Hello, and welcome to Inseego Corp’s Second Quarter 2018 Financial Results Conference Call. Please note that today’s event is being recorded. All will be in a listen-only mode. [Operator Instructions]. On the call today are Dan Mondor, Chairman 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 & 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 our 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, Chairman and Chief Executive Officer of Inseego. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining today’s call. It’s good to be speaking with you again, this time as Inseego’s Chairman and CEO. I’ll start with the headlines. First, second quarter results were at the top end of our guidance range, with sequential revenue and adjusted EBITDA growth, and annualized adjusted EBITDA exceeded $15 million. Second, we raised approximately $20 million in new capital to accelerate 5G and IoT market launch. I’ll provide you a progress report on new investments in a few minutes. And third, we saved the company roughly $17 million by settling a lawsuit brought before I joined as CEO. Frankly, it seems that the market hasn’t yet appreciated the significance of this third accomplishment. We continue to make great progress in the transformation of the business to Inseego 2.0, as we refer to it, and the execution of our three-year strategic plan is on track as reflected by our results and market momentum. Since I joined as CEO at the end of the second quarter last year, we increased adjusted EBITDA by $7 million from a loss of $3.2 million in the first quarter of 2017 to a positive $3.8 million this quarter. Demand for our new 5G and IoT cloud products is accelerating. Yesterday’s financing announcement underscores our objective to be first-to- market and is an affirmation of our strategy. The investment proceeds are an offensive weapon for us to take advantage of multiple new opportunities we are seeing. We continue to see tremendous market momentum in both IoT and Mobile Solutions and Enterprise SaaS Solutions. Customers are voting for Inseego with their wallets. The outlook for Q3 is very positive. We have launched new industrial IoT products and made great progress with 5G products. Starting with 5G. The total addressable market for…

Thanks, Dan, and good afternoon, everyone. I'll start by further elaborating on the financing transactions with the Tavistock Group and North Sound Trading, L.P. This financing moves us towards a couple of key initiatives. Number one, it provides us with the working capital required to accelerate new product development of 5G, cloud and industrial IoT and invest primarily in the areas of new product development and sales. Number two, we move closer to our long-term goal of deleveraging the balance sheet. Bottom line, Tavistock and North Sound are here to invest for the long haul. On top of the financing, we settled the legal matter with the former shareholders of R.E.R. Enterprises. As Dan pointed out in his remarks, the settlement removes approximately $17 million in aggregate liabilities from the balance sheet. More importantly, it reduces the cash liability from about $15.8 million to as low as $1 million. Detailed accounting will be completed in the third quarter. These two initiatives taken together add almost $35 million in additional liquidity. With our Q2 annualized adjusted EBITDA run rate of over $15 million, this deleverages the balance sheet by approximately 23%. Now on to the results of the second quarter. As noted in our press release this afternoon, we continue to see positive forward progress, improvements on both adjusted EBITDA and our strategic initiatives. Q2 revenues of $49.1 million were up $2.3 million or 5% from Q1 and down 18% from the same quarter last year. This was at the top end of guidance we provided during the May conference call. GAAP gross margin was 36% for the second quarter, an increase of 2.7% from last quarter and 7.2% points higher than the same period a year ago, due to a combination of cost reductions and a relentless focus on operational…

Thanks, Steve. I’m pleased with the progress we’ve made over the last several quarters. We built product and customer momentum. We are confident in our innovation and growing customer pipeline and our ability to create value for our shareholders. As we discussed previously, our strategy is to invest in products and go-to-market resources to drive revenue growth as we continue to transform our business. I’ll reiterate, we are very disciplined in evaluating all investments. So opportunities that are real, worth it and winnable get funded, moonshots don’t. We have dramatically increased face time with customers and by that, I mean both current customers and numerous prospective new customers. We are listening to them and they are telling us how they want to use our current device to cloud solutions and how they plan to introduce 5G. The insight we’re gaining on 5G is priceless. We captured several opportunities with new customers who stopped buying from Chinese suppliers and chose Inseego as their trusted U.S. business partner, and there are additional opportunities in process. I promised we’d go out to capture these and the Inseego team worked around the clock and won. And I’ll tell you my philosophy, it’s simple. The harder you work, the luckier you get. I want to thank Phil Falcone for his leadership as our Chairman. He provided invaluable insight and guidance, especially during the early stages of the turnaround. Phil will continue to be one of our biggest fans and a long-term investor. Mark Licht has stepped down from the board and will serve as a strategic advisor to me on Telematics. I’m delighted to welcome Jim Avery and Brian Miller to the Board of Directors. They both bring incredible expertise and decades of experience and will play a major role in helping me shape the…

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Mike Walkley of Canaccord Genuity.

Great. Thanks for taking my questions and congratulations on the strong results and guidance. Just as we look out to your opportunities with the recent funding, how should we think about the cadence now of OpEx? Are you going to be ramping OpEx to drive those opportunities in the short term or can you help us with some OpEx targets over the next couple of quarters?

