Inseego Corp (INSG) 2017 Q1 法說會逐字稿

Hello, and welcome to the Inseego First Quarter 2017 Financial Results Conference Call. (Operator Instructions) Please note, today's event is being recorded.

On the line today are Sue Swenson, Chief Executive Officer; Michael Newman, Chief Financial Officer; Tom Allen, Interim Chief Financial Officer; Michael Sklansky, Investor Relations.

I'd now like to turn the conference over to Michael Sklansky. Mr. Sklansky, please go ahead.

Thanks, Keith.

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.

Now, I'd like to turn the call over to Sue Swenson, Chief Executive Officer of Inseego.

Thank you, Michael. Good afternoon, everyone, and thank you very much for joining today's call where we'll share our first quarter 2017 results and provide an update on our key initiatives.

I'll cover 3 main topics on today's call. One, an update on the proposed sale of MiFi to T.C.L. Number two, an update on each of Inseego's business areas, including Ctrack's positioning within global telematics. And three, management's view on strategic alternatives.

As most of you are aware, we announced the proposed sale of our MiFi business to T.C.L. in September of 2016. In November of 2016, we filed for CFIUS approval of the transaction. For the past several months, we have been working with T.C.L. to develop solutions to mitigate any potential issues.

We believe MiFi hotspots are a commodity product. I am sure that every listener on this call already has a hotspot via their smartphone. MiFi devices do not use apps and do not have excess memory, so introducing malware is virtually impossible. And most perplexing to both Inseego and T.C.L. is the fact that T.C.L. already sell hotspots and smartphones to U.S. carriers: Sprint, T-Mobile and AT&T.

T.C.L. has been in the U.S. market for nearly a decade. They have built a business with annual revenues around $1 billion and their intention is to grow the MiFi business and provide even more opportunity for U.S. jobs. We do not believe that a threat to national security exists and believe that we have provided sufficient information to CFIUS to make that case.

With T.C.L., we have jointly provided assurances to CFIUS that the current personnel and processes will be maintained so that any possible future concerns are alleviated. That is why we refiled with CFIUS on April 24 and continue to push through the process towards a positive resolution.

For those of you not familiar with the CFIUS process, I am sure you may be wondering why we haven't been able to come to a satisfactory outcome if we believe there is not a threat to national security. Unfortunately, the process is very opaque. And when we ask for additional clarification from the committee, which, by the way, is made up of 9 different government agencies, we are told that information is classified. So while we have been unable to identify any specific concerns that we believe haven't already been addressed, we don't yet have an agreed-upon mitigation agreement from CFIUS. I can assure you that we are exploring any and all avenues that may get us to a successful outcome. While we remain hopeful to close this transaction, we have been considering backup plans, which I will comment on later in my remarks.

So let me move on to this past quarter's results. In a word, they were disappointing. Throughout the nearly entire -- throughout nearly the entire first quarter, we were under the impression from CFIUS that we were within days of getting approval to close the sale of MiFi to T.C.L. Responding to inquiries and working on additional strategies for CFIUS pulled management time and resources from the core business operations. The uncertainty surrounding the closing date also caused multiple disruptions to our supply chain, again, pulling management to deal with the MiFi business.

The end result was lower gross margins for MiFi as well as missed opportunity and underperformance for Ctrack and Inseego North America, the business we formerly referred to as FW. This is the first quarter since we acquired Ctrack in October of 2015 that we did not meet our objectives. We believe that this is not indicative of any broader slowdown at Ctrack or increased competition. We believe that Ctrack's portfolio of opportunity continues to grow.

Taking a closer look at Q1. The MiFi business was the most significant contributor to Inseego's reduced EBITDA during the first quarter. While revenue was mostly in line, gross margins declined substantially. It is important to note that gross margin challenge does not have anything to do with pricing pressure or competition, but rather supply chain challenges resulting from the significantly delayed sale of the business. As these challenges can be remediated by the purchaser, we are confident the MiFi business has not lost inherent value, and Mike will go into more detail on these challenges in his comments.

During this period, the MiFi team has done a good job of keeping their heads down in executing amid distraction evidenced by the successful launch of a new product last week for Verizon, the wireless home phone, which is a low-cost alternative to traditional home phone service. While not a fit for Inseego as we transition to SaaS and services, the MiFi business is a good business in the hands of an owner looking to benefit from our relationship with Verizon and significant manufacturing scale. We plan to do everything we can to close the MiFi transaction with T.C.L., but if we are unable to do so, we will seek strategic alternatives.

