Inseego Corp (INSG) 2018 Q4 法說會逐字稿

Hello, and welcome to Inseego Corp.'s Fourth Quarter and Full Year 2018 Financial Results Conference Call. Please note that today's event is being recorded. (Operator Instructions)

On the call today are Dan Mondor, Chairman and CEO; Steve Smith, executive vice president 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 in the 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.

I'll start with the main headline. We ended 2018 with a very strong fourth quarter performance, including outstanding top- and bottom-line growth and expanded customer base in North America and worldwide. We believe that the combination of our market-leading gigabit 4G LTE and 5G NR innovation and positive industry dynamics will enable us to further extend our leadership position in 2019 and beyond.

I'll start with a few highlights of our recent progress. First, consolidated Q4 results came in at the top end of guidance with very strong revenue growth and record adjusted EBITDA. Q4 revenue grew 11% sequentially and 20% year over year. Adjusted EBITDA of $5.8 million easily met our stated objective of exiting the year with an annualized adjusted EBITDA in the $20 million to $25 million range. Adjusted EBITDA was the highest in nearly a decade and took us above 10% EBITDA margins and is a major step towards our objective of further balance sheet deleverage.

Second, Inseego is addressing the global 5G market opportunity for mobile hotspots and fixed wireless access. So how is that? Our secret sauce is a universal platform architecture for 4G LTE and 5G millimeter wave and sub-6 gigahertz products. Together with our partners, Inseego has become an industry thought leader by showcasing new 5G use cases in numerous live demonstrations. For example, augmented reality for first responders, virtual reality telemedicine, AI robotics and live streaming of 4K video and others. Inseego has real, working devices that show attendees can pick up and operate. They're not glass encased static products like some of our competitors. Our devices meet rigorous latency and throughput requirements that make these successful public demonstrations illustrate the power of 5G. And as the saying goes, no guts, no glory.

Third, we've seen an astonishing acceleration of customer engagements in the last few months. Our current service provider pipeline is in excess of 20 opportunities with mobile and fixed wireless 5G. We are obviously thrilled to be out in front in the 5G market working hand-in-hand with ecosystem key partners such as Ericsson, Nokia, Qualcomm, and others. Both the Consumer Electronics Show and last week's Mobile World Congress were tremendous successes, resulting in a major increase in customer awareness of Inseego. In other words, who we are, what we do and why we matter.

The Inseego team has made great strides in 2018, and the transformation of Inseego 2.0 is right on track. Since I joined as CEO, quarterly adjusted EBITDA has grown over $9 million, going from a loss of $3.2 million in the first quarter of 2017 to positive $5.8 million this quarter. Quarterly EBITDA has grown sequentially by 31% on average over the last 7 quarters.

2017 was all about restructuring, creating focus and cost cutting to pave the road ahead. In 2018, we shifted gears to planning and then the early innings of the execution phase of our long-term strategy. 2019 is about laser focus and continued execution. A lot has been accomplished in a relatively short period of time, and rest assured, we have the right stuff to keep the momentum going. Inseego is in it to win it.

I want to take a few moments to look back over the last 12 months so everyone can connect the dots on how we plan to move forward over the next 12 months. In January of 2018, we launched a new 3-year strategic plan and reorganized around 2 business units: IoT & Mobile Solutions and Enterprise SaaS Solutions. We created a comprehensive product roadmap shaped by large, high-growth market opportunities that passed the real, worth it and winnable test. We then developed an ecosystem of strategic partners to complement the roadmap. We raised about $20 million of new capital led by a Marquee new lead investor Tavistock. This was done to accelerate our investment in new products and go-to-market resources and to take an important step towards deleveraging the balance sheet. And we strengthened our board of directors with 2 outstanding new board members. We successfully ended an outstanding lawsuit filed before I joined the company, which removed a dark cloud that was hanging over the company. We stabilized the MiFi product and resumed growth in the second half and increased full-year EBITDA on our Enterprise SaaS business by $5.6 million year over year. We recorded numerous design wins in 4G, 5G, aviation, IoT and DMS and captured new business globally. We brought numerous new products to market with more to come in 2019.

