter, Q2 was a transitional quarter for Inseego; Q3 was as well. Consistent with the remarks made during the second quarter conference call, in the third quarter, we began to see real reductions in operating expenses from our restructuring efforts. By the first quarter of 2018, we should see the full benefits of previously announced cost initiatives – cost-savings initiatives, I should say. As noted in our release this afternoon, Q3 revenues of $57.5 million were down sequentially from the second quarter by 4% or from $59.9 million. On a year-over-year basis, total revenues were down by 6% from $60.9 million. Hardware revenues of $42.8 million in Q3 were down $2.2 million from $45 million last quarter. Year-over-year, hardware revenues were…

Just before we turn it over to Q&A, just a correction, our adjusted EBITDA for the third quarter of 2017 was $1.5 million. I think there was just a slight misspeak on that.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mike Walkley of Canaccord. Please go ahead.

Thank you. Just looking at your MiFi hardware business, can you walk us through how you see it recovering after Q4? And to hit your targets, your intermediate-term targets, what kind of revenue and gross margin do you need to achieve in MiFi to hit maybe that $30 million run rate and some of the other targets you talked about? Thank you.

Yes. Well, it’s Dan here. Let me start – and by the way, I should mention that we have Ashish Sharma here and Chris Lytle, who can assist in some of the questions. So the model that we have does not rely on revenue growth, it’s a flat year-over-year model. And so there is really – there isn’t really an absorption factor, if you will, in terms of cost to achieve higher margins. So a couple of things. Firstly, we are moving contract manufacturers and have negotiated quite heavily several there through a selection process. And quite frankly, we just have better commercial terms actually both in transfer price as well as our payment terms. So there is a fairly significant contribution in terms of basis points from that alone. Secondly, there’s been a lot of work now on the product side to look at the cost of components, the overall cost of the product as far as the housings, et cetera. So going forward, there is a new approach to essentially have a lower design floor, a cost floor, if you will, on the products. So those in combination give us the confidence that we can run the MiFi portfolio going forward at a 10% EBITDA margin. I don’t know, Ashish, if you have anything to add.

Thanks, Dan. The only thing I would add is that’s the strategy based on the current MiFi product, on the hotspot product that we do have strategies to take that technology and move that into a more comprehensive mobile and IoT portfolio that then would allow us to grow our margins significantly in the future.

Okay. And then just maybe your visibility in growing channels. Do you think Q1 starts to grow off the implied guidance for Q4? Or just how do you think it kind of trends in terms of your pipeline that you’re working on to expand channels?

Well, it’s Dan here again, I’ll start. We are – to create a comprehensive channel strategy and principally centered around our IoT and mobile solutions. If that was your reference in terms of both stocking distributors as well as value-added resellers, we have a handful today. There’s a big opportunity as far as just expanding that channel to market. Naturally, there’s a push-pull effect, and the other is broadening of our customer base which, of course, creates the pull effect. So we’re working on both directly with the end customer, and I’m speaking on IoT and mobile solutions here, to create the pull as well as a push to a new – a channel partner strategy.

Okay, great. And then just on the SaaS, your sequential revenue is a little lower than expected. I know there’s a lot of changes going on. Can you kind of just walk us through the SaaS revenue, kind of what’s going on there and how you see the Ctrack business returning to growth from that area?

Sure. Great question. Chris, do you want to cover that?

Yes. Thanks, Dan. Chris Lytle here. The sequential and year-over-year growth was heavily affected by the decline in hardware sales at Ctrack which was basically driven by a shift in our customer demand in terms of wanting a rental option on the hardware versus the cash upfront sale. We anticipate that those year-over-year comparisons will diminish in the fourth quarter, and then we expect reported Ctrack revenue to be growing again in the first quarter of ‘18. I think it’s important to note recurring revenue growth at Ctrack was up in the quarter year-over-year and sequentially. And then back to the guidance for ‘18, we do expect reported growth in the first quarter and that should accelerate throughout the year as increased investment in the European vertical and also momentum in the aviation solution accelerates growth throughout the rest of ‘18.

Great. Thank you very much.

[Operator Instructions] Our next question comes from Mike Latimore of Northland Capital Markets.

Great. Thanks. Yes, on the – just on the supply issue surrounding the hardware business, MiFi business. Should that supply issue be sort of out of the mix in the first quarter? And then, if so, would that suggest that hardware should grow sequentially in the first quarter?

Yes. So Mike, Dan here. Yes, long story short, yes. We made reference to it hurt us in Q3, and it has a lingering effect into Q4, predominantly the first half of Q4, but there is a carryforward effect. We are turning up a second contract manufacturer that we’re – that I referenced, and production is already coming online. So essentially, that then fills the gap. We are caught up in terms of – if you look at week-to-week supply-demand, it’s the lingering effect that is the impact. But long story short, we’re going to be fully transitioned and fully caught up by the end of the quarter on the MiFi. And as a matter of fact, it is extending to all of Inseego products. So we have a much more robust, I would say, supply chain going forward, Mike. So yes, Q1 will be, if you will, business as usual.

Got it. And then did you say the gross margin on hardware would be into the mid-20% range in the fourth quarter? Or did I not hear it correctly?

What we talked about was the – this is Ashish Sharma, was the adjusted EBITDA for MiFi to be above 10 percentage in 2018.

What about just the gross margin on hardware? Did you guide on that in the fourth quarter? Or did I not hear that correctly?

We guided on total company and Ctrack only.

We did not guide on hardware per se. Obviously, we don’t guide, but you can see what we’re doing on the supply side as well as the design side. And the 10% EBITDA margin on MiFi is the plan going forward. And so as we look at some of those products, there’s an ability to underwrite some of the R&D cost with NRE. There certainly is going to be pure gross margin improvement. But in general, we felt the better figure of merit is talking about EBITDA margin.

Got it. And then the airport win, very interesting. You said that could be your largest SaaS deal, I believe. What is your largest SaaS deal apparently?

At full deployment, it will be the largest SaaS Ctrack deal in history. We haven’t made reference to the sizing of prior deals. All I can say is that it’s a significantly lower number.

This is Chris. Just to give a little context on the airport opportunity. We believe the North American market represents 250,000 asset type market where we immediately have the opportunity to get material market share both in North America and worldwide. So the first win in the U.S. is obviously important, then it adds momentum where we have seven deployments internationally in airports and really think of ourselves as a leader of IoT platforms for connected assets at airports. So it’s very exciting, a lot of work to do going forward but definitely represents a very large market opportunity for Ctrack.

Great. Thanks.

[Operator Instructions] There appear to be no further questions at this time, and the question-and-answer session has concluded. I would like to turn the conference back over to Dan Mondor for any closing remarks.

Yes. Thanks again, everyone, for joining today’s call and for your ongoing support of Inseego. The strategy and the purpose behind what I refer to as Inseego 2.0 is to relaunch the company and focus on increasing shareholder return by growing the value of our largest and most important assets. We are certainly creating a more efficient and effective company, and we’re beginning to record important wins which translate to long-term traffic profitable growth. I look forward to providing you progress reports on future earnings calls and meeting you in person. Lastly, I would want to thank every employee of Inseego for your tireless efforts and commitment to achieve success. So with that, we’ll conclude today’s call.

Thanks, Andrea. I think we’re – let’s conclude the call at this point.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.