Turning to Inseego North America. Quarterly performance was impacted by lower hardware sales and associated software and services that attach to this hardware. We were pleased with the progress we have made transitioning Inseego North America to a provider of SaaS and services. At the same time, we recognized that these positive changes are not yet playing out in financial performance as the shift away from upfront hardware sales towards recurring revenue creates a revenue headwind until the recurring revenue portfolio begins to mature.

Inseego North America focuses on 2 main areas of business: Number one, the DMS SaaS business; and number 2, the sale of originally designed and third party IoT hardware. We increasingly seek to bundle IoT hardware with software and services such as our proprietary Crossroads platform.

Device management services or DMS is a SaaS platform that provides a complete shopping cart experience with powerful real-time reporting through workflow management portals. The integration of DMS with carrier ERP systems helps organization manage costs and contracts while mitigating compliance risks. DMS is an attractive high-margin business with growth opportunities. New leadership has provided a clear vision and focus to strengthen our business for our 2 main customers: T-Mobile and Sprint. In addition, while not yet evident, the financial performance we have been productizing DMS to address a much larger customer base, including other U.S. carriers, global carriers and local state and federal agencies. We believe DMS will be a contributor of high-margin revenue growth for Inseego North America.

We believe the areas of IoT, upon which Ignite and our bundled IoT solutions are focused, remain highly attractive markets with modest penetration and high growth, including remote connectivity, sale over and digital signage. We continue to mature our solution of bundled hardware SaaS and services offer and continue to work with T-Mobile to jointly develop this new market opportunity.

Turning to Ctrack. While we fell short on our Ctrack guidance for the first time since we acquired the business in October 2015, I continue to believe we are on track to drive Ctrack to 20% revenue growth. The quarterly hiccup has nothing to do with the underlying strength of the Ctrack business, which continued to move in the right direction overall during the first quarter.

A significant portion of Ctrack's revenue shortfall was driven by the restructuring of the contract with a large usage-based insurance customer. UBI accounts for approximately 15% of Ctrack revenues, with this customer being a significant portion of these revenues. We believe the economic realignment will be a positive for both sides in the long run and has already led to discussions on the potential expansion with this customer. We also began ramping a solution with a new UBI customer during the first quarter. Despite the headwind for this segment during the first quarter, we believe UBI will be a solid contributor to growth and profitability in the coming quarters.

The majority of the remainder of the revenue shortfall for Ctrack was driven by some softness in our South African consumer and stolen vehicle recovery business, which accounts for approximately 10% of Ctrack revenues. We believe the quarterly challenges in this submarket will be remedied through improved execution. We do not see any particular market trends in South Africa leading to the weakness. We have made some internal changes to better address this market going forward.

Ctrack's core fleet management business, which accounts for approximately 75% of overall Ctrack revenues, continue to perform very well during the quarter. The South African business continued to perform well in the large fleet space, signing wins with Glencore and South32, both large mining companies. The U.K. business continued to secure wins with Marquee Brands in the government, utilities and courier verticals. Examples include Wessex Water and City Facilities Management U.K. Limited. And the Australian business continued to build on strong carrier and distributor relationships to help further penetrate the government and SMB verticals with a recent win with Department of Finance Western Australia.

While year-over-year revenue growth for Ctrack was less than we expected in the first quarter of 2017, we see sequential growth resuming during the second quarter. In the back half of 2017 and into 2018, we see growth coming from both the core business and some new growth opportunities and initiatives for Ctrack.

These include: Number one, ramping the overhauled SMB platform into regions other than Australia such as South Africa, the U.K., Netherlands, Germany and the U.S.

Number two, continuing to expand Ctrack's airport solutions business. We are responding to 2 separate RFPs with U.S. airlines and are hopeful our differentiated offering will be selected.

Number three, deepening strong relationships with international carriers such as Vodafone, Telstra and MTN. We have identified several global strategic initiatives with Vodafone, are jointly selling to government business and SMBs in Australia with Telstra and are hopeful to better capitalize on our MTN relationship. MTN helps facilitate Ctrack's deal with Cameroon and we believe our strong relationship with this carrier will lead to both similar deals in other African countries as well as other unique opportunities across the continent.

Now, before establishing new opportunities with U.S. wireless carriers, we are currently jointly deploying the ride share opportunity with a U.S. automotive company with a leading U.S. carrier. In addition, we are jointly bidding on one of the U.S. airport solution RFPs with a leading U.S. carrier.

And last, number 5, we're expanding our rapidly growing FleetConnect asset optimization platform to geographic regions beyond South Africa. In South Africa, we have recently won large deployments for this compelling product, including Standard Bank.

