Good afternoon, and welcome to the Inseego Corp.'s 1st Quarter 2019 Financial Results Conference Call. Please note that today's event is being recorded. [Operator Instructions]. On the call today are Dan Mondor, Chairman and CEO; Steve Smith, EVP and Chief Financial Officer; Ashish Sharma Chief Marketing Officer and Executive Vice President of IoT & Mobile Solutions; and John Weldon, Senior Vice President of Enterprise SaaS 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 that contains -- that's contained in today's press release. I would now like to turn the call over to Mr. Dan Mondor, Chairman and CEO of Inseego. Please go ahead.

Thank you. Good afternoon, everyone. It's great to be speaking with you again and thanks for joining today's call. I'll start with the headlines for the quarter. We started 2019 with revenue at the high end of our guidance. We continue to make great progress with our 5G NR millimeter wave and sub-6 gigahertz fixed wireless and mobile solutions with our key customers. Our global customer pipeline of 5G opportunities has grown substantially since the last earnings call. Starting with our mobile business. We've conducted live field trials on real 5G NR networks with results showing mind-blowing speeds. For confidentiality purposes, I won't discuss the specifics, but there should be no doubt that the promise of 5G is very real. The number of customer engagements with our 5G portfolio continues to grow with our global pipeline now in excess of 30 mobile operators. We are out in front of the competition by bringing high-performance, standards-compliant and fully interoperable solutions to the market right out of the gate. The size and diversity of the 5G pipeline is providing us tremendous market insight, which is paying dividends as we move towards commercialization. In addition to 5G, we are seeing strong traction with our new 4G LTE Advanced product portfolio. We have won new 4G customers who will launch mobile services with our 8000 series hotspot this year starting in the second quarter, and we are working on additional LTE opportunities. The global 5G market momentum is accelerating. As of last month, there were 224 operators in 88 countries investing in 5G networks in the form of lab testing, field trials, and planned and actual deployments. And this is up from 134 operators in 62 countries at the end of 2018. From our extensive customer engagements, we are seeing many operators accelerating lab…

Thank you, Dan, and thank you, everyone for joining today's call. The results for Q1 '19 met guidance for both revenue and adjusted EBITDA. Revenue for Q1 was $48.6 million, which is up 3.9% on a year-over-year basis and down 13.4% on a sequential basis. IoT & Mobile Solutions revenue was $32.8 million, up 13.5% year-over-year and down 18.2% sequentially. This anticipated sequential decline is primarily due to a combination of the impact of a specific component shortage highlighted during the last call and lower engineering design services revenue as development projects were completed. These projects are expected to translate into revenue in 2019. Enterprise SaaS Solutions revenue was $15.8 million, down 11.6% year-over-year and 1% sequentially. Foreign exchange rates continue to impact our results. On a constant currency basis, Enterprise SaaS revenue was down approximately 2% compared to both Q1 and Q4 2018, reflective of real growth in the UK, Europe and Australia, offset by lower consumer revenues in South Africa. As we stated in earlier conference calls, we are implementing a turnaround in both South Africa and Australian businesses. Consistent with our strategy, we deemphasized the low ARPU consumer business which began in early 2018 in favor of higher-margin higher-ARPU fleet and SMB businesses. To that end, we had renewed growth in fleet and SMB in Q1 across all key markets. From this point on, my discussion will focus on non-GAAP numbers. Reconciliation from GAAP to non-GAAP is detailed in our earnings release. The non-GAAP gross margin in the first quarter of 2019 was 31.7%, which is down 4.2 points year-over-year and 4.8 points compared to Q4 '18. Compared to last quarter, margins were impacted by spot buys to overcome the specific component shortage, expedited shipping, lower than planned cost reductions and factory transition costs. In aggregate, this…

