Hello, and welcome to Inseco Corp's Second Quarter 2021 Financial Results Conference Call. Please note today's event is being recorded. All participants will be in a listen only mode. After today's presentation, there will be an opportunity for analysts to ask questions. On the call today are Dan Mondor, Chairman and CEO Ashish Sharma, President Bob Barbieri, Interim Chief Financial Officer and other members of the management team.
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 based on the company's current expectations and beliefs.
For a discussion on factors that could cause actual results to differ materially from the expectations, Please refer to the risk factors described in our Form 10 ks, 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, please go ahead.
Thank you, operator, and hello, everyone. Thanks for joining the call today. I'm pleased to report a very strong second quarter for Inseego with revenue up 14% sequentially to $65,700,000 and we approached breakeven adjusted EBITDA, both well ahead of consensus. The strength in the Q2 was driven by continued growth in the sell through of our suite of 5 gs hardware and software solutions. I want to highlight an important fact.
Our 5 gs solutions now represent almost 29% of total revenue, an increase of 182% over the Q2 of last year. These remarkable results reflect the continued overall market growth And customer adoption of Inseego 5 gs products. One of the core reasons we can meet our customers' growing demand for our products It is our long standing direct relationships with key component suppliers and manufacturing partners. Unlike what other players are experiencing, our business was not impacted this quarter by the global semiconductor supply shortage. That said, we believe this challenging environment will last at least through the rest of the year.
We remain vigilant and have confidence that our supply chain is set up to support growth for the remainder of the year. Our rapidly growing Software as a Service business also experienced similar strength. Excluding Ctrack South Africa, software including Ctrack Rest of World and Inseego Manage grew 49% year over year and subscriptions increased 10% sequentially and 139% year over year. More on our software initiatives will be provided for Ashish. After the close of the quarter, we successfully completed the sale of our Ctrack South Africa unit, which brought in more than $36,000,000 to our balance sheet.
This gives us the financial flexibility to meet So here we are halfway through the year and we see great momentum in our business as we remain diligently focused on our information into a 5 gs pure play company. Back in May, we stated the belief the second half of twenty twenty one would be better than the first half And we remain confident in that expectation. And here's why. First, we continue to see 4 gs LTE sell through stabilize at levels higher than we had pre pandemic. With 2 more 4 gs U.
S. Carrier launch is planned for this quarter. You will note that we now sell to the 4 largest mobile networks in the U. S. And our pipeline of opportunities with international carriers and enterprise customers continues to grow.
Net net, we expect continued robust demand for 4 gs LTE solutions. 2nd, We continue to roll out 5 gs product deployments with new carrier customers across the globe. The reception to both our existing and new products Wireless is a major contributor in the second half and twenty twenty two. 3rd, we continue to see Strong sales of our software offering that not only adds to the top line, but improves the overall value proposition of our solutions with greater stickiness, pricing power and Aseego's overall margin profile. And 4th, I'm happy to report We're seeing a dramatic increase in engagement and pipeline for enterprise 5 gs fixed wireless solutions.
These opportunities are being driven primarily by well known enterprises that are increasingly looking for ways to integrate 5 gs into their workflows. This quarter, we've begun to see our investment in this strategy pay off. Ashish will go into more specifics on these, I would like to highlight that there are well over 100 companies trialing and purchasing in Seagull 5 gs solutions for primary connectivity use cases. These customers represent a wide range of verticals from the Department of Defense, federal, state and local agencies I'm confident that the ground has been laid for a strong second half and I can only imagine what 2022 will look like. With that, let me turn the call over to Ashish to provide additional detail.
Thank you, Dan. For the past few years, the company has been investing in the state of the art 4 gs, 5 gs and cloud solutions to form As you heard from Dan, we had impressive momentum in Q2, which gives me great excitement And optimism for what's ahead. We saw customer demand across the business led by major market shifts, Hybrid work, digital transformation and continued strong uptick of our subscription based software offerings. As Dan mentioned, our 5 gs broadband portfolio grew 182% year over year in Q2 and now represents almost 29% of total revenue. And cloud software portfolio grew 49% year over year, which is now 20 percent of total revenue.