The guidance that we provide is on the top line and our adjusted EBITDA. We don’t provide specific guidance on OpEx but obviously, within that envelope, it speaks our – to our contribution and our spending levels. But, yes, I mean, the new opportunities are there. We are going to invest to pursue them, as we said. We remain very judicious on how we spend every penny, quite frankly. And I think that, that result is showing up quite well. As opportunities come along, importantly in 5G and cloud IoT, we’re going to field them and address them as we have with some of the opportunities that came about quite suddenly from the ban on the Chinese vendors, so the suppliers that we took – we seized the opportunity with. So it’s a measured approach, Mike, and I think we’ll just leave it at that.

Okay, that’s fair. And just talking about some of the strategic wins for 4G, that certainly puts you in a good position with those carriers as they upgrade to 5G. You have when you [ph] win those deals, is there a cost in winning those deals in terms of maybe lower gross margin to get that footprint with that customer as you then transition maybe longer term with them? Or is it just accretive to your overall business model on the gross margin just by getting a fresh chance to reprice those deals?

Well, yes. I mean, it’s a great question and it’s spot on. So, I mean, these are opportunities, as I said, and what you typically find with using our 4G products that are fundamentally current products, there are certification costs associated with different carrier bands as the case may be. There’s that type of cost relative to certification. It’s not really, shall we say, development cost per se. But I tell you what, what is really happening is it’s an opportunity, these are new customers and amongst some others, it has really opened the conversation to a broader base of business. And quite frankly, through that opening, we’re now having conversations about 5G that we would not have had before. So there’s goodness in seizing those opportunities with 4G and there is a lot of goodness in now being involved in the bid and selection and evaluation process and strategies associated with 5G.

Great. Thanks. And then just building on that, I know you won’t talk about specific customer plans, but as you look at kind of your 5G roadmap on there, there’s some big carrier spending starting the second half of this year on the network rollout. When do you think you’ll see your first meaningful 5G revenue for Inseego?

Well, I think it’s fairly well understood that there are plans for commercial launches later this year. So I think there will be some of that later this year, modest, because of the deployments will be limited in scope, we believe. We see a transition in the first half of 2019 to the beginning of, shall we say, broader scale deployment and a ramp in the first half of 2019 and exiting and onward from there. I am being very careful and I mentioned in my remarks, the customers we were working with are – have very closely held plans beyond what they’ve announced publicly. And so when we talk to product introductions and launches and timelines, we’re directly announcing the news quite frankly on the behalf of the customer, which we’re not going to do. So we’re being very guarded about talking exactly shipped, supplied, those sorts of words, because we’re being cautious with that. And when those are announced, it will be very, very exciting but we need to let it be the customer’s news, not ours, and we’ll be part of it naturally at that point.

Great. Last housekeeping question for me and I’ll pass it on. Steve, just with the company getting closer and closer to flipping to positive non-GAAP EPS, can you help us just with the updated fully diluted share count when your earnings does turn positive? Thank you and congratulations on the strong result.

Thanks a lot, Mike. So our – what we provided the number of shares, just our fully – our weighted average outstanding shares, they’re $61.5 million that will obviously change the new financing. And you can grab those numbers off of the 8-K, what to add to the figures.

Thanks that’s all the questions I had.

Our next question will come from Mike Latimore of Northland Capital Markets.

Great. Thanks. Excellent quarter. I guess on the – can you just elaborate a little bit? You said that the patterns around your legacy MiFi business have improved a little bit. Can you just explain that why that be might be occurring, elaborate a little bit?

Yes. So what we’ve seen fairly recently is that from the shift to focus to 5G, there has been now flushing out or really a more details, I guess you’d say, in the planning of the transition from 4G LTE to 5G and how it’ll be positioned and how some of our newer technology and the higher capacity broadband area of 4G, such as gigabit LTE 4G have come into focus. So customers have flushed out their transition plans and have identified use cases that they want to enable, frankly starting with 4G, and we're starting to see that sort of transformation going. So a broader understanding, I think, and the flushing out of transition plans and use cases that they're looking to provide applications for today pre 5G.

Great. And then I think you had indicated maybe we could see Enterprise SaaS subscriber level improve in the September quarter. I guess, is that tied to Aviation or what would your confidence level might be there?

Mike, I actually broke up a little bit. I wonder if you could [indiscernible] question again, please.

I think you had indicated that your confidence level and improvement in subscriber growth rate in the September quarter, your confidence is up. I guess, is that tied to Aviation deployment or what causes that confidence?

Well, yes, so the con enabler was regarding Enterprise SaaS in general, which covers, if you will, the Ctrack the three verticals, SMB, fleet and aviation, and then the DMS SaaS subscription business. So there's a couple of factors going on there. First is the growth in Ctrack verticals and subscriber growth and the second area that I made a comment on was related to DMS and these two long-term contracts now, Sprint for five years, T-Mobile 3. And they've opened up past the kind of the government account area to business enterprises, of which, of course, they have many. And so we will be deploying the capability in adding subscribers in the Enterprise side of both of their businesses, and that creates a nice uplift in our subscription base. So both of those factors playing together, Ctrack and DMS are the drivers.