Thanks Steve. In my opening remarks, I said that our global 5G pipeline has grown substantially since our last earnings call, surpassing 30 mobile operators. The total number of subscribers served by these operators across the Americas, EMEA and APAC is massive, exceeding 2 billion mobile subscribers combined. Our contract manufacture move in the fourth quarter of 2018 from a Tier 2 manufacturer in mainland China to Foxconn in Taiwan was clearly the right decision at the right time for several reasons. Foxconn has steadily increased production volume in the first quarter and has given us much more flexibility to scale capacity going forward. Foxconn is currently building and shipping four product families, including our first 5G device, with more in our new product introduction pipeline. We're working hand-in-hand with Foxconn to strategically leverage their buying power and supply network going forward. Hats off to our operations and supply chain team who have done an amazing job to quickly address the inherent challenges that arise from switching contract manufacturers. Before I close, there are just a couple of more things. I'm delighted to report that we have chalked up more 5G success by signing an MOU with a leading mobile operator in Europe, and our 5G products are being tested by a new operator in South America, leveraging our strategic partnership with Ericsson. Additionally, our gigabit 4G LTE hotspot has been standardized with Sprint and will deploy in the second quarter and Bell Canada will deploy later this year. Once again, I want to thank every Inseego employee for their tireless efforts. Our progress in transforming Inseego 2.0 is the result of their capabilities and dedication. Anecdotally, I'll also tell you that very talented engineers who left the Company prior to the beginning of our transformation are now eagerly rejoining us. Inseego 2.0 continues to gain momentum. We're bringing innovative new products to market and aggressively doing the blocking and tackling necessary to win in those markets. So that concludes my prepared remarks. I'll turn it back over to the operator to start Q&A.

[Operator Instructions]. The first question comes from Mike Walkley from Canaccord Genuity.

Dan, it sounds like the pipeline is continuing to grow. Can you help us just think about your engagement with [indiscernible] now 30 operators, just kind of the cadence, the time to win these big customers and turn it into product revenue? And I guess what I'm trying to get at is, your comments about the stronger second half, how we should see some of these new operator customers layering into the revenue in Q3 and Q4?

I think the way to think about it is probably going back to my description of the timeline spectrum, if you will. And the work that we've been doing -- that we're doing across these 30 operators, I think fair to say, represents those three parts of the spectrum I described. There are definitely the market disruptors. There's a handful of those. Early adopters are there and following, and then there's going to be the fast followers. So I'm not going to break it out specifically, but there are many in each category, the first of which of course will start to produce revenue, we expect, in the second half of this year. So it's going to be a continuum. The rollouts that will start this year will continue in 2020. And as more operators get past their trials and planning periods and deployment, of course, it stacks up and yields an acceleration of revenue. So that's broadly what we're going to see. We're going to see it phased out -- phase out over time.

So is there any 1 or 2 major customers important to the second half? Or is it just broad-based strength with multiple customers with multiple different product lines?

Well, I would say there's a couple of anchor customers in there and there's a handful of others that will be contributors. I did say in prior earnings call, we were targeting 8 to 10 design wins this year. We are on our way to doing that. And the revenue will start to contribute as more and more of these operators begin their deployments.

A follow-up question just on the gross margin, near-term impact and then the progression. Thinking about -- for the year, you've talked about the need -- with the pipeline growing, to support sales and marketing and R&D, gross margins will be under pressure here in the short term. Is the $40 million adjusted EBITDA run rate exiting 2019 still possible? Or right now, you just see the need to invest and maybe pushing out those type of EBITDA numbers?

Mike, great question. We're not changing anything. We're obviously assessing as we go. I think you can appreciate that the rate of change in the market is extraordinary. And naturally, to capture those opportunities, we're going to do what we need to do investment-wise to capture them. So we'll be assessing that going down the road. But right now, it's really -- there's no -- it's indeterminate to make a change or to comment further on it.

Okay. Last question for me and I'll jump back in the queue. Just on the component shortages, are those mainly behind Inseego now going forward? Or are there going to be some more expedited cost maybe hampering gross margin in Q2 and you should see better margins into Q3 and Q4?

Mike, this is Steve. The component shortages are all behind us at this stage. Of course, you can never predict the unpredictable. But as of right now, we don't have any issues with component shortages.

I think also on that note, part of the values of Foxconn is basically their massive supply chain in behind their production with a wide array of inventories that they hold, raw material and all kinds of components. So it really does diversify. You can never predict, I think as Steve said, the unpredictable. But I think the mitigation of risk just inherently via our work with Foxconn now is much, much better than it has been in the past.

The next question comes from Jaeson Schmidt from Lake Street.

Sorry if I missed this, but first, can you provide the IoT and Enterprise SaaS non-GAAP gross margin for each segment?

Jaeson, we typically don't provide that on the call. We provided the revenue number. But I'll give you some -- at least some high-level numbers on IoT & Mobile. We're in the mid-to-high teens and then the Enterprise SaaS, mid-60s.

