Hello, and welcome to Inseego Corp’s Third Quarter 2018 Financial Results Conference Call. Please note that today’s event is being recorded. All participants will be in a listen-only mode. [Operator Instructions] On the call today are Dan Mondor, Chairman and Chief Executive Officer; Steve Smith, EVP and CFO; John Weldon, Senior 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 us today’s call. It’s great to be speaking with you again. I’ll start with the headlines. First, Q3 was a strong quarter with results in line with guidance. We reported sequential revenue growth and record adjusted EBITDA. We faced two headwinds in the quarter: foreign exchange rates and supply constraints reduced Q3 revenue by approximately $6 million in total. The supply constraints stemmed from a recent jump in demand, and I'll talk about what we're doing to increase production capacity in my later remarks. Despite the revenue headwinds, adjusted EBITDA reached $4.7 million, which is the best quarterly operating results in the earlier decade. We're on track to deliver our target of $20 million to $25 million run rate adjusted EBITDA exiting 2018, and it's another major step towards our objective of further balance sheet deleverage in 2019. Second, we announced our new R1000 wireless home gateway product supporting Verizon 5G Home, the world's first 5G broadband Internet service. The R1000 is our entry into the wireless consumer gateway market, which is a new product category, and a $30 million home addressable market in the U.S. I'll also comment later on 5G NR mobile market traction. And third, our company-wide momentum in capturing new accounts and pipeline expansion across domestic and international markets is simply amazing. Our new product launches are progressing to plan. Overall, I'm very pleased with our continued progress and the transformation of the business. Inseego 2.0 momentum is accelerating. Since I joined as CEO at the end of the second quarter last year, we've increased adjusted EBITDA by $8 million going from a loss of $3.2 million in the first quarter of 2017 to positive $4.7 million this quarter. Quarterly EBITDA has grown sequentially by 32%, on average,…

Thanks, Dan, and good afternoon, everyone. I'll cover GAAP to non-GAAP results, and provide some additional details on the performance of IoT & Mobile and Enterprise SaaS Solutions. I'll start by further elaborating on the accounting for the settlement with the former RER shareholders and the resulting gap profitability for the quarter. In Q3, we took a gain to GAAP operating expenses of $17.2 million associated with this settlement. The other key highlights for the quarter are the closing of the $19.7 million financing announced in August, and the record Q3 adjusted EBITDA $4.7 million that Dan highlighted in his comments. Now let's get into the meat of third quarter. As noted in our press release this afternoon, we continue to see forward -- positive forward progress, improvements on both adjusted EBITDA and our strategic initiatives. Q3 revenues of $50.6 million were up $1.6 million or 3.2% from Q2 and down 12% from the same quarter last year. Revenues included approximately $2.1 million of engineering design services, specifically in IoT and Mobile Solutions, that I'll touch on later. GAAP gross margin was 34.8% for the third quarter, a decrease of 1.2 points from last quarter due to lower revenue contributions from enterprise SaaS solutions, and 6.3 points higher than the same period last year due to cost reductions and continued focus is on operational efficiencies. Our Q3 GAAP OpEx, prior to the effects of the legal settlement, was $18.2 million, including approximately $250,000 of restructuring, $900,000 of amortization of purchased intangibles and $1.6 million of share-based compensation. The third quarter gained up $17.2 million in OpEx associated with legal settlement resulted in OpEx of approximately $1 million. The GAAP operating loss prior to the effect of the settlement was $600,000 as compared to $800,000 loss in Q2 and $6.4 million…

