Hello and welcome to Inseego Corp's Second Quarter 2019 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, 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 contained in today's press release. I would now like to turn the call over to 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. Here is the headlines for the quarter. The 5G opportunities are accelerating at a much faster pace than anticipated at the beginning of the year. To put this into perspective, at the end of 2018, our global 5G pipeline was in single digits, growing to over 25 at the end of Q1 and now we have greater than 40 service providers. As a result, we are increasing investments in product development and sales and marketing to take advantage of the growing number of new opportunities. Well, this will have a short-term impact on our EBITDA margin. We believe the ROI warrants the incremental investment and will deliver significant revenue growth. We continue to gain momentum company-wide with revenue at the top end of guidance and we made great progress with 5G in the quarter. We've talked extensively about investing in new 5G products and in July we launched the world's first commercially available 5G MiFi mobile broadband hotspot with Verizon. Our innovations together were with our ecosystem of 5G partners are transforming our customer's business as they aggressively rollout 5G networks and introduce new 5G services. Second quarter revenue was driven by our mobile business as our 4G LTE Advanced gigabit hotspot is doing exceptionally well in the market. The global 5G market is moving at a fast and furious pace and we're building upon our early lead. If you thought the technology transitioned from 3G to 4G was fast, a decade ago, then buckle up for the ride of a lifetime, 5G technology and the ecosystem value creation is unlike anything the mobile world has ever seen. Add to that, the massive spectrum in play for 5G and you have…

Thank you, Dan and thank you everyone for joining today's call. Revenue for Q2 with $55.9 million meeting the top end of guidance, which is up 13.9% on a year-over-year basis and up 15.1% sequentially. IoT & Mobile Solutions revenue was $40 million, up 26% year-over-year and up 22% from last quarter. This increase in revenue includes an 80% sequential increase in our main 4G LTE-Advanced Pro products. In Q2 we introduced the MiFi 8000 with Sprint and two new groundbreaking industrial IoT products, the Skyus 300 and 500. Enterprise SaaS Solutions revenue was $15.9 million, down 8.1% year-over-year and up about [indiscernible] sequentially. The plan run-off of the low ARPU South African consumer business combined with the shift from right device purchases to a rental in all geographies and currency fluctuations has impacted our year-over-over revenue comparisons on a U.S. dollar basis. The results on a constant currency basis are much more favorable, will the 2% decline year-over-year and an increase of 3% sequentially. With our continued focus on fleet away from the consumer business, we've seen a significant year-over-year increase in bookings to new and existing customers. These positive leading indicators point to revenue growth over the coming quarters. Turning to the balance sheet, we ended the second quarter with approximately $20.3 million in cash and equivalents, down approximately $11.6 million due to a combination of capital and other investments in product development and sales and marketing and support of our 5G initiatives. During the quarter, we transferred the purchase of raw materials to Foxconn, while increasing our inventory of key 4G and 5G finished goods to meet the increased customer demand. The increase in 5G finished goods was in preparation for the early Q3 product launch and ramp of our new 5G MiFi M1000, which we began…

Thanks, Steve. In my opening remarks, I said that our global 5G pipeline has grown substantially since our last earnings call. Now exceeding 40 mobile operators and we remain on track for eight to 10, 5G design wins this year. And before I close, there are a couple more things. I'm delighted to report that we're preparing to introduce a new product for AT&T enterprise, government and small business customers. Our renewed relationship with AT&T will give us access to a very large new market of subscribers and we look forward to growing our presence there. This is closely tied to another big win for us, which we’ll be achieving certification for our USB800 modem series on the FirstNet network. This rapidly growing public/private network designed specifically for first responders, another government user’s now serves over 7,000 public agencies. Once again, I want to thank every Inseego employee for their tremendous efforts in this dynamic fast pace market. Our employee’s enthusiasm and 24/7 work ethic directly correlate to the momentum we are building. The energy level and our share will to win continues to be one of the most important factors behind my confidence in our long-term success. I am bullish on the future. The global 5G market opportunity is a game changer for Inseego and the leading indicators in other parts of the business are all pointing out. That concludes my prepared remarks. I'll turn it back over to the operator to start Q&A.

We’ll now begin the question-and-answer session. [Operator Instructions] The first question today comes from Scott Searles with Roth Capital. Please go ahead.

Hey, good afternoon. Thanks for taking my question and nice to see the momentum building across the product portfolio especially in the 5G front.