In the fourth quarter we moved contract manufacturing to Foxconn in Taiwan to achieve greater scale, meet the technical requirements of our new generation of products and eliminate potential future tariff exposure. We added a lot of muscle to the organization by recruiting key resources in advanced technology, product development and product line management. Additionally, we opened a new innovation center in Cupertino to be at ground zero of the technical expertise we need going forward. We implemented a new go-to-market structure and appointed sales leaders for North America international markets. All of these advancements combined created a much broader product line and gave us the ability to win new customers and expand into new geographies.

In summary, 2018 was an amazing year of progress and creation of the foundation for sustainable growth and shareholder value.

Moving to the IoT & Mobile Solutions business, we added 6 new customers with our mobile products, including several tier 1 service providers and numerous enterprise customers with our Industrial IoT portfolio. Our strategy of upfront investment in common global platforms allowed us to rapidly adapt our 4G LTE products to meet the needs of new customers who operate on a wide array of wireless bands. IoT & Mobile Solutions quarterly revenue increased 16% sequentially and 35% year over year. This increase was led by the launch of our MiFi gigabit hotspot in Q4 as well as design services revenue for our new 5G products. Adjusted EBITDA improved by 46% quarter over quarter and 235% year over year. And I would say, to have some of our R&D investments funded by our customers speaks volumes to our value proposition.

We made amazing strides to be first in the industry with a complete 5G in our mobile and fixed wireless product portfolio. We started with the industry's first millimeter wave deployment with our R1000 Home Router solution as part of Verizon's ultrafast 5G home service. We have since engaged multiple global tier 1 service providers for both millimeter wave and sub-6 gigahertz fixed wireless and mobile hotspot solutions for consumer enterprise and SMB markets as the end customers. The expertise of our product teams and history of being first to market in every new generation of wireless technology gave us the unique position to lead the 5G NR device solution market and to stay in the lead.

Much discussion in the industry today is about 5G for the consumer broadband market, which will be massive. However, we expect the 5G enterprise and SMB market to be even bigger. And why is that? Well, it's because of the sheer number of use cases for businesses. We are now extending our industry leading mobile platforms into industrial enterprise IoT markets where we are winning new enterprise customers. We're also addressing greenfield market opportunities specifically driven by FirstNet and CBRS spectrum. We've made progress in the enterprise market by strengthening our channel sales team and signing key distribution partners, including SYNNEX, Novotech, and this morning, we announced Arrow Electronics. We are investing in focus marketing to grow awareness of our new offerings with channel partners and to drive lead generation. I call this line-of-sight to revenue marketing. Going forward, we will continue to extend our latest mobile technology innovations across our Industrial IoT portfolio and add a cloud-enabled architecture to provide our customers deep visibility into their enterprise operations. In other words, it's a very compelling, intelligent device-to-cloud IoT value proposition.

Turning to the Enterprise SaaS business, we saw a 3% quarter over quarter growth in subscribers, bringing our total recurring revenue subscriber base to nearly 1.1 million. The Ctrack business outside of South Africa continues to experience double-digit annual subscription revenue growth.

It's not news that 2018 was a year of significant foreign exchange rate fluctuations against the U.S. dollars and all our foreign currencies and a much weaker South African rand. Quarterly Enterprise SaaS revenues were flat sequentially and decreased 5% year over year. However, on a constant currency basis, quarterly revenues grew 1% sequentially and 3% year over year. Quarterly Enterprise SaaS adjusted EBITDA decreased 3% sequentially and increased 9% year over year. On a constant currency basis, adjusted EBITDA decreased 2% sequentially and increased 10% year over year. The quarter-over-quarter decrease is primarily attributed to installation backlog on Ctrack fleet deals in South Africa, while the year-over-year increase is driven by a much improved cost structure.

