Business context and reporting period
Inseego Corp. designs and sells wireless and IoT hardware, including MiFi and Skyus products, and enterprise SaaS solutions, including Ctrack telematics and device management. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. The company adopted ASC 606 in 2018; management said adoption had no material financial-statement impact.
Key financial results
Amounts below are in millions of dollars except per-share data. Results are GAAP unless noted.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $50.6 | $57.5 | $146.4 | $172.8 |
| Gross profit / margin | $17.6 / 34.8% | $16.4 / 28.5% | $50.8 / 34.7% | $49.8 / 28.8% |
| Operating income (loss) | $16.6 | $(6.4) | $13.2 | $(23.0) |
| Net income (loss) attributable to Inseego | $10.8 | $(13.8) | $(3.9) | $(41.9) |
| EPS, diluted | $0.15 | $(0.23) | $(0.06) | $(0.72) |
- Revenue mix: Q3 IoT & Mobile Solutions revenue was $34.6 million, down 15.8%; Enterprise SaaS Solutions revenue was $16.0 million, down 2.1%. For nine months, the segments were $95.3 million, down 22.6%, and $51.2 million, up 3.1%, respectively.
- Operating results include a major unusual gain: Q3 and nine-month 2018 operating income included a $17.2 million gain from extinguishing acquisition-related liabilities under the RER settlement. Excluding that gain, operating results were approximately a $0.6 million loss for Q3 and a $4.0 million loss for the nine-month period.
- Cash flow: Nine-month operating cash use was $3.9 million versus $14.8 million in 2017; investing cash use was $2.4 million versus $3.8 million; financing cash provided was $18.3 million versus $29.9 million. Cash, cash equivalents and restricted cash ended at $31.6 million, up from $21.3 million at year-end 2017.
- Liquidity and debt: September 30 cash and cash equivalents were $31.5 million and working capital was $29.8 million. Current liabilities were $49.6 million. Debt carrying values were $91.0 million for convertible notes and $44.7 million for the term loan; $1.6 million was outstanding under DigiCore bank facilities. The term loan had $47.5 million principal outstanding, matures in August 2020, and bears interest at three-month LIBOR (minimum 1%) plus 7.625%. Convertible notes had $105.1 million principal outstanding and a 5.50% coupon.
Material changes versus prior comparable periods
- Q3 revenue declined 11.9%; nine-month revenue declined 15.2%, chiefly because of lower mobile hotspot and home-device sales as key customers focused on upcoming 5G products.
- Gross margin improved to 34.8% in Q3 and 34.7% year to date, which management attributed mainly to changing contract manufacturers and higher-margin services revenue.
- Operating expenses fell year over year, including lower sales and marketing, general and administrative, and restructuring costs. Nine-month interest expense increased to $15.4 million from $14.3 million, primarily due to term-loan interest and debt-cost amortization.
- On August 6, 2018, the company raised $19.7 million gross in a private placement by issuing 12.062 million shares and warrants for 4.222 million additional shares. Common shares outstanding rose to approximately 73.4 million from 58.6 million at December 31, 2017.
Outlook, commentary and risks
- Management provided no specific revenue or earnings guidance. It said cash and cash equivalents together with anticipated operating cash flows should meet needs for the 12 months following the filing date, while noting that sustained positive cash flow depends on adequate revenue and execution of cost reductions.
- The company planned additional SaaS telematics offerings, industrial IoT products and mobile/fixed wireless products targeting the emerging 5G market. Management cited 5G deployment and adoption, competition, pricing, tariffs, component availability and customer demand as factors affecting future results.
- Customer concentration is significant: one customer represented 46.9% of Q3 revenue and 35.9% of accounts receivable at September 30. Management also highlighted reliance on contract manufacturers and certain suppliers, including risks from production moves, delays, quality, capacity and pricing.
- Liquidity risks include operating cash use, substantial debt service, refinancing or covenant constraints, and possible need for additional capital. Equity financing could dilute shareholders; management cautioned that additional financing may not be available on favorable terms, or at all.
- The RER settlement released mutual claims. The company paid $1.0 million cash and issued 500,000 shares, with two further $1.0 million installments due within 12 and 24 months, payable in cash, stock or a combination at the company’s option. Approximately $2.0 million remained recorded as liabilities at quarter-end. The settlement reduced previously accrued acquisition-related liabilities by about $17.2 million and generated the noncash gain noted above.
- Other risks include foreign currency and geopolitical exposure, tariffs, intellectual-property claims and litigation. The company said existing legal matters were not expected to have a material adverse effect; the Carucel patent judgment in its favor was affirmed on appeal. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- How much of reported 2018 operating income and earnings reflects the $17.2 million settlement gain, and what are normalized operating trends?
- Whether the decline in IoT & Mobile Solutions revenue reverses as 5G products launch, and whether SaaS growth offsets hardware weakness and lower-priced customer contracts.
- Whether operating cash flow improves enough to fund investment and service debt, given cash of $31.5 million and the term loan and convertible-note obligations.
- Customer retention and concentration, especially the customer representing 46.9% of quarterly revenue, and the effect of the new lower-priced SaaS contract.
- Execution and costs of manufacturing transitions, tariff mitigation, restructuring, and the remaining RER settlement payments; also assess potential dilution from outstanding warrants and other equity awards.