Clearly, Ctrack's portfolio of opportunity is extremely compelling, if not industry-leading. We see 2 key areas of differentiation driving Ctrack's success. First, Ctrack has a physical presence in global regions experiencing rapid telematics growth, including Africa, Australia and certain regions of Europe. Customers tell us that having feet on the street and aftermarket support differentiates Ctrack for many of our key competitors in these regions. Second, the breadth of Ctrack's portfolio aligns well with targeted market opportunities in particular verticals. A recent portfolio review of regions, verticals and distribution strategies is enabling the leadership team to prioritize and leverage successes globally, with a focus on execution.

Turning to strategic alternatives. Inseego clearly owns a tremendous asset in Ctrack. However, unlocking the full extent of opportunity of Ctrack will require investment. While we believe the sale of the MiFi business to T.C.L. would provide sufficient cash to drive growth at Ctrack, we recognize that if the T.C.L. transaction does not close, we will need to explore all other strategic alternatives for MiFi, including the sale to another entity, a joint venture or a licensing arrangement. Simultaneously, we will begin exploring strategic alternatives for all parts of the Inseego business so as we can prepare for whatever outcome unfolds. Additionally, we will continue our ongoing efforts to streamline the business and take out any costs that don't contribute to our key strategic initiatives.

So with that, I'm going to now turn the call over to Mike Newman. Mike?

Okay. Thanks, Sue.

As Sue mentioned, Q1 was a challenging quarter for the company. As our sale of the MiFi business to T.C.L. stretched out, we did not generate consistent improvements to our business as we would expect. As compared to Q1 a year ago, our core metrics in Q1 2017 all showed substantial growth. But on a sequential basis, as compared to Q4, we did not maintain our momentum. In other words, we took a step backwards after 5 quarters of success. However, our core businesses remain strong and are squarely aligned with the growing global market opportunity. And as always, execution is the key to success.

Total revenue in the first quarter of 2017 was $55.4 million, down 17.2% from $66.9 million in the first quarter last year. This decline was driven by the company's strategic shift towards SaaS, software and services with reduced standalone hardware revenues as compared to last year. We generated $14 million in SaaS, software and service revenues in the first quarter of 2017, an increase of 9.4% from $12.8 million a year ago. These are our most profitable revenues and represented 25.3% of our total revenue mix in the first quarter of 2017 compared to 19.1% in the first quarter of 2016.

Despite this annual growth, we did misstep from an execution perspective in Q1. Our SaaS, software and services revenue decreased sequentially from Q4 due to reduced sales from third party products and associated service offerings from Inseego North America as well as reduced revenues from our South African user-based insurance and consumer telematics offerings. A Ctrack contract with our largest UBI customer was restructured. And while that negatively impacted short-term growth in SaaS and services revenue, over the longer term, we believe that sets the stage for sustained growth with that UBI customer as well as other potential UBI business.

Our UBI and consumer telematics offerings in South Africa represent approximately 25% of our global Ctrack business. The consumer UBI business lines have a lower value proposition and, therefore, lower ARPU than our Ctrack fleet products sold in South Africa, the U.K., Europe and Australia. Pricing continues to remain stable in these core markets and product sets.

Our hardware revenues declined to $41.4 million in the first quarter of 2017, down 23.5% from $54.1 million in the first quarter of 2016. While this year-over-year decline was driven by our strategic de-emphasis of the standalone hardware sales, revenues from our MiFi products actually increased sequentially from Q4 2016 as our next-generation MiFi hotspot product launched with Verizon in early 2017. While this product is not part of our long-term strategy at Inseego, the product launch itself was quite successful and we've received positive feedback from Verizon and end customers alike.

I also want to remind you that we divested our hardware modules business to TELEC last year, and there were $4.2 million of revenues associated with that business in Q1 2016.

Our Ctrack operations contributed $15.3 million of revenue in the first quarter of 2017, growing 2% from $15 million a year ago. Ctrack revenues experienced the same seasonal decline in Q1 from Q4 as we've seen in the past. We had hoped to buck this trend in Q1 2017, but could not overcome it due to the pricing adjustments with our largest customer in the UBI space as well as other executional challenges in the consumer stolen vehicle recovery market in South Africa.

In terms of subscribers, our subscriber base grew in the first quarter by 18.5% to 633,000 total subscribers at the end of Q1 2017 from approximately 540 -- 534,000 subscribers at Q1 2016. More specifically, in the first quarter, our Ctrack fleet subscriber base grew year-over-year by 15.2%, ending the quarter with 189,000 Ctrack fleet subscribers. Our other Ctrack telematics subscriber base grew year-over-year by 16% to 239,000 subscribers, although this group of subscribers declined on a sequential basis from Q4 based on the challenges we experienced in the UBI and consumer SVR markets in South Africa.