Thanks Scott.

Hey maybe for starters, just to get some clarification in terms of the immediate outlook, we got good top-line growth, EBITDA is moving up, but kind of trying to understand the balance and the improvement in gross margins versus some of the incremental spending that you've got from an OpEx standpoint to support the multiple carriers that you're continuing to engage with from gigabit LTE and 5G standpoint. Could you of give us an idea and looking out into the third quarter, what sort of improvement you expect in mobile and – IoT and Mobile gross margins and kind of what the absolute increase in non-GAAP OpEx looks like?

Well, as you know we provide guidance on EBITDA. We don't provide specific guidance on gross margins, but we are undertaking a number of initiatives. We did encounter a few unexpected cost elements, moving in factory, some new products, new contract manufacturing process. But we have a very, very focused cost reduction; cost down program we call it, efforts across our mobile solution products. And we do as we've commented and see an uptick in gross margins in Q3 and Q4 both sequentially. I won't get into the specific numbers, but we see the trend is up.

Okay. And, and maybe just a quick follow-up in terms of – up to 40 operators now from 30, I think last call you talked about representing about 2 billion plus subs. I wonder if there's an updated number on that front. And then looking at those eight to 10 carriers who are alive by the end of this year; could you give us an idea, is that a fixed wireless access? Is it mobile hotspot? Is it millimeter wave? Is it 6 gig? I'm sure it's a combination of those, but any color that you could provide on that front would be helpful? Thanks.

Yes. Thanks, Scott. I'll answer the last part first. So in terms of the 5G design wins, we were referring – we are referring to product line design wins. So in other words, our two principal markets thus far are mobile broadband hotspot and our fixed wireless home router. Design win is a product design win and so that’s what that represents. And it could be any – any one of those, a combination of those and it certainly represents as particular operators interest in sub-6 gigahertz product offering or millimeter wave. Those fundamentally represent a different award. It ultimately boils down to customer awards. You can think of it that way. And, I'm sorry could you repeat the first part of your question?

Just in terms of the number of subscribers represented by the various operator engagements? Thank you.

Yes. Well, yes the total that we referenced last time as you pointed out was 30 operators represent around 2 billion subscribers. It is obviously higher than that, but we kind of think at this point it's rather academic to start counting that. We were trying to get across the point that it really from an addressable market and the number of service priors, importantly internationally it is a big leap from where Inseego was, which was really principally addressing Verizon as a customer base with the 135 million, 140 million mobile subscribers. So suffice to say its north of 2 billion, but we're not really keeping count anymore. It's there, it's out in front of us and it starts to become a little redundant to continue to report on that. But yes, it is continuing to move north.

Fair enough. Thank you.

Okay, Scott.

Your next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.

Great, thanks and also it’s great to hear the pipeline for 5G growing. Just building on the momentum of the business, you talked about, you’re very favorable press from the Verizon launch and how it's increasing customer engagement. Can you just update us on what your customers are telling you in terms of the competitive environment for your products and what's helping you increase that pipeline and you can get more of your customers either winning into product designs or into lease trials? Thank you.

Yes. Thank you, Mike. Well I think the first and foremost it's having real working products and importantly a very strong reference account. The product is solid. It works, the speeds are high, it's stable, performing very well, and its being rapidly rolled out into additional markets. And with that, I'm referring to Verizon of course and you've seen at the time we launched the M1000 it was five cities. You've seen in subsequent announcements with initial cities. Those are all watching very rapid pace and the product importantly is working on the three predominant infrastructure providers uniformly and really well. By that I mean Ericsson, Nokia and Samsung. So it's basically turnkey now. It’s rolling. International customers are obviously seeing the news, I don't know how many press interviews we had posts that, it was by the dozens. But you know, I'm getting pinged on LinkedIn by various country regions of Vodafone, people saying I would like to buy a lot of these, who do I talk to? So you know when something's happening like that, it really means the market is buzzing. But I think first and foremost, our products work, they're stable, they're real, they're shipping. You can go online, you can go into one of the retail stores for Verizon and certainly through their enterprise sales force, you can buy them. They exist. You can actually buy them in real. I just think with that point, it kind of differentiates primarily what we're seeing from our competitors, which is lots of announcements haven't been able to touch the products. So that's the differentiator, right there. We're making 5G real; coin the phrase that we've used in quite a while. There's a reference account that more than happy to tell customers from around the world how we're dealing with them and the news is sprinting. So that's what's creating the opportunity. You've got to have product.