And then looking at the industrial IoT business, I know it's early, but would you mind sort of outlining what verticals you're most bullish on going forward?

Yes. Well, we've talked on the call about SD WAN, WAN connectivity, remote monitoring, that sort of thing. But we're starting to see our solutions being integrated as part of a broader vertical solution. So if you will, you can think of horizontal and vertical. Talked about our integration into Dell for an enterprise application. But if you look at manufacturing, if you look at oil and gas, if you look at smart city, if you look at field services, there's a pretty broad range of verticals that these products go into. So it's not really a question of a concentration of particular verticals. It's really quite a wide range. But I think if you could look at one area, it would be SD WAN connectivity is really where the bulk of the action is happening. We have a number of strategic partners in that vertical, Riverbed being one of them we mentioned, and that is a high-growth market. So there's a big pull from the standpoint of SD WAN.

And last one from me. Curious if you could comment how you're viewing the opportunity for Ctrack in the North American market these days?

Well, great question. It is definitely growing. I will say this, from the standpoint of initiatives and engagements we have for North American enterprises, also global enterprises with North American operations. And from that point of view, if -- our comments earlier on a European carrier, I will say this that there are US operations of that carrier. Also if you look at some of our major customers in the Benelux region, Germany, they have North American operations. So the synergies of Ctrack being deployable across multiple geographies are allowing those kinds of decisions to be easy decisions, and we extend those agreements to then include some of their operations in North America.

Our next question comes from Scott Searle from Roth Capital.

Just to follow up on some of the earlier questions for gross margins, could you give us an idea about directionally what we should expect going into the second quarter? Clearly in the first quarter, there was some headwinds. Is all of that gross margin pressure related to component shortages and freight makeups? Or is there something else going on from a pricing standpoint? And where would you expect gross margins or target gross margins on the hardware front to exit the year?

We expect the gross margins to continue to increase throughout each quarter going forward, Scott. I would expect a couple of points this quarter to be -- this quarter being Q2 -- to be what we get overall. The component shortages are behind us. We don't expect to pay any more premium as we move forward.

Got you. Okay. And to follow up on some other costs, Steve, capitalizing of some of the R&D, as you start to go live with some of these products, that will start to reverse a little bit. So what is kind of the normalized level of R&D as we get out to the back half of this year?

Well, just expect that we'll be amortizing it over like a two year time frame. Obviously, they'll -- we'll start to amortize the cost back to the P&L as the product sells. So it will start selling later in the year in the second half and then, we'll see the amortization come back in the GAAP P&L.

I guess, to add a comment, we have and we'll continue to do a very good job of managing our costs. We also need to be on the money in capturing these new opportunities that come along. And so, as we've commented and discussed, if you look at the normalization of the R&D with respect to the capitalization, it is growing. And that's a function of market opportunities, it's a function of new products being brought to market, and then similar on sales and marketing. So we're going to be diligent on costs, but we sure as heck are going to go after the opportunities in front of us.

Got you. And Dan, if I could, on the hotspot front, it sounds like now you're engaged with 30 mobile operators. It takes the addressable subscriber base to 2 billion from 1 billion, I think, last quarter, somewhere in that ballpark. And your target is still 8 to 10 carriers this year that you developed a relationship with. Can you give us an idea how many do you think you'll actually be commercially shipping to by the end of this year? And how does the mix -- what does it look like when you think about gigabit LTE versus 5G NR hotspots? And then how does fixed wireless access kind of feather into that as well? We've got Verizon waiting for NOR, but we're just concluding Auction 102 where the number is up to $2 billion right now so presumably these guys are going to spend. I'm curious what the level of activity is also on the fixed wireless front, not just domestically but internationally.

Yeah, sure. Well, my comment on the 30 opportunities encompass both our fixed wireless gateway solution as well as mobile hotspots, just for clarity on that, across those operators. So it's both those product categories. We talked about the 8 to 10 design wins. The question about contributing revenue is of course a timing-related question. But we see the contribution of revenue from several operators beginning in the second half. I'm not going to say specific numbers, but it will be several. The timing is dependent on the design win and the term from testing to field trial to deployment. But we feel very comfortable on what we've discussed. And I will say this that the 5G phenomenon doesn't come to an end in 2019. It's in fact just at the beginning in 2019. So our focus, as I said in the past, is stacking up design wins, working with the customers, working with them through trials, evaluation, supporting them and then being there with them as they roll out their technology. So second half of 2019 is where we see the action beginning, and sure as hell, the action is going to continue fiercely in 2020.