Our Inseego North American IoT subscriber base, which is formerly known as FW, grew year-over-year by 25% to 205,000 subscribers.

Non-GAAP gross margin was 31.8% in the first quarter of 2017, decreasing by 3.4% from 35.2% in Q1 a year ago, driven by a decline in gross margins for MiFi mobile broadband products that offset the company's strategic transition towards the improved mix of higher-margin IoT solutions with the significant SaaS and recurring revenue components.

The launch of our next-generation MiFi hotspot product came with a reduction in gross margins as compared to the prior-generation MiFi hotspot, largely due to the distractions and challenges of launching a major product while in the midst of a publicly announced divestiture. For example, we experienced an unwillingness of certain core suppliers to match price concessions from prior MiFi product releases for 2 reasons: One, they felt they were -- they felt we were committed to the product launch regardless of component pricing since the MiFi business was announced to be sold to T.C.L.; and two, they expect T.C.L. to extract price concessions from them and, therefore, are unwilling to go through that cycle twice for the same product.

Over the longer term, the latest MiFi hotspot product should be able to achieve the same gross margins as the prior-generation MiFi hotspot, but that may not happen until the MiFi business is divested due to the challenges of dealing with suppliers who are looking ahead to discussions with new ownership.

Our non-GAAP gross margins from SaaS, software and services revenues were 67.7% in the first quarter of 2017, down from 71.5% in the first quarter of 2016, but still overall riding the strength of our comprehensive IoT solutions, including our Ctrack branded telematics offerings. As I mentioned earlier, reduced revenues from our restructured contract for the large UBI customer negatively impacted our margins for the quarter, but also provides a platform for new growth.

Our non-GAAP gross margins for our hardware revenues decreased to 19.7% for the first quarter of 2017 compared to 26.6% in the first quarter of 2016, primarily as a result of reduced gross margins on the latest MiFi hotspot that I described earlier.

Our non-GAAP gross margins for Ctrack products, which are a mix of hardware, SaaS -- hardware and SaaS, software and services sold as bundled telematics solutions, were 65% in the first quarter of 2017 as compared to 63.7% in the first quarter of 2016.

Our non-GAAP operating expenses decreased by 6.1% to $22.9 million in the first quarter of 2017 from $24.4 million in the first quarter of 2016. The expense reductions were driven by the restructuring actions we undertook throughout 2016 and 2017 to position the company for its planned decreased operational footprint in North America following the announced divestiture of the MiFi business.

You will note that non-GAAP operating expenses did increase on a sequential basis from the fourth quarter due to 3 factors: one, an increase in G&A expenses as we prepared for trial to defend an IP infringement lawsuit, which, by the way, we won with no liability whatsoever in a jury trial the first week of April; two, an increase in sales and marketing expenses as Q4 expenses included some onetime benefits associated with exiting co-marketing obligations to certain legacy MiFi customers; and three, a seasonal increase in employee costs in Q1 versus Q4 due to increased payroll and other withholdings. Clearly, we have work to do on further cost restructuring initiatives to help drive improved EBITDA toward our targeted EBITDA margins for the overall business.

Our adjusted EBITDA for the first quarter of 2017 was very disappointing at negative $3.2 million as compared to positive $1.3 million in Q1 2016. Ctrack generated $2.3 million of positive adjusted EBITDA in the first quarter of 2017. So this disappointing adjusted EBITDA performance was, once again, driven by the MiFi business. Despite increased MiFi revenues in Q1 2017 as compared to Q4 2016, adjusted EBITDA was significantly negatively impacted by the reduced gross margins for the MiFi business due to the pending divestiture transaction as well as the significant legal expenses from the IP infringement lawsuit.

Our non-GAAP net loss per share in the first quarter was negative $0.14 per share as compared to a non-GAAP net loss per share of negative $0.08 per share in Q1 last year.

In terms of how we calculate our non-GAAP financial results, as always, a reconciliation of our GAAP to non-GAAP financials is contained in our press release.

Turning to the balance sheet. Cash and cash equivalents were $6.4 million at the end of the first quarter, declining from $9.9 million at the end of the fourth quarter. We had increased receivables and payables at the end of Q1 due to the MiFi hotspot product launch in early January, but we also saw more meaningful increases in AP and accrued expenses as we carefully managed cash throughout the quarter. We tightly monitor the company's liquidity position as the MiFi divestiture transaction extended longer than anticipated, consuming capital with new MiFi product launches and ongoing operations.