Great. Thanks. And just building that, I know you're not giving specific P&L guidance, but maybe just longer term you talked about 5G having a higher margin overall to your portfolio as it ramps. As we see these new operators ramp and you get scale and the business is growing over 20% in terms of your guidance. Is there any longer term targets you could share on gross margins where you think they should hit as 5G becomes more of the mix, maybe exiting 2020 or longer term? Any kind of targets that you guys are targeting internally that we should think about?

Yes, Mike. I think we need to be up in the 30s.

Okay. Great, thanks. And then just on the, you've shared some adjusted EBITDA targets but it sounds like in the shorter term you're going to push those out a little bit, because you see such a ramp in 5G? Is that a good way to think about it? You're going to invest now and then harvest those investments as you launch more potential customers with these 40 operators over the next two to three years. That'd be a way to think about just the trajectory of the business.

Yes. I mean I think you hit the nail on the head. Mike, as you can – as we commented the pipeline we referenced a quarter ago was 30, well 12 of those turned into live field trials, active testing of our products. So there's a pretty good conversion, it’s not all done. So that's 40% of the 30% was more to fall from the top from that standpoint. But the way I see the 5G market now, it's a land grab, it's a land grab. And so when the market window is there, you've got to grab it. And what that means is investing in product development. As customers get their hands on the products, they want some initial features, functionalities, that sort of thing; you have to kind of tweak it into it. And the other is our sales and marketing efforts, importantly internationally. So we're investing to capture the opportunity. It's the right thing to do. It's the best thing from a long-term value creation for our shareholders. And the time is now. So we have to invest now. It's a conscious decision we've made in order to seize the opportunity. And we've seen enough proof points that we're confident we have the ability to do it. We're not doing it recklessly. So yes, that’s what we're doing.

Okay, thanks. That makes total sense. And last question from me and I'll pass it on. Just going back to the Ctrack SaaS business, sounds like the consumer's are – here you’re starting to roll off. Steve, can you just help us maybe think about how much of the sub basis left there? And you talked about maybe that business stabilizing and starting to grow. You have to think maybe about longer term growth in that business once the lower end consumers are done rolling off. Thank you?

Yes, I’ll make a comment. I’ll just add John Weldon is here, who runs that business as you, so I’ll just make a quick comment. Just a backdrop for those that may not be aware, we made a conscious decision to roll off – run off the book, if you will. The consumer business is principally South Africa. Why is that? Low ARPU, a high churn just had very poor returns in that business. It was just not really a good book business. And so therefore what we did was we focused our efforts on fleet, and we focused our efforts on aviation, higher ARPU, better return, longer term contracts, and frankly less cash burn. So that was the strategy behind it and we deliberately therefore, run off the consumer book. It was part of our fundamental strategy. So that it is moving along, we are getting our wish. The book is running off as we expected some slight variations in the trend line, but it's basically doing what we thought we would do. I know, John you want to answer that?

Yes, I think Dan you've nailed it. The only thing is as we still expect to see revenue from that throughout 2020 as well. So it is declining quarter-over-quarter, but at the rate it’s declining there will still be people on the book for the back half of this year and the remainder of 2020.

Yes. I suppose the nuance there also I should mention is that the poor returns was really about capturing new customers. But once the device is paid for and you're actually in the run rate business, in other words your along in this subscription revenue, it does generate a modest profit contribution. So we are not acquiring new customers. However, of existing customers that wish to renew, we are renewing them because that is a positive contributor.

Got it. Thank you.

Your next question comes from Jaeson Schmidt with Lake Street. Please go ahead.

Hey guys, thanks for taking my questions. Just looking at the industrial IoT business, just curious if you could comment on if there's any particular end market you're seeing particular strength from that's been a surprise for you guys.

Yeah. Well, I'll make a comment. Actually, I'll ask Ashish to jump in as well. But, so firstly, the SD WAN market is very, very big for us, a very big market. And you can debate whether that's a vertical or horizontal solution that goes into Verizon verticals. I think it's more of the latter, but that's been a very strong market for us. And we've developed an ecosystem of partners, who are the – all of the leading SD WAN providers. And I think after you get through the top four, it kind of really rolls off, but I mean you can see the names. We announced one new one and that we signed a partnership with. We weren't able to name names, but its right at the top. So I think the SD WAN market is very important for us. I will say this as far as some of the new things we're doing on creating solution bundles. I talked about video surveillance as one area. And when we think about video surveillance, we're thinking about some really good opportunities in a couple: one is oil and gas and the other is financial services vertical where those are – there's a big demand for video, a complete turnkey video span solution.