Thanks, Steve. I'm pleased with the solid progress we've made with numerous new product launches and continued customer momentum. We are increasing our investments to capture the new 5G and IoT opportunities, and are very confident in our strategy to create value for our shareholders. We have increased the size of the sales force and face time with customers. The strategy to expand IoT in the mobile business outside of North America is gaining traction, and the corresponding strategy to expand Ctrack business in North America is progressing very well. These 2 initiatives alone have dramatically boosted our addressable market. We added to our success capturing new customers who stop buying from Chinese suppliers and chose Inseego as their trusted U.S. business partner. As a result, we have established business relationships with all top-tier wireless service providers in the U.S. If you look back when I joined in mid-2017, we had a single Tier 1, namely Verizon. I promise we'd go all out and, frankly, the results exceeded our expectations. Reaching an annualized adjusted EBITDA run rate of nearly $19 million is a milestone for Inseego. Our performance improvement, and doing what we said we'd do, is the direct result of every Inseego employee's dedication, commitment, combined with relentless execution and phenomenal teamwork. I want to take a moment to thank our employees for their tireless efforts, and be assured we are building the very best team and adding muscle with every new hire. Before I close, there's one more thing I want to mention. We recorded wins with our new 5G and our mobile hotspot by Tier 1 service providers in North America and international markets. We expect to plant more 5G flags with our fixed and mobile products very soon, so stay tuned. There is no doubt that Inseego 2.0 is gaining momentum. And with that, that concludes my prepared remarks, and I'll turn it over to the operator to start the Q&A.

[Operator Instructions] And today's first questioner will be Mike Walkley with Canaccord Genuity.

Dan, just building on a lot of comments on the call, can you update us just on your new gigabit LTE mobile hotspot product, how that's doing? How that's leading to share gains with carriers that should lead to 5G? And are you seeing any update off from the Chinese getting back to the market? Or ship's already sailed where the carriers with Inseego going forward?

Thanks, Mike. Let me comment on the last part first. I think I said this before but we don't see any evidence of the toothpaste going back in the tube regarding Chinese suppliers. In fact, I think, there's some recent news coming out of the U.K. and previously, Australia. Yes, so the gigabit hotspot, I mean, that's really a first of a kind, a category 18 product. That was launched, as you saw in the press release, with Verizon. And I made mention, actually in the last call, it was part of the roll up on this call, there was another Tier 1 service provider in the U.S. that will be deploying that product coming up, a slightly different version of it but essentially, again, 1 gigabit 4G LTE hotspot. And importantly, that platform is common amongst some of our technology in other areas. So we are taking that technology on the road and pursuing several markets internationally as well. So it's just gotten underway. We are very excited about it and we think it's a market leader.

And building off that, you have talked in the past about a more cost optimized product road map. Obviously, some near-term headwinds with having to change contract or deciding to change contract manufacturers and some component shortages. Can you just walk us through how we should think maybe about gross margin progression as you start to get more of these costs itemized products out to the market?

Yes. So we talked about common technology. Now that's a boost for development costs because quite frankly, unlike previously, we're creating global platforms and using those across all of our technology domains and 4G LTE both hotspots, IoT, gateway products and industrial gateway, so that's a development cost of strategy. On the gross margin side, once we get a blend of the newer products coming out and talked about industrial gateways, the 5G and our hotspot, the home gateways, those have much higher gross margin profiles. So as we see ourselves currently in the IoT & Mobile Solutions business, let's call it roughly 25%-ish gross margins, we see that progressing over time to 35% and beyond. It's going to take a mix of products as we blend out the older generation and blend in the new, but we see hitting that. And our goal, frankly, was the gross margin profile was to get in the mid-40s.

Great. And for the Q4 guidance, Steve, you indicated that it assumes ongoing component shortages. Should we assume maybe the same type of magnitude of revenues that you'll be pushing maybe into 2019 given the component shortages in the change going on with contract manufacturers? Can you help us quantify maybe what you've left out of guidance given some of the short-term component issues?

One of the things I said in my remarks is that we expect to be -- we expect to sell this -- have this shortage solved by the end of this calendar year, by the end of the quarter. So will it be about the same magnitude? It will probably a little bit less, at least that would be my expectation.

Okay. Last question for me, and I'll pass on the queue. Just an update on the overall Enterprise SaaS business. Can you walk us through just some of the airline opportunity pipeline? And overall, just overall pipeline and competitive issues for that business?