All this led to our $20 million financing transaction that we announced today, which injected $18 million of cash into the company, net of a $2 million commitment fee. This should stabilize our balance sheet while we continue to pursue our MiFi sale transaction with T.C.L. and, in the event that transaction is ultimately blocked by CFIUS, enable the company to pursue strategic alternatives to the MiFi business or otherwise. This loan is due to be paid in one year, providing ample time to engage in a strategic transaction. We did repay and terminate our Wells Fargo credit facility simultaneous with the close of the new financing and we paid off $3.1 million of borrowings under that facility.

Moving on to second quarter guidance. This will, once again, be impacted by the pending divestiture of the MiFi business. We expect our consolidated company, including the MiFi business, to generate adjusted EBITDA of negative $200,000 to negative $400,000 per month while operating as a consolidated business. This is significantly improved from the negative $1 million plus per month of negative adjusted EBITDA that we experienced in Q1. And this is attributable to 3 reasons: one, cost restructuring initiatives intended to realign the company's cost structure with the current business environment; two, planned growth in Ctrack and Inseego North America revenues for Q2 as compared to Q1; and three, reduced legal spend as our significant litigation matter concluded in early April.

We are also providing guidance for our SaaS, software and services revenues for the first time with a second quarter 2017 outlook for SaaS, software and services revenues of $14 million to $15 million.

Ctrack solutions are expected to contribute $15 million to $16.5 million of revenue in the second quarter of 2017, growing sequentially again from Q1, with Ctrack non-GAAP gross margins of 60% to 65% and adjusted EBITDA from Ctrack of $2 million to $3 million.

There's obviously one last item that I want to address on this call. I'm sure you've all seen the announcement today that I will be leaving Inseego due to personal and family reasons. I want to emphasize that while it's my decision to leave the company at this time, I continue to believe the company has a bright future and will become a global leader in IoT SaaS and services, including fleet telematics. In addition, I'll remain with the company in an advisory role through the conclusion of the sale of the MiFi business.

I am proud of the passion and dedication our employees have shown during the company's monumental transition from a hardware-only business to a SaaS and solutions provider, and I'll remain close to the company as it continues to execute its strategic vision. With Inseego's latest financing concluded earlier this week, I believe the company is well-positioned for the future and in great hands with Sue, Tom and the entire leadership team.

At this point, I'll turn the call back over to Sue.

Mike, thank you.

And before I turn the call over to the operator for Q&A, I'd just like to take a moment to publicly thank Mike Newman for his contributions over the past several years. He joined the company at a very turbulent time and has been key to the transformation of the business. The partnership that we had and our shared vision and values enabled us to work very well together as we worked through some very tough challenges. I know that Mike will remain interested in the future of Inseego and I know I'll be able to count on him for sage advice and counsel.

I also look forward to working with Tom Allen again. He, too, has worked with us during turbulent times in the past and understands the business and the challenges that still face us. Having worked closely with Tom during his last interim assignment, I am confident that he will be able to provide us the support we need while we search for a permanent CFO.

With that, I'll now turn it over to the operator for Q&A.

(Operator Instructions) And the first question comes from Jaeson Schmidt with Lake Street.

I just want to start on that UBI contract negotiation. Was it more -- was the impact more due to the timing of the contract or early negotiating of the terms?

Jaeson, good question. That's a contract that the company has for a while now. And it really was the first of its kind and largest UBI deal, not just in South Africa, but probably in the world. And I think, between ourselves and our UBI customer, it just got to the point that the economics of that arrangement really weren't working going forward in terms of attracting and growing the business the way that they would like. And while we obviously would have, over the short run, preferred not to restructure the contract because it's a short-term hit to our revenue, over the longer term, having a restructured arrangement that allows for growth and a platform for growth and expansion is better than having a contract that was really going to run its course. It also positions us better as we continue to try to prioritize UBI in other regions to take this opportunity to those places as well.

Okay. And then, just shifting gears to the SMB product. Any update you can provide on how traction and the reception is going in the North American market?

Yes, Jaeson. We -- as you know, we revamped the UI, UX a while ago and we've been in trials with a variety of customers around North America, and we've gotten very good feedback. We've taken a look at -- you've heard me comment that we've done a recent review of our regions and the opportunities in those different regions. And we think we have a pretty good opportunity that -- maybe even better than North America in our Australia organization, partly because they're established. They've got an organization. They've got infrastructure. It doesn't mean we won't continue to expand the opportunity in our other regions, but we did a little bit of a pivot as a result of some analysis that we did about the different regions.

So we're pretty pleased with the progress that we're making and the feedback has been very, very positive. We'll continue to develop that platform and add features and functionality as we see it appropriate, but we think we have a pretty robust and attractive offer based on what we've developed to-date.