Jaeson, in addition to what Dan said, these products are really designed to improve both as well as backup connectivity. And there are a lot of applications out there, video surveillance to connected infrastructure, connected transportation, obviously the first responder applications, there are plenty of those applications in the market, connected retails, so we are seeing interest from multiple different markets that we can enable with a gigabit router, which is much more than any other solution in the market has had in the past. So just having that big pipe out there, being able to connect these remote assets and infrastructure and vehicles is that – that's the market we are going after right now.

Yeah. And I think as you'll see us moving forward, what we're doing now is working with a number of partners to create what we referred to the solution bundles? And what the solution bundles are really to have a turnkey offering for a particular segment or customer type of vertical? So, oil and gas and financial services are actually two that we're engaged with initially. But so I would say stay tuned for more on our solution bundle offering with an ecosystem of partners. And that's really how we plan to approach the various vertical markets.

Okay, that's helpful. And then finally on OpEx, I know you guys have a numerous different opportunities here whether you will continue to invest in sales and marketing. But should we think about this elevated spend being the new norm as we progress through 2020? Or is this more of a second half situation with adding sales and marketing certifications, et cetera, and it then moderates to a more historical level throughout next year?

Well, yeah, I mean it's a great question. The answer is certainly derived from opportunity and all the things we're doing are opportunity driven. And it includes both product developments. We are developing additional 5G products. We're not yet announcing them, but there are more products in our products – more products coming into our 5G pipeline as well as sales and marketing resources. And you must appreciate that the company had not really had any kind of international presence. And as you're talking – looking at 4G operators, I think you can do the math that after you dropped down below eight, that's pretty well it for North America and so the rest are international. And that's really what that's about. So that demands investment in front end sales and biz dev, in field application engineers, technical account managers, all of that as well as product management. So we are investing around the opportunities to try to predict at this point in time what the dynamic will be on OpEx as we move out into the next year, really hard to predict. We're not going to provide that kind of guidance. So – but what we are doing is opportunities are in front of us. My test is always, is it real, is it worth it, is winnable and the answer to the 5g opportunities for those three are yes, yes, yes. So we're going to seize the opportunity. And the business for that has a tremendous ROI and that's what we're doing. So I think, we'll have to stay tuned for guidance in the future before we can really triangulate to answer the OpEx question.

No, that makes sense. Thanks a lot guys.

Thank you.

Thanks, Jaeson.

Your next question comes from Lance Vitanza with Cowen. Please go ahead.

Hi. Thanks for taking the questions guys and congratulations.

Hey, Lance. Thank you.

So first on the spectrum front, you mentioned – I think you mentioned the 6-gigs of 5G spectrum coming to market to support the end market demand, which obviously we think is going to be pretty massive here. Specifically, my question is the FCC is expecting – they've said that they expect regulatory resolution on the C-band spectrum this fall with presumably spectrum would be then brought into use over the course of 2020. And I'm wondering how relevant – if – to what extent is that – is the rollout and the usage of the C-band relevant to your prospects for 2020 revenue growth in particular? Or is it more of a 2021 story there?

It's a great question on the timing aspect. There is lot of factors involved. Just a couple of comments, I would ask. Ashish is our spectrum expert. So I just ask him to comment in a second. But there's a dependency on a lot of factors there: the timing, the entry, the types of solutions and how quickly networks are rolled out. So the time of the revenue from a spectrum availability is a trick where there's Qualcomm chip sets, there's our infrastructure ecosystem partners, there are all the devices. But typically where we are paced by – you can think of it like we call it Qualcomm plus four months. So the availability of new chipset to address particular market sub-6 millimeter wave is really that availability and then our products come out typically that kind of interval after. So specific timing lasts tough to predict, but I'll ask our spectrum expert here Ashish to comment.

Thanks, Dan. It’s the last. And in addition to what Dan said, the deployment, the 6-gigahertz of new spectrum that FCC is looking at is investments to long-term play and not for next year in the sense there’s enough spectrum available to rollout massive network by next year. And the operators are moving forward in doing so, the C-band spectrum obviously, as you mentioned, is being looked at that would be very valuable at some point in the future. But I don't believe that changes the current operator plans as they move forward and rolling off networks on the frequencies that are ready available on 28-gigahertz, 39-gigaherts. There is some 24-gigahertz option that took place earlier in the year. And then obviously the spectrum that's amenable both 4G spectrum as well as in a 72.5-gigahertz spectrum that's available for Sprint to deploy a 5G. So there is plenty of spectrum already in play that they can rollout a very nice sized network by next year. So...