The timeline from engagement to revenue growth in the Ctrack aviation vertical in many ways resembles our service provider customers. In aviation asset tracking, the customers are global airlines, major airports, and global ground service equipment operators. It takes time and requires patience. And 2018 was all about planting aviation flags by capturing design wins and signing agreements with ecosystem partners such as KLM Equipment Services and Sprint.

In Q4, we added new aviation customers including another tier I global operator and expanded our North American deployment footprint. Our current opportunity pipeline is the largest I've ever -- it's ever been, with 13 global and regional customers evaluating our solution set.

Net net, we have a diverse base of customers and new opportunities across North America, EMEA and APAC, further validating the leadership and compelling return on investment of our Ctrack aviation solution. We continue to see aviation asset tracking as another billion-dollar revenue opportunity over a multi-year basis since these are a multi-year contracts.

Last earnings call I discussed how we restructured global sales and appointed new leaders for North America and international markets. Commensurate with more products, more customers, and more geographies, we are strengthening our supply chain.

In February, we announced the appointment of Doug Kahn of executive vice president of operations and customer success reporting directly to me. In this role, Doug is responsible for our complete fulfillment value chain from customer order to installation. That brings more than 20 years of supply chain and operations management experience in public and private equity backed companies throughout the United States, Asia, and Europe. And Doug is another world-class tech executive who, like the rest of the management team, knows how to scale businesses.

Partnering with Foxconn enables us to optimize product cost structure, provides access to the world's best component suppliers, and delivers best-in-class supply chain service levels. Job 1 for Doug is to put in place the structure, processes, and resources to dramatically increase the scale of our supply chain operations and drive cost of goods sold efficiencies.

Looking forward into 2019, first and foremost, we have painted an even more aggressive target for ourselves than in 2018 notably accelerating our product leadership and planting many more flags around the globe with design wins, reinvigorating Ctrack topline growth, and improvements in our operations and supply chain to drive profitable growth. The outlook for 2019 and 2020 is very positive.

Now I'd like to turn the call over to Steve to provide financial highlights for the quarter and guidance for the first quarter.

Thanks, Dan, and good afternoon, everyone. I'll cover the GAAP and non-GAAP results for the year and the fourth quarter and provide some additional details on the performance of IoT and mobile and Enterprise SaaS Solutions.

As Dan highlighted, we've made tremendous strides over the past 12 months. We've won new businesses with new domestic and international service providers. We've distinguished ourselves as a key player in the 5G ecosystem. 5G and 4G LTE Advanced products will be the top growth drivers for Inseego over the next several years. Before getting into the details of the quarter and the full year, I'm going to touch on some key highlights.

GAAP operating expenses income for the year inclusive of the R.E.R. settlement was $14 million, a year-over-year swing of $36.2 million and the highest operating income in over a decade. Successive growth in the adjusted EBITDA: $2.8 million in Q4 '17, $3.3 million in Q1 '18, $3.8 million in Q2, $4.7 million in Q3 and $5.8 million in Q4. The last 2 quarters of which were sequential record quarters. 2018 full-year EBITDA was $17.6 million, as compared to $2.3 million for full-year 2017. Non-GAAP earnings per share in Q4 was $0.02, the highest achieved since 2011. On a full year basis non-GAAP loss per share improved from $0.29 to $0.04.

All in all, in 2018 we made tremendous progress towards Inseego 2.0. In 2019, our focus will be on growth, mainly in the second half, planting 4G and 5G flags, driving the aviation asset tracking business, expanding into and within new geographies across all product lines, and setting the stage for further bottom line growth and deleveraging the balance sheet.

Now I'll get into the meat of the quarter and the full-year results. As noted in the press release you received this afternoon, 2018 total year revenue was $202.5 million, 7.7% less than 2017. Q4 revenue of $56 million was $5.4 million better than the last quarter and up $9.5 million from Q4 '17. From the first quarter 2018 to the fourth quarter, revenue has grown sequentially quarter over quarter. Virtually all of the growth was in IoT & Mobile Solutions.