Okay. And then, so you're just going back to your comments on the prepared remarks about being able to grow the Ctrack business 25%. Any sort of time line you can provide and how we should think about that target?

Yes. Well, first of all, let me correct you. I think I said 20%, but I -- we can certainly aspire to do 25%, but I think I said 20%, but thanks for the confidence. And based on -- like I said, Jaeson, we've been doing quite a bit of work on -- as you know, we've done a variety of things here in the old Novatel past. And I think Ctrack has done a number of things and we are really honing in on those markets and those products that we think have the best opportunity for growth. So that's why we feel very good about it because of that analysis that we have conducted over the last 3 months.

It's been great to have Cobus Grove here in the United States because we can have the opportunity to interact with him more, and he certainly understands his markets and his people. So that's why we're feeling much, much better and more confident about that.

Okay. That's helpful. And the last one and I'll jump back into queue. Just want a clarification on your comments regarding strategic alternatives and potential routes you may pursue if this deal doesn't get done. Do those comments relate strictly to the MiFi business or the entire Inseego umbrella of products?

Yes. No, I think it's a great question. In my comments, I said that obviously MiFi is a priority and it's something that we have obviously thought about for quite some time and set probably back to the early 2016 time frame when we were thinking about the sale of this and have been considering this for quite some time, but I think I really said at the end of my comments, we'll begin exploring strategic alternatives for all parts of the Inseego business. So I think it's important for people to understand we're taking a very comprehensive look of what we have to do because we think there's great value here and we want to make sure we maximize it. So as far as I'm concerned, nothing's off the table.

And the next question comes from Rob Stone with Cowen and Company.

Sue, I wanted to follow-up a little bit on the comments in your prepared remarks about seasonality x unexpected turbulence from things that you had mentioned with the divestiture process. How do you think about normal seasonality? If it's Q1 down sequentially, what's the typical shape of your SaaS business for quarters 2 through 4?

Yes. That is a good question.

I'll take that instead of Sue. So Ctrack folks haven't historically seen the quarterly seasonality in Ctrack since Ctrack was a first base company listed on the Johannesburg Stock Exchange and they reported in 6-month cycles.

We look at it on a quarterly cycle. Q4 likely to seen, Q1 tends to seasonally step down from Q4, then you get a step up seasonally in Q2 since June 30 was Ctrack's historic fiscal year-end. Then it's flattish, a little bit flattening across from Q2 to Q3 and then a step up in Q4.

Now, Ctrack is just one portion of our SaaS and services business. We have the Inseego North America business, which is formally known as the FW business. That has a more traditional North American seasonal trend where it's -- you sometimes get a little push there in Q4 due to budget flush, but that's much smaller than the Ctrack business, particularly when it comes to the SaaS and service offerings. So it's really the Ctrack seasonal trend that impacts that line.

Okay. Great. That's helpful. A couple of housekeeping items, probably I'll ask for you, Mike. One, you mentioned the expense reduction year-over-year from planned actions already undertaken. Are you expecting to see more of that? Or as the revenue steps back up sequentially, should we see expenses move up a little bit along with that? Just sort of a general directional comment on OpEx.

Yes. So in the very, very short to run in Q2, you should see expenses step down in large part due to savings on the legal side as a result of that litigation item. So as a result of that one item, it will step down in Q2.

But overall, I mean, look, right now, as evidenced by the EBITDA and the EBITDA margin, negative, obviously something -- you can take steps to align the cost structure with the company's revenue profile and, now, new gross margin profile of what we saw in the MiFi business. So that's not just a MiFi-related subject though. It really cuts across the whole business because we had a whole business to run. And so I would expect continued aggressive management of the costs to align with the revenue as opposed to wishful thinking for the revenue to magically pop up and support all the costs.

Now, that doesn't mean we don't expect to see growth in revenue. We are guiding to revenue growth for Ctrack. We are guiding to revenue growth for SaaS and services and the company looks to get back to consistent sequential improvement, not some dramatic onetime blip on the revenue side. So we'll manage to that revenue. We'll manage to the planned revenue growth, which is not wishful thinking growth, but actual realistic reasonable believe growth and the cost structures got to align to that.

Great. A question on the credit line. You -- so you've put in sufficient capital to do what you need to for a year. I guess, $2 million to effect that transaction. Were you in a position to repay that sooner, let's say, in the next couple of months? Are there any additional fees to prepay the line before the end of a one-year term?

Not at all, not at all. Good question. There's no prepayment fees, prepayment penalties. If we prepay, we simply would pay accrued interest at that time, but there's no penalty fees or other charges for prepaying. And in fact, when the MiFi businesses divested or if it's not divested, if there are any other divestitures, those proceeds under the loan are called for to repay the loan, again with no fees or penalties.