Combined, these next generation products now represent almost half of total revenue, Up from 44% of our business just last quarter. Let me reiterate that because it's impressive. Our new generation of products now represents almost half of total revenue and we are just getting started. Inseego's End to end portfolio is laying the foundation towards 5 gs Controlled Enterprise Networks that can untether Numerous applications and extend reach to areas never connected before. What an exciting time to be in the 5 gs space.
Now let me provide details on our key businesses. Let's start with mobile broadband. We saw great growth in the quarter with this portfolio. And as Dan mentioned earlier, we see no signs of that slowing down with 2 more 4 gs launches on track for the Q3 in the U. S.
Our 5 gs solutions are proving to be perfect for the work from anywhere paradigm and our carrier customers Leveraging these solutions to provide amazing broadband experiences for a variety of use cases like employee remote connectivity. This is because these solutions are capable of delivering sustained 5 gs performance with gigabit plus speeds, low latency And security. Let me provide an example of a new use case. We are collaborating with a Tier 1 carrier in Western Europe for digital transformation. This program is powering a wide range of innovative use cases across multiple sectors.
One such use case is for mission critical search and rescue efforts in which our 5 gs mobile solutions Outfitted with location equipment and cameras, search and rescue teams can map unknown areas, especially areas with complex terrain Before deploying Allantyne, our solution is enabling real time mapping with ultrafast processing of massive data. Next, let's talk about fixed wireless access. In the first half of the year, We have released a series of 5 gs FWA products, including 2 indoor products and 2 rugged outdoor products, which was certified for use in many markets globally. We also just released a new industrial 5 gs gateway Purpose built for vertical markets. Response has been extremely positive and we believe 5 gs FWA Will be a major revenue driver for us moving forward.
In addition to anchor channel partners who've been quick to adopt our portfolio, we 5 gs products certified by both T Mobile and Verizon, including hotspots and FWA. These new products are the primary drivers of the dramatic increase in customer engagements and they will be instrumental First, the 5 gs networks continue to be rolled out at an aggressive pace and operators are looking to quickly capitalize This is reinforced by the work from anywhere paradigm and a growing enterprise customer pool. 2nd, the breadth and depth of our 5 gs portfolio is resonating with customers. Our partners and customers Tell us that Inseego products bring out the best in their networks. No other vendor has the performance of our 4 gs and 5 gs solutions.
Not only are Inseego solutions fast, but they are extremely reliable and proven to deliver consistent throughput for long periods of time. And our new fixed wireless In addition, our products are built with a security first mindset with multiple layers of security built in our proprietary hardened operating System software, which is at the core of all of our devices. In this environment with ransomware and security breaches dramatically rising, Everyone is coming to the realization that security is one of the killer apps for 5 gs. The combination of Performance and security is unique to Inseego and creates a highly differentiated competitive advantage. To put it simply, no 3rd, our strategic decision last year to increase our investments in go to market is yielding fantastic results.
I'm very pleased with our performance and momentum across all geographies, all market segments and all products. We're building a strong pipeline of 5 gs customer opportunities across many enterprise segments in our global markets. Allow me to now go over some of the use cases that are driving this incredible growth in user engagement for our FWA products. The work from anywhere shift across the board has increased in demand. When the pandemic began, business continuity Connect first was paramount and often meant that security considerations took a vaccine.
This created significant vulnerabilities Enterprise's overall network security posture. Now as we come out of the pandemic, we're seeing demand extend beyond work from As enterprises look to create more flexible work environments for their workforces. Our FWA portfolio is a national choice As it improves on the already impressive capabilities of our mobile hotspots with stronger antennas, Better heat dissipation that allows for 20 fourseven use and centralized cloud management. Another growing use case is the branch office on remote location connectivity. Whereas in the past wireless was used as a backup, the capabilities of our 5 gs allow enterprises to make wireless their primary source of broadband.