Okay, great. And then, I guess, given the work you've done to improve the supply chain and some of these new products that are coming out, I mean, what – where should we think about sort of the hardware gross margins trending over the next year?

Upward. Well clearly, we've got more work to be done. You've seen some modest improvement in IoT gross margins. I think we've got up to around 23, a little shy of 23 this last quarter, not even close. I mean, it's not where it needs to be. The benchmarks quite frankly, in that industry, and I probably don't need to tell you this, are much, much higher, like two times that number. So we got a long way to go, as Steve said. We've got a lot of work to do. From built-in design the day one margins, which is really how you get fundamental gross margin capabilities, you got to design it in from day one, but also, we're taking cost out. So a combination of launching higher margin products, IoT, Industrial IoT and certainly, 5G and then taking cost out of the building materials and supply chain, manufacturing costs in general is the journey we're on. So we have a much, much more aggressive target than you might be thinking. And in my books, good hardware appliance margins are in the 45% to 50%. Now we're a long way off, but we clearly have our sights to really strengthening and improving there.

Yes. Okay, great. And I guess just last on the recent investment here. Is that specifically for 4G or 5G and IoT hardware or is some of that kind of – can some of that be directed to the SaaS business?

No, it's actually both. And what we've said is 5G and IoT cloud, I'll try to capture as a single statement, but we are investing in software platforms, cloud solutions for our Enterprise SaaS business, evolving current platforms with new cloud platforms that we are looking to leverage, to source, to find a means by which we can do that and there is technology out there. So yes, short answer, it's both hardware and it certainly is in cloud software capability.

Okay, great.

You’re welcome. Thanks.

The next question comes from Jaeson Schmidt of Lake Street Capital Markets.

Hey guys, thanks for taking my questions. Most of my questions have been answered, but just two quick ones for me. Wondering if you could comment on if you're seeing anything out of the ordinary from a competitive and pricing standpoint in the Ctrack business. And then wondering if you would be willing to disclose how much the MiFi business currently comprises of the IoT and Mobile segment.

Okay. So first question is competitive pressure kind of in the Ctrack area. Well, I guess the broad answer is nothing profoundly so. It's a very competitive market, the bases are – it's very dependent on which vertical. There are different competitors in different verticals, SMB from fleet from aviation. We're well established in SMB and fleet and oftentimes, it's the existing customer renewal and it's new logo. So there is a big basis of run rate revenue as a function of those being well established and our renewal rates, which is reflective of price take out, is high 90s, so there's stickiness through there. Aviation is a slightly different story because we feel we're in quite a unique position there in our value proposition. And how long our pricing levels will stay there will be dependent on competitive responses, but that's a very bullish outlook that we have for aviation and where we are. And what we're doing now is as I commented on is it's a land grab. We are in a land grab of customers, acquisition and pipeline, and time will tell. But, yes, in general, there's nothing extraordinary coming out of left field. And I think if you're commenting relative to the gross margins, those are other factors involved with those. Transition of hardware, FX effects, there's other factors, from hardware to rental model upfront. So there's different factors associated, but not pricing pressure.

Okay, that’s helpful.

The next question comes from Marc Wiesenberger of B. Riley.

Thank you very much. A couple earning calls ago, the idea of monetizing non-core assets was discussed. With the recent financing transactions, is that still on the table? And if so, what assets are non-core and potentially ripe for monetization?

Yes. So thanks for the question. Yes, we did say that and that is still on our plate to look at. I won't comment on specific areas that we might look to monetize. But as I said before and will repeat, we know which assets are core and fundamental to the business and which assets aren't. And so we may choose to monetize those at some future date, but I can't really make any more specific comments on that.

Understood. Are there other non-fleet verticals that you might be interested in pursuing such as rail?

Well, it's interesting, yes. So great question. And within fleet, it's interesting because we lump a couple of things in there. For instance, there's mining and construction, heavy equipment, which is not necessarily what you might think of as freighters running around the countryside and that sort of thing. So there are subverticals kind of within what we refer to as fleet. We've not pursued rail in any big way so far. Your point is not lost on me, that's been some of the things we've been thinking about. Nothing really definitive to say there but I just would – I would want you to recognize there's more subtly unused nuances within the fleet category. There are other forms of asset tracking in there.

Okay. And one more for me and then I'll hop back in the queue. Could you provide a timeline for when the company might be able to achieve the 25% target EBITDA margins?

We are only at this point providing the following guidance. So you got the last – the next quarter, we are still saying we're going to be coming out of 2019 with an EBITDA run rate of $40 million, exiting this year at $20 million to $25 EBITDA – annualized EBITDA run rate. Did that answer your question?

Yes, thanks.

And this concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.