So then if I understand you correctly, so C-band will be nice but it’s certainly won’t be a bottleneck for you guys if it takes longer than expected.

That's correct.

Okay.

No, I would see it to build on – I would see it as additive.

Right, okay.

So the near-term plans and I think – I mean that's – well, that's a massive amount of spectrum. So the number – the kinds of use cases, bandwidth, hungry use cases and that can enable our extraordinary. And I think, as I said in my remarks, we can't even envision what they could be, but there's plenty of opportunity there.

Okay. I wanted to ask you on the M&A impact on your business and you mentioned a couple of things, dish network as a new 5G entrant. I think you called it a big plus for Inseego. And I was wondering if you could elaborate on the potential there. And then also you'd mentioned 4G mobile hotspots with Sprint. So of course I'm wondering what happens if and when T-Mobile, Sprint closes. Does that business go away or what happens there?

Okay, well, so in addition and as you know it's a very interesting play as far as the DOJ stipulations for the merger. Dish has access to the T-Mobile network, so they can operate as an MVNO for a number of years. They have I think a unique ability in my mind to build quite a unique 5G network. They are required to have a majority of the nation coverage and 5G by 2023. So they'll be building and moving pretty fast. We have started the engagement of leaving at that. And we think our product solutions lines up fairly well with what we're learning about their needs. So we do think it's a big plus for Inseego from where we're positioning what we understand they plan to do. On the T-Mobile, Sprint getting together in their current base of business there, as you know, we launched the gigabit, the 8000 series gigabit hotspot with Sprint. And we do see that, if you will, there are being synergies with that offering and that moving forward into the combined entity. We have DMS, which is our TIMS business, principally with T-Mobile, little bit with Sprint, mainly government that now moving in enterprise and we’re seeing the two companies coming together, the DMS platform will be more ubiquitously applied across both of their enterprise and government business side. I think as a one plus one equals three. And those are kind of two of the areas that we're excited about. In addition, they're going to really get way more off in their front foot in the 5G – and 5G now is really a big part of the merger justification if you will and we're engaging on that front as well.

Thanks. Just one last one for me on the Foxconn relationship. Are you comfortable with how that's rolling out and working and their ability to fulfill is needed given the expected product ramps that you're looking at?

The partnership is phenomenal. We're very happy with how that's turned out. And they're really a great partner that are helping us on our go forward cost initiatives. As you know, they – as we mentioned, they took over all the purchase of raw materials, which there's a large volume from Qualcomm. They are really helping us. They are very responsive and really supporting as well. Good quality, on time deliveries, all kinds of support that we – beyond what we can even ask for. So I couldn't be happier about that relationship.

Thanks again guys.

Thanks, Lance.

Your next question comes from Mike Latimore with Northland Capital Markets. Please go ahead.

Yeah. Hi. This is Vijay Devar for Mike Latimore, a couple of questions on Verizon. Did you report up now how much was on the Verizon's contribution during the quarter?

No, we don't break out in digital customer contributions. No, you can pick that up from the Q on Friday.

Okay. And did Sprint add a couple of millions during the quarter?

We don't report an individual customer contributions.

Okay, it’s all right.

Unless, it’s required reporting that is there over a 10% or…

Now, given that the component shortage of issues is behind, are there any challenges from the new tariffs from China?

If I understood you correctly, no the component shortages are behind us as are the – the startup with Foxconn. So we don't expect any going further. Is that your question?

Okay, yes. Got it, yep. Thank you.

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.

Okay, thank you. Before we wrap up the call, I want to mention a few events that we'll be participating in this quarter. We'll be participating in the Canaccord Conference in Boston this Thursday. And I will say this is an important customer opportunity came up which conflicts with the Canaccord schedule and Steve Smith will be presenting in my place. We're also exhibiting at a major event in Denver this week, which is hosted by our global channel partner Arrow. And in September, we'll be showcasing our IoT solutions at the Qualcomm smart cities event right here in San Diego. So I look forward to seeing many of you at these upcoming events and continuing the dialogue on Inseego 2.0. Thanks again everyone.

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