Great. All right. But just to make sure I'm not leaving Sue short on questions, one more for you. You mentioned targeting new carrier relationships. Obviously, there's a particular skill dealing as a small company with much bigger ones. How do you think about the lead time to stand up a relationship like that? And I recognize none of this is brand-new since you've been working with one or more big carrier customers for quite a while, but just when might we see that crop get harvested?

Yes. That's a great question, Rob. Each of the carriers is a little bit different. We have done quite a bit of work at looking at our global carrier strategy. And depending on the relationships we have today, which are many, I think the opportunities are probably have a shorter cycle time. We obviously want to try to deepen the relationships with the ones we have, which, again, I think would shorten the cycle time. We also think there are some interesting target ones that we don't have an opportunity with, but I think we're -- it's certainly an important relationship for us. And we do have some fairly high level relationships in most of the carriers, which certainly facilitates movement. We don't have to start at the midlevel management. We can start at a more strategic level, which, when that comes top down in the carrier world, things happen faster. So I don't think I can give you specifics, but I think we're well-positioned within the global carrier, call it, ecosystem.

I think it's also important to think about the evolution of the carrier world because, certainly, they're changing. I think the things we have to offer today are more interesting for them because of, obviously, the penetration they have within their base business. And as you know, there are several carriers who view the kind of business we're in very attractively. So we think we'll see where that leads us, but I'm pretty pleased about the progress we're making there and the relationships we have.

So we hope to give you more information as the quarters evolve. I think I gave a little bit of a preview on some things we have underway. And hopefully, as the quarters evolve, we'll be able to announce some specific transactions with them.

(Operator Instructions) And our next question comes from Mike Walkley with Canaccord Genuity.

Just a clarification for me. On the cost cuts, I think you've talked also on the call about the need to invest in Ctrack, et cetera. So the cost cuts is mainly on the MiFi business? Or are there other areas where you think you can cut costs? It's the first question.

Yes. I think it's more of a holistic approach in terms of trying to assess where we're overspending against the return that we're getting. So I wouldn't confine that to any particular business. I mean, obviously you've heard us talk in the past about certain areas of business that we think are underperforming and can be cut back. At this point, though, I think, as with the strategic transactions discussion that Sue covered earlier, I don't think there's really any areas of rationalizing our costs against our revenues that are off-limits.

That's correct.

Okay. And then, just on a bigger picture, just with -- assuming this -- you get the approval on MiFi sold, any kind of thoughts on how we should think about longer-term EBITDA targets or 12 months out EBITDA margins for the stand-alone businesses? Any of those type of targets that you're willing to share at this point?

Yes. Nothing's really changed from the prior view in terms of what that stand-alone business looks like. We talked about on this call a lot of what the factors that turned positive EBITDA into negative EBITDA related to reduced gross margins for the MiFi business, that litigation item, which also relates to the MiFi business. We weren't pleased with how either the Ctrack or Inseego North America businesses performed. But neither one of them -- while they both underperformed against our expectations, neither one has more recurring-oriented businesses, neither one really fell off the map by more than hundreds of thousands of dollars.

I think, as we look ahead, I don't think the outlook for those businesses really changed. We had talked about whenever the MiFi sale to T.C.L. closed, we talked about emerging from that in the first quarter following the closing with a $90 million revenue run rate for the new business with a 5% to 10% EBITDA margin. And I think that continues to be the goal and the focus. I don't think anything has changed there at all. And I think when you look a year out from that, whenever that may be, I think you'd expect to see growth in the top line. Whether that translates into EBITDA margin expansion or not over time ultimately depends on how much of that growth is reinvested to drive further growth, but we certainly would expect to see growth in the top line as well as stable, if not expanding, EBITDA margins over time.

Okay, Mike. That's helpful. And best wishes to you and your family as you move on. Last question for me and then I'll pass the line is any kind of run rate we should expect kind of for modeling or to think about Inseego North America, given some of the changes, and how you're pursuing that business from less hardware upfront sales? And is that $90 million still the right target for the combined company, given the Inseego North America kind of changing their strategies since the last time you shared that number?

Yes. I think the $90 million is still the right target. I think when you think about Inseego North America, you have to remember -- Sue may have mentioned this earlier, you have to remember that when you're converting from a hardware-based revenue system to one that relies on SaaS and services, hardware tends to be recognized upfront and SaaS and services over time. The lifetime value of the customer is obviously much greater with SaaS and services, but in the short-term, as you're making that transition, it's hard to get revenue growth -- total revenue growth because you're losing hardware revenues while you're on a -- you're growing the lifetime value of those customers faster, but in the short term, the revenue is -- the offsetting revenue is growing slower. So I think you should continue to think of the -- our Eugene-based operations as relatively flattish from a revenue perspective while the mix improves.