For example, we are working with household name retail outlets buried deep Inside shopping malls, a heavy equipment manufacturer wanting to implement digital twin application at a remote location And a global airline to light up secure wireless connectivity at all their gates, just to name a few. With our record breaking long distance connectivity capabilities, work from anywhere locations such as secluded industrial parks, The remote logistics centers, pop up emergency response centers and other rural and Outdoor settings can be lit up with high speed wireless access in no time. We are seeing this in action now through trials and pilots across the globe. We're also working with the police department in one of the largest metro areas here in the United States. They are piloting an application to deploy new innovative counterterrorism tactics, leveraging our WaveMaker FW 2010 Millimeter Wave Solution to enable a secure and reliable live stream of 4 ks surveillance video at the edge Where fiber would just not be economically feasible.
Another exciting pilot leveraging our 5 gs FWS CPEs is the Department of Defense Powered by a handful of partners to demonstrate a smart warehouse for a military logistics base. In this example, Inseego 5 gs solutions are enabling several applications, including autonomous vehicles for These incredible use cases and applications were not possible before with other broadband technologies. Lastly, let me cover the progress of our software business that continues to perform well. During the first half of this year, We added over 65 new large enterprise customers to our Inseego Managed software subscription customer base. Major retailers and wholesalers are using our cloud to securely connect, configure and monitor operations in distributed locations.
We will continue to drive new cloud innovations to improve our software attach rates. In closing, I'm proud of the 5 gs and cloud innovations we've been bringing to market, which are driving such phenomenal growth for Inseego. Our unique ability to bring out the best in the network is making Inseego the partner of choice to deliver 5 gs solutions to the enterprise. Our team will continue the rapid pace of innovation, so we can continue fueling the fantastic growth we are seeing with 5 gs. And now, I would like to hand
the call over to Don.
Thank you, Ashish. Let me now review the results of our Q2 fiscal 2021. Before I start, I would like to remind everyone That year over year comparisons will be impacted by the pandemic driven surge for current and 4 gs hotspots, Which began in the June quarter last year and continued through the remainder of fiscal 2020. That demand for our latest generation 4 gs products Has now normalized at a level higher than where it was pre pandemic. With that, let us get into the results.
Q2 revenue was $65,700,000 up 14% from the prior quarter's $57,600,000 The strong result was driven by 5 gs solution revenue, which was up 71% sequentially and 182% from the prior year. 2nd quarter IoT and Mobile Solutions revenue was $51,800,000 up 20.7% quarter over quarter Due to the strength of the 5 gs solution sales, accelerating sell through of 5 gs products led to strong reorders in the quarter from our current partners, T Mobile in particular. Enterprise SaaS Solutions revenue of $13,900,000 was down 5.3% from Q1 and up 21.8 percent from Q2 of 2020. The year over year increase resulted from continued subscriber growth And Ctrack rest of the world that we are now able to recognize as COVID related restrictions have eased in some countries allowing Inseego To install our IoT modules, cash at the end of Q2 was $40,400,000 and includes $5,800,000 of cash classified as held for sale as well as $3,700,000 of restricted cash related to the sale of Ctrack South Africa. The decrease in our cash balance is reflective of increased R and D spending on 5 gs products And net working capital adjustments.
We continue to diligently manage use of cash, including working capital, And we expect cash burn will steadily decline in the coming quarters consistent with our free cash flow positive goal for Inseego. With respect to the sale of Ctrack South Africa, the deal closed on July 30 with net proceeds of approximately $36,600,000 You will see that amount reflected in the balance sheet when we report our Q3 results. From this point forward, I will focus on non GAAP measures. A reconciliation from GAAP to non GAAP is detailed in our earnings release and is found on our IR webpage. Gross margin for the IoT and Mobile business was 24%, down from 26.1% in the prior quarter, but up from 23% in the prior year.
The decline from the prior quarter was due to product mix, more specifically much stronger hardware sales Versus Q1, we expect gross margin to steadily improve through the year as we see a higher mix of 5 gs and This dynamic is visible in the 100 basis point improvement from Q2 fiscal 2020. Enterprise SaaS solution gross margin was approximately 60%, which is roughly in line with the prior quarter and prior year. Our Q2 operating expense was $28,000,000 up $1,300,000 from the prior quarter and up from $22,900,000 in the prior year. The increase in operating expense year over year reflects the investments we have made to take advantage of the considerable 5 gs opportunities we are pursuing. The significant increase in engagement and the opportunity pipeline is clear evidence we were right in pursuing this path.