The next question comes from Mike Latimore from Northland Capital Markets.

On the 8 to 10, just to be specific, that is the deals with -- the goal for 5G-related wins, is that right? And second, how many do you have now?

Yeah. Thanks Mike. Yes, the commentary is on 5G.

And then, how many wins do you have now of those 8 -- like how many wins relative to 8 to 10 do you have now?

Well, we're about halfway there.

Okay. Got it. And obviously, the big opportunity around 5G is multi-year. But when do you think you might start seeing a couple million of revenue a quarter from 5G-related products?

The beginning of couple of million a quarter?

Yes.

Okay. That's easy, second half of this year.

And then, this -- you may wait until the 10-Q for this, but what was Verizon as a percent of revenue?

Roughly 45%.

Okay. And for the -- kind of the hotspot and fixed wireless product category, should we think about -- I guess a different question would be, for growth in the overall hotspot and fixed wireless category this year, should most of that come from like new opportunities or would be -- would Verizon be the -- kind of the biggest driver there?

Well, as I said, there's going to be several and it's going to be a mix, very dependent on how aggressive the stance is of the operator to be a market disruptor, get out of the gate early. Verizon has certainly been making announcements, and as is AT&T of course, and there's others in other parts of the world. So it's a microcosm, but we're really spending a lot of time studying the international markets and spending time in the international markets. And there are equal number, on a percentage basis if you will, Tier 1s that are going to take a market disruptor stance. So yes, we expect Verizon to be in the mix, but there will be a lot more in there too.

Yeah. And then just last on gross margin, any change to your long-term gross margin targets for the IoT & Mobile category?

No. No, we're not changing that.

[Operator Instructions]. Our next question comes from Matthew Galinko from National Securities.

You mentioned a few new distribution partners. Just curious how you think about the sales cycle and how long it takes to get them from kind of signing to ramping and contributing?

Yes. Hi, Matthew. Good question. The sales cycle in that part of the market is actually quite short. It really is a function of recruiting the channel partners, training them on the products, getting them all the collateral support they need, but the time to market and the time to engage and sell is really quite short. So we can recruit a new VAR and we can have revenue from them in the same quarter. So again, it's a very different model. And with the two tier models, of course, you have typically stocking distributors. We've talked about Arrow, SYNNEX and others, and then the value-add resellers. So we'll see revenue from the standpoint of stocking orders going to distributors and then you have the sales out that goes through the VARs to the market and replenishment. So it's a very different dynamic in that part of the market and certainly the carrier or service provider market, and the name of the game there, so it's short -- long sales cycles and short sales cycles in the enterprise.

And then, you talked about some improvements in kind of your South African operation. Can you be specific around -- I know you changed leadership there, but what -- any specific you could point to that would help us understand how sustainable those improvements are?

Well, yeah. It's a good question. Yeah, well, excellent new leadership. There's certainly I would say much more sales discipline. There is talent upgrades going on in the sales force. There are partner and programs that are being done. There's a lot more outreach being done, pursuing new logos. So really -- it is really an upgrade, if you will, from a leadership point of view and importantly in the sales area on many, many fronts. So the market was always there and in fact growing. We weren't doing a very good job of capturing it. So as I said, the -- on my comments, we had a 7% growth in the first quarter in South Africa in the SMB sub-segment, if you will. So that is a very good early indicator. And we're seeing a stronger order book, all these kinds of leading indicators that you look for. So that's the nature of my comment.

This concludes our question-and-answer session. I would like to turn the conference back over to Dan Mondor, Chairman and CEO, for any closing remarks.

Thank you. So before we wrap up the call, I wanted to mention a couple of things. First, we'll be at the Cowen 47th Annual Technology Media and Telecom Conference in New York on May 29. And also building upon the momentum from the Mobile World Congress in Barcelona and as we discussed the strong and growing pipeline of 5G opportunities, I want to also mention, I'll be on the road this month meeting with customers throughout the Asia Pacific region. And in June, I'll be hosting meetings with EMEA operators at the 5G World Conference in London. I look forward to seeing many of you at these events and continuing the dialogue on Inseego's transformation. Thanks again, everyone.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a good day.