And the next question comes from Cobb Sadler with Catamount.

Just a first question on the CFIUS process, and I don't know if you're talking about that today or not, but like from this time around, are you doing anything different or just more of the same and explain your case better? Because, I mean, I agree with you. I walk into AT&T, there's 3 hotspots. Two are made by ZTE, which is a Chinese manufacturer. I just don't understand the situation. As you mentioned, T.C.L. already sells hotspots in the U.S. So the case to me is clear-cut, but are you doing anything different this time around to help your case? And when might that conclude?

Yes. Let me comment on that. I hope you could tell by my comments the -- kind of the frustration that I felt out of the whole thing. We have done everything asked of us since we started the process with them, Cobb. And as you could tell by my comments, we are confident that we are not a problem, but the opaqueness of the process has caused us to take, I would call them alternative routes, which I really don't feel comfortable disclosing at this point in terms of what those are. But I would tell you we're dealing with obviously directly with the CFIUS entity within the federal government and continuing to try to answer questions for them, but we're exploring some different routes to see if we can get our message across more clearly. Interestingly, I have a secret clearance as a result of the work I do in another area. And even that was indicated to us by CFIUS that they could not share the -- any concerns that they have. So we're, as I said, exploring any and all alternatives available to us, of which there are several. And I'll just leave it at that.

I would just tell you, from a timing perspective, I don't expect, and Mike can say something differently, but I don't expect that we'll be talking about this in the next quarter.

(inaudible) Go ahead Cobb.

And then, just I want to talk about EBITDA. I mean, you guided next quarter for, what, $2 million to $3 million. And so maybe the business -- the Ctrack business that it is probably $12 million for the year or something like that. I know you're not guiding for the year, but -- so that's kind of a base. Your churn hasn't been that high. And then, Mike, could you tell me -- so let's say, if you grew 20% off of that business, maybe it's 14 million extra or something like that next year. And so you've got this EBITDA margin, but then you have what incremental EBITDA would be. So like, for new revenue, you're not going to have any G&A increases associated with that revenue as it relates to EBITDA. You're not going to have probably much more marketing expense, and you're not -- sales expense would probably be there. But like for each incremental dollar next year, what is kind of -- what kind of dollar -- so let's say you do $14 million just to round up, just a number of 20% growth x for next year, how much would drop down in dollars to -- for EBITDA? So, I guess, your gross margins are maybe 65%, 70% or something like that. It certainly won't be that high, but it's certainly not going to be as low as the corporate EBITDA margin because, again, there's no G&A associated with new revenue. So what I'm trying to figure out how much revenue that -- or how much EBITDA that $14 million revenue is going to kick out? What's the number you think?

So it's a complicated question, Cobb. It's a complicated question because you're hypothesizing that everything else stays the same and there's going to be -- there will be some restructuring activities, cost savings activities to align with the current revenue. So there'll be a lower cost base against that increasing revenue that you're describing. But yes, if you assume, let's just assume for argument's sake that it's a 60%, 65% gross margin revenue dollar because it's a Ctrack revenue dollar, you don't scale -- you wouldn't typically scale operating expenses dollar-for-dollar or $0.60 on $1 to match that. You're obviously going to have some sales expense, but you gain leverage as the company -- as you have more revenues as a company.

The real question is, ultimately, as you do that, do you reinvest those dollars in operating expenses towards growth in other regions. Let's say, that -- let's say, you're driving growth in Australia with the SMB product, which you described earlier, and it's gaining real traction. You've got to make a choice then. Do you reinvest that to grow the U.K. market because you're now seeing the -- it perform well in Australia to grow the U.K. market?

I think the answer is you probably reinvest some to keep growing. And then, obviously, given the company's overall situation, you'd like to see some drop to the EBITDA bottom line. So that's why I said I can't imagine in that type of environment that you're talking about, the company's EBITDA margin is going to decline. The company's not going to spend like crazy to drive further growth. It would stay flat to go up. I would imagine it's going to go up. Other companies in this space are doing 20%, 30%, 35% in EBITDA margin. I know that there are times where we may it look very difficult, but it really isn't rocket science. If other companies can do that, so can we. And those growth -- those EBITDA margins out there are ultimately achievable as they've been for other companies.

Okay. And this does conclude the question-and-answer session and the conference call. So I would like to thank you for your participation. And you may now disconnect your lines.