Q2 net loss was $8,700,000 or $0.08 a share compared with a loss of $7,700,000 or $0.08 a share in the prior quarter And a loss of $1,300,000 or $0.01 in the year before. Our adjusted EBITDA loss $51,000 improves on the prior quarter's loss of $868,000 but is down from the pandemic aided EBITDA gain of $4,300,000 last year. For additional details on non GAAP and adjusted EBITDA results, please refer to the reconciliation tables in our press release. Finally, some thoughts for the rest of 2021. We have seen a significant expansion of our sales pipeline with the carriers, especially with our fixed wireless products And from enterprises.
And as a result, we remain confident to reiterate the second half of the year will be stronger than the first half. In addition, we expect to see IoT and mobile grow sequentially for the rest of this fiscal year. With that, let me turn it back to Dan for his closing remarks.
Thanks, Bob. Before moving to Q and A, I want to welcome Stephanie Bowers to our Board of Directors. Stephanie brings a wealth of experience in International Relations and Government Affairs and we're delighted to have her join our Board. She will be instrumental in opening new global markets for Inseego by helping us with the security, supply chain and government approval aspects of our 5 gs products. On the CFO search, we continue to make good progress and we have narrowed our list of candidates.
That said, Bob has been doing an excellent job. I am in no great rush and plan on taking the necessary time to find the right candidate, Wonder will have the experience and capabilities to support the growth of our next generation 5 gs and software solutions. I will conclude by expressing my sincere thanks to our dedicated employees who continue to execute so amazingly well in these challenging times. They are the driving force behind the strong second quarter and the tremendous growth in our opportunity pipeline and I can't thank them enough. Their accomplishments gives us even more confidence in our ability to become a high growth, high margin 5 gs and Software as a Service Global Solutions Company.
Thanks again everyone.
We will now begin the question and answer session. Our first question will come from John Marchetti with Stifel. Please go ahead.
Thanks very much and thanks guys for taking the question. If I can just start first on the Ctrack sale, can you let us know what revenue was for the portion of that business that you're divesting In the first half, just as I'm assuming given your comment about a better second half over first, we need to exclude that out. I just want to make sure We have a sense of what that revenue is that we should be accounting for.
Yes. Hi, John. It's Dan. Thanks very much. Good question.
I think Bob was jumping in ready to answer. So take it away, Bob. Yes. Thanks a
lot, John. If you With respect to South Africa, in the first two quarters, the amount of revenue generated was 14,200,000 And in the July month, think in terms of about 2.5 We saw it exactly at the end of the month. That's helpful.
Yes. Thank you very much. That's helpful there. And if I can just follow-up With a question on the margins, I want to make sure that I understand this correctly. You clearly saw more 5 gs in the quarter, all of that very, very So I was a little bit surprised that margins took a step back here given the growth that we're seeing in 5 gs and in the software portfolio.
Can you know is it Solely a function of more 5 gs MiFi hotspots versus something fixed wireless access or things of that nature. Just you can help me understand that dynamic So we can think about that as we're looking out over the next several quarters and into 'twenty two.
Yes. Thanks, John. Thanks. Well, the overall margin for our 5 gs products is better than our 4 gs products. That said, our fixed wireless Access products are even better than our hotspots.
We believe there will be a large improvement in overall 5 gs Solutions gross margin and especially we have the value added software when we attach to the hardware. Economies of scale, And we did through the journey in 4 gs, get pretty appreciable gross margin improvement over time, Better inventory supply chain costs. That said, there was premiums for spot market purchases as well as higher Freight and shipping costs that we saw in the quarter for all the reasons that I think the market knows well.
Great. And then maybe one last one for me and I'll jump out. Just on the software side, should we expect more applications launched this calendar year or is that more of a
22 events. Yes. Let me turn it over to Ashish.