Engineering design services and IoT & Mobile Solutions revenue was $3.8 million in the fourth quarter, up from $2.1 million in the third quarter. 2017 had no material engineering design services revenue. In the near term the majority of our IoT and mobile revenue remains concentrated with few customers. Accordingly, we will continue to see some level of revenue lumpiness until the recent design wins, notably 4G, 5G and aviation, begin to materialize into meaningful revenue streams which is expected in the second half of 2019.

Full-year 2018 GAAP gross margins increased from 30.7% to 34.9%, and Q4 gross margin was 35.3%, an increase of 0.5 from the third quarter and 2.4 points less than the same period a year ago, mainly due to the Q4 2017 onetime recovery of $1.8 million of our previously abandoned product line.

Full-year 2018 GAAP OpEx was $56.6 million, an improvement of $33 million from the prior year, including the $17 million gain associated with the R.E.R. settlement in Q3. Net of that settlement, operating expenses were lower by almost $16 million, or 18% year over year. Given the breadth of new products in the pipeline and our push into new geographies, expect that our OpEx will increase most specifically in the areas of product development and sales and marketing.

Our Q4 CapEx was $19 million, including approximately $634,000 of impairment of certain Ctrack assets in Africa; $860,000 of amortization of purchase intangibles and $1 million in share based compensation. GAAP operating income for the year was $14 million, versus a 2017 loss of $22.2 million. Q4 GAAP operating income was $814,000, as compared to $16.6 million in Q3, which included the settlement gain, and $788,000 in Q4 '17. Our GAAP net loss and net loss per share were $8.1 million and $0.12 respectively for the full year '18 and 2. -- I'm sorry, and $4.2 million, and $0.06 respectively for the fourth quarter. On a comparable basis, the GAAP net loss was $45.7 million, or $0.78 per share for full-year 2017, an income of $10 million, or $0.15 per share for a fully diluted share in Q3, including the settlement gain. The net loss of $3.8 million, or $0.06 per share in Q4 '17. As you recall, in Q4, we benefitted from almost $3 million associated with the sale of the previously written off product and the newly enacted tax legislation.

Our weighted average shares outstanding for Q4 was 73.6 million shares, an increase of about 5.1 million shares from the third quarter. In Q4, our weighted average shares outstanding was approximately 60.4 million. For 2018 full year, our weighted average shares were 66.1 million, as compared to 58.7 million for 2017.

Now turning to the non-GAAP metrics, full-year and Q4 2018 non-GAAP gross margins were 36.3% and 36.5% respectively. This compares to full-year and Q4 2017 of 32% and 35.2% respectively, and 36.1% in Q3 2018.

Full-year 2018 non-GAAP OpEx was $63.8 million, compared to $76 million for 2017. More than 2/3 of the reduction was in G&A. For the quarter, non-GAAP operating expenses were $16.4 million, an increase of approximately $900,000 from last quarter and an increase of $1.1 million, or 7% as compared to Q4 '17. G&A grew about $140,000 from last quarter, sales and marketing increased $270,000 and R&D expenses grew just over $500,000 as compared to last quarter, consistent with expectations.

We currently have many new products in the pipeline, some of which have launched. Others are in various stages of development, spanning a collection of technologies from 4G LTE to 5G; from Industrial IoT to hotspots to edge gateways. The point is, we're investing for the future. Keep in mind that we purposely designed our product platforms to cover global bands, which reduces both the cost and time associated with product development. However, we still need to fund the carrier-specific certifications. Expect that our product development cost will increase as we bring these new products to market.

Our Q4 non-GAAP operating income was $4 million, an increase of $1.2 million from last quarter and an increase of $3 million from the same period last year. On a full-year basis, 2018 non-GAAP operating income was $9.7 million versus a loss of $5.8 million in 2017, a $15.5 million year-over-year improvement.

Our adjusted EBITDA for the fourth quarter was -- for the fourth quarter of 2018 was a record $5.8 million as compared to $4.7 million for Q3, and $2.8 million for the same period 2017. This represents year-over-year growth of 107% in EBITDA.