Yes, thank you, Mike. As I said, we've had 5 new aviation wins since the beginning of the year and there was 3 more recently this quarter, U.K., Germany and South Africa. So that is gaining momentum. The pipeline is growing. Significantly, it is a small base on a revenue basis but that's what we expect to capitalize on 2019. So that's progressing very, very nicely. I would add to that our partnership with KLM equipment services is paying dividends. The number of customer engagements as a function of that partnership is large, low double digits, quite frankly. So we're really gung ho and blasting away. And I think I made in my comments earlier, our focus is to stack up the wins. We don't -- we can't very well predict the timing because there's proof-of-concept, trial periods that sort of thing. So what we continue to focus on is stacking up the wins and the results will follow. And that's why I said with aviation, with new product design wins, new service providers, it's really tough to calculate the magnitude over the next 12, 18, 24 months. We just know it's going to be hell of a lot more. So we're heads down, stacking them up and we'll go from there.

And the next question is from Scott Searle of Roth Capital.

Dan, Steve, just quickly to follow up on the gross margin front. In terms of the supply constraints in this quarter, did that have a corresponding gross margin impact? I think you talked about sales but I'm not sure if you mentioned anything in terms of the gross margin front. And also as part of the CM transition, is there anything that is going to impact your onetime charges or otherwise related to the gross margins in that transition? And I had a couple of follow-ups.

Yes, I guess I'll comment on the last part first. So what we're doing is we're transitioning into a, we'll call it a global Tier 1 CM, and our expectation is cost improvements, and why is that? It's from their component supply strength, supply chain strength and able to procure, and also on their manufacturing efficiencies. So quite frankly, we expect the gross margin development once again from that CM move. And that will start to -- really start cranking out products towards the end of this -- starting the end of this quarter. So I think that will be good all around. I think if you look at some of the things we needed to do in Q4 as far as some of the long lead time components, we have to do some premium buys to support the capacity. So in fact, that hurt gross margins a little bit, but obviously, we have to serve our customers' needs. So I think in combination, we're going to see a gross margin profile improvement.

Got you. So as we get into the first quarter, no component constraints, top line should reflect that along with new products in the gross margin impact as well, both from the CM front and the component front.

Yes. Largely, that's what we expect to see, Scott. And it's fundamentally part of our plan. I will say this that the long lead time components and the nature of what we purchase from Qualcomm, as an example, is the nature of the beast. And so when you have long lead times and you get a jump in demand, you can get caught a little bit flat footed on supply, and that's really kind of part of what happened. But looking ahead and actually doing some things for our customers with vendor-managed inventory and just a better CM partner that has a much broader reach on their supply chain backwards and I think the supply chain will mitigate those problems going forward.

Got you. And if I could, following up on the MiFi front, it seems like in terms of IoT & Mobile Solutions, this is the best quarter you've had going back, I think, about 5 or 6 quarters. Certainly, done a good job in terms of turning around the MiFi product portfolio, and now adding to cat 18 products. Wondering if this is at the base and we should be thinking about as we are going in 2018, particularly as we ramp-up the cat 18 product and we are starting to diversify into some new Tier 1 carriers. I guess, as part of that, what kind of growth rate are you thinking about for that core business as we go into 2019? Or is it a little bit early?

Well, I think, yes, I mean, you take the supply constraints and where we hit. We were basically, I think taking that into account, we would have been around $40 million in supply, so anyway, you consider that the baseline going forward. Yes, I mean, we're stacking these up, who knows how high it will go. We're always faced with the valuation periods, and rollout periods and so forth and they same to never happen as quickly as we would like. But I'm really bullish on this business. There's a lot of stuff happening. The categories we're expanding, for instance, the CATM1 tracker is a brand-new category for us all altogether, the 5G stuff, 4G LTE gigabit. So I'm extremely bullish on that business right now and I think, yes, sky's the limit. We'll see. I think if there's a lot of things that are happening, one of the big drivers is 5G. And quite frankly, it is amazing what's happened in the last 90 days since our engagements and we talked about the wins in our mobile hotspot. Those happened rapidly and quick, a lot faster than we expected. So yes. Much, much bigger. How big? that's the question.

Dan, if I could, one follow-up on 5G and then I'll pass it on. But looking on 2019, you talked a little bit about it sounds like multiple engagements on the mobile hotspot front on 5G NR. When would you expect to shipments, is that kind of middle of next year? And then sounds like as well that you are pretty actively engaged on the 5G fixed front as well in terms of the Verizon relationship transitioning into some other opportunities. Could you provide a little bit more color on that front? And when we might be able to get some more details or quantification of what that opportunity is going to look like.