Hey, John. Good question. So We do expect to launch some new solutions later this year in addition to continuing to add more functionality and more features to the existing customer base solutions. So there will be some new ones coming out, but we do continue to, puff up the existing ones.
Great. Thank you very much.
Thank you, John.
Our next question will come from Lance Vitanza with Cowen and Company. Please go
Hi. Thanks guys for taking the questions and congratulations on the nice quarter. I wanted to actually ask about the pipeline in the enterprise Actually, I don't know if it was Anne or she, someone mentioned that there's now well over, I think the phrase was well over 100 customers Trialing and buying right now and then there was a list of all the different types. I wanted to try to get a sense for how close or far you are From converting the pipeline to revenue, but it sounded like from that statement that maybe you're already beginning to do that. And I'm just wondering From the press release and the language regarding the improved revenues in the back half versus the first half, it sounds like that's Largely attributable to the enterprise pipeline being sort of converted.
Is that right? Am I reading it the right way? And was enterprise Was it measurable? Was there a contribution in 2Q? Was it measurable?
Will it be measurable in Q3? How should we be thinking about that? Thanks.
Yes. Hi, Lance. Thanks for the question. Well, as you know, in enterprise and 5 gs is what we're referencing, we're just getting going. Really, when the comment was, you're right, 100 plus 5 gs customers In our enterprise pipeline, but that's from 0 in May.
So, that's pretty incredible growth, yes. And some of the I can't name names, but Largest corporations and brands in the world, very, very impressive 5 gs pipeline. They're looking to adopt them. We have good visibility into the pipeline. The projects are defined.
We understand the scope, the budget, the start time, The decision makers are, who cuts the POs, that sort of thing and the selection process. So in terms of timeline, to answer your question, The start dates for the pipeline we're referencing can be anywhere from 30 days to a few months. And the other part of your question, yes, there was There was 5 gs enterprise revenue in Q2, but it was a very, very small number as you could imagine. So We do see that ramping up quite nicely.
Okay. And then my other question was, If I think about 5 gs plus cloud, if I got it right, that improved sequentially to 49%. I think you said 49% of revenue from 44% in the Q1, and I think it was the 5 gs piece went from 20% to 29%. The cloud piece, if I got it right, that actually as a percent of revenues went down even though the revenue grew 49% year on year. So Was that I guess it was just that when you've got the 5 gs piece tripling year over year, then that piece is going to get smaller.
But are you pleased with The way that those 2 are growing relative to one another?
Well, very, very pleased. And I think you hit it. The denominator was a different number, so larger number. So the ratios We're different. 5 gs is clearly going gangbusters.
I think overall if you look at the 49% Up from where it was a year ago and last quarter, the way I said it is we're getting the growth in the areas we want to get the growth. Those are the engines that we invested in, incredible market traction, the numbers speak for themselves. So we expect to see that growth curve continuing.
Great. If I could just squeeze in one more on the cash Alan, if I just take the $37,000,000 from the sale of Ttrack and add it to the 30,000,000 That you reported, is that sort of the way that your pro form a cash balance is kind of $67,000,000 or will there be some taxes payable there? And I'm just wondering, I know you mentioned that you think that the burn is going to decline. I think you mentioned noticeably over the next few quarters, but On a straight math basis, I mean $20,000,000 burn versus $67,000,000 pro form a cash, it's only 3 or 4 quarters worth of cash. Are you feeling comfortable with your liquidity position?
Would there be perhaps a need to raise incremental capital at this stage?
Yes. I'll ask Bob to comment. Just a slight correction. It was $40,000,000 cash at Q2 end, but your question nonetheless Sorry, I apologize. Yes.
No problem. No problem. There were some things associated with Q2 that were, If you will, specific to Q2, if you will, some one time cash burn aspects and we want Bob, I'll ask you to explain that so we can go through that. But we do see cash burn It was high because of the working capital changes and we certainly see a steady decline going forward. But Bob can give you some of the Color on the Q2 cash use of cash?