2018 full-year adjusted EBITDA was $17.6 million, which is almost 8x higher than the total 2017 adjusted EBITDA of $2.3 million.

Our non-GAAP net income per share in Q4 was $0.02, as compared to a loss of $0.01 last quarter and an increase of $0.04 versus this same period last year. On a full-year basis, the non-GAAP loss per share was $0.04, compared to $0.29 in 2017. You'll find the reconciliation of our GAAP to non-GAAP financials in the press release that was issued earlier today.

Now a breakdown of IoT & Mobile and Enterprise SaaS Solutions. IoT & Mobile Solutions revenue for the full year 2018 was $135 million, down 11% from 2018. Q4 '18 revenue of $40 million was up 16% from Q3 and up 35% from Q4 '17. Consistent with our development initiatives, we recognized $3.8 million of engineering design services revenue in Q4. We currently have several 5G projects underway, and unlike Inseego 1.0, we are benefitting from customer investments as we drive to accelerate deployment of our 5G portfolio with multiple tier 1 service providers in multiple geographies.

We are focused on growth in 2019. Accordingly, we have moved the majority of our production to Foxconn in Taiwan. The results of this move will both improve the supply chain performance and allow us to more aggressively pursue cost and margin improvements.

Non-GAAP gross margin for IoT & Mobile Solutions was 25.4% in Q4, as compared to 23.4% in Q3, and an increase of 6.8 points year over year from Q4 2017. On a full-year basis, 2018 gross margins improved 5.6 points to 22.7%.

On a pro forma basis, adjusted EBITDA for IoT & Mobile Solutions was $3.3 million in Q4, up about $1 million or 46% from Q3, and up $2.3 million from the same period last year as a result of higher revenue and approved gross margins. On a full-year basis, IoT & Mobile Solutions adjusted EBITDA was $8 million, compared to $600,000 in 2017. Enterprise SaaS Solutions revenue was $16 million in Q4, flat to the prior quarter. The end quarter revenue FX was approximately $250,000 from the prior quarter, mainly as a result of continued weakness in the South African rand versus the U.S. dollar. On a full-year basis, Enterprise SaaS Solutions revenue increased about $700,000, the majority of which was in Ctrack. Double-digit growth in the European markets was offset by both currency weakness and market dynamics in South Africa.

The non-GAAP gross margins for Enterprise SaaS Solutions in Q4 '18 was 64.5%, as compared to 63.6% in Q3 '18 and 64.4% in the same period last year. Total gross margins contracted slightly falling 2.7% to 63.6% for full year 2018.

On a pro forma basis, adjusted EBITDA for Enterprise SaaS Solutions in Q4 was $4.4 million, or about 28% of revenue. This was down $150,000 from the prior quarter and up about $400,000 from the same period last year, due to cost containment actions taken over the past 18 months. On a full-year basis, Enterprise SaaS adjusted EBITDA was $18.3 million, an increase of 44% from 2017.

To round things out, this leaves approximately $1.9 million per quarter, or $8.7 million per year in unallocated corporate expenses, largely G&A to tie to the consolidated adjusted EBITDA. Keep in mind, this pro forma information is strictly a non-GAAP estimate intended to illustrate the businesses as stand-alone entities. These pro forma figures are based on allocations of shared service costs and are subject to change.

Now turning to the balance sheet. Cash and cash equivalents inclusive of restricted cash was $31.1 million at the end of Q4, decreasing about $0.5 million from Q3. Compared to the same period last year, cash and cash equivalents are up about $8.9 million. Operating cash flow was $2.1 million in Q4. As I stated on previous conference calls, we will see cash balance fluctuations due to inter- and intra-quarter working capital changes as we balance the performance of payables, receivables and inventories.

Accounts receivables dropped $6.8 million in the quarter. Inventories grew about $12.7 million in Q4, approximately $8 million of which was due to a pre-purchase of raw materials in