Yes, I appreciate. Thanks, Scott for, the question. I don't want to be evasive but, especially in 5G, and actually also in 4G gigabit hotspot, the domain of announcing when they're going to launch is the property of the service provider. And I'm very reticent to comment on that. I'm not trying to be evasive but it's their domain. Now having said that, I would expect to see revenue getting underway towards the end of Q2 and moving into Q3. That's my expectations, that's one thing. And the other thing is there's a lot more flags to be planted. And we'll have to see how that comes to fruition. Simon Rain has joined us, leading the charge. And one of the charters is standing up IoT & Mobile in international markets. Not been there before, lo and behold, what do we get? We have a 5G and our hotspot when and the tracker win in Telstra, so we're expecting big things.

[Operator Instructions] Our next question is from the line of Mike Latimore with Northland Capital Markets.

In terms of the gigabit router in Verizon, doest that generate any revenue in third quarter? Or is it more kind of fourth quarter and beyond?

We see that being a fourth quarter impact. I think the announcement occurred at Mobile World Congress, in LA, in September there. And there's a controlled introduction. Again, I don't want to speak on behalf of the service provider because that's a dangerous spot to be. But that product is being launched and being rolled out in those trial mark and those trial markets. That's about as much as I can say, but yes, we do expect to see a contribution coming in this quarter and moving into the first part of next year.

Got it. And then on the new Tier 1 win for that gigabit router, is there anything inherently different there that would suggest the opportunity there? Smaller, larger, the same, what you're seeing in Verizon in terms of maybe how to go-to-market or feature set?

Well, yes, so I think it is different, and here's the reason why. That is obviously a high-performance product. And unlike days in the past where it was kind of a jump ball on 4G hotspots, this is a real differentiator. So as we're looking at it, we're seeing it as sort of a consolidator of the enterprise domain. And frankly, absorbing more the market that might have actually been split multiple ways. So I think it's got a really strong leverage in the category, quite frankly,, because it's highly differentiated. So I think we'll see more uptake, and I actually think that we'll see our competitors kind of been less successful in the future.

Okay. And just in terms of the hardware serial throughout the quarter, is it pretty linear? How much do you need to do that see in the last month of the quarter?

Well, I think like years in the past where you kind of see the inventory management, those kind of things, in a sort of a seasonality effect, quite frankly, with what's going on now, I think we are blowing through that. So we don't, as you can see, from where we're guiding, and even in the light of continuous supply constraints, we don't see a seasonality kind of a pull down at all.

Okay. All right. And the new head of Enterprise SaaS, obviously, a great background there, but what would be his sort of number 1 or 2 priorities here kind of in the next 6 months?

Well, he's on the call with us. So John, why don't you answer that question?

I'm going out to all the locations and meeting the people and the customers. And number two, focus on partnering with on the product side on the innovation as we drive [indiscernible]

An initial thoughts on innovation?

It's early days so far.

Okay. And very last...

We've made reference to cloud technology and investment there, so a large part of John's agenda is directing our evolution in the cloud technology, and that's part of the product roadmap domain. So he's got his hands full.

And just last one, you previously given dividend, I think, EBITDA ex guidance I think for it's second quarter of '19, and exiting '19, is that still the same as it always has been?

We are not changing our operating model targets. So yes, we're sticking with our targets.

And this will conclude our question-and-answer session. I would now like to turn the conference back over to Dan Mondor for closing remarks.

Thank you, and thanks, everyone again for joining us today. I greatly appreciate your attention and the questions. Just a couple of events coming up. We'll be at the Roth Capital 4th Annual Technology Event in New York, which is actually next Wednesday, on the 14th. And we have a couple of other investor events this quarter hosted by Northland Capital and Canaccord Genuity. And I'm very happy to report that we'll be presenting for the first time at the upcoming Needham 21st Annual Growth Conference in New York, which is happening mid-January. Also, we'll be showcasing some exciting new 5G and IoT products, some of which you've heard about on this call, at the upcoming 2019 CES show in Vegas. So we look forward to seeing many of you at these events and continuing the conversation on Inseego's transformation. Thanks, again, everyone.

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