Yes. Lance, a couple of things. First, just in terms of The raw cash amount, in the held for sale Treatment, what happens is the cash that we have gotten after the sale closed, a little bit under $7,000,000 accrues to us, but is in the line of the assets held for sale. And then second, we have restricted cash About $3,700,000 for a period of about 12 or exactly 12 months after closure. And that will be our cash and that is just held Separately,
from a
buyback or better term of a rep and warranty standpoint on the sale, but that is our cash. And then if you add Those together, that's where you get to the $40,000,000 that Dan mentioned. And then going forward, we and how do you think about it? In the Q1, a couple of things. One is the company paid its bonuses and restricted stock In the Q1 and that had an impact.
In that, we basically held taxes from the employees And our cash account in the Q1, but then relieve them in the Q2 through our outside payroll company. So that was about $7,000,000 of an impact of a cash movement. The remainder was Yes, certainly just the movement from quarter to quarter, we had some less rebates only because of if you look at The Q3 and Q4 of prior year versus the lower Q1 revenue, certainly less rebates were earned, It's about a 1 quarter lag. So that contributed in that quarter Qualcomm rebates referred to. Yes, for more of a cash burn.
And then that will reverse itself going forward because of the step up in revenue to Q2 and As well as some other in and out of working capital. Certainly, when you have a lower like a Q1 revenue number, Your accounts receivable activity is less on your recovery and then that will reverse itself because of the strength of Q2 as we move forward. So hopefully that's a little bit of color. Lance, the other thing is, as Dan mentioned, we are managing that cash burn down and that's the goal And that's how we're executing.
Thanks guys. Appreciate it.
Our next question will come from Mike Walkley with Canaccord Genuity. Please go
ahead. Hey,
guys. Good afternoon. This is Daniel on for Mike. Thanks for taking my question. Just a quick one for me.
Could you just give us a sense of the timing of some of the new carrier launches you mentioned moving forward? Yes. Hi. Thanks for your question. While we have it's part of our pipeline.
We have a number of launches That we expect to occur this quarter and going forward. The pipeline has a pretty long tail on it, different stages. So, I can't really give specific answers as to numbers, but again it goes back to a very healthy pipeline. And in terms of the carrier pipeline, it's a longer cycle sales cycle as you can imagine. So the engagement from testing the products To approval, to certification, to launch takes time, but we expect to expand our carrier custom base going forward.
I think at any moment in time, I think right now we've got something like 30 RFPs that we're responding to. Again, it's a function of healthy pipeline, but we expect to have and we expect to announce a steady flow Of new carrier customers, that's number 1. Number 2, it's additional product slots within a customer we already have. That's another aspect.
Our next question will come from Mike Latimore with Northland Capital. Please go ahead.
Hi. This is Aditya on behalf of Mike Latimore. Could you tell me how many 10 percentage customers did you have?
Well, Bob is looking for numbers. The answer I'm going to give is 2.
Okay. Okay. Can you give me like what were their individual percentages to total revenue of these two customers?
No, we're not going to we don't break out the actual revenue dollars. So That's just not something that we discuss because we do not want to identify Revenue numbers for any specific customer, so we just don't provide that kind of breakout.
All right. All right. And On the mobile and IoT pipeline, what percentage of it is international?
Ashish? Yes. Not a lot at this point. We've got a nice pipeline. We have some early customers, But majority of the value is still coming from North America.
Got it.
Yes, I think there's an answer relative to revenues, an answer relative Pipeline, so not a lot of international revenue currently. I would say on a relative basis because The international market is a new market and we're building it products and our go to market teams. The pipeline on a percentage basis would be much higher than the current revenue
This concludes our question and answer session. I would like to turn the conference back over to Dan Mondor for any closing remarks.
Well, thank you, operator. I will say this and just to wrap up, the Inseego team is executing exceptionally well In every part of the company, as you saw, we're seeing growing customer adoption of our 5 gs and software solutions with carriers And the market reception of our newly launched enterprise portfolio is incredible. We have highly differentiated products And our go to market teams have never been stronger. So you put it all together, these are the reasons behind our pipeline of opportunities being the largest in recent company history. So net net, we've laid the groundwork for a strong second half as we discussed, and I think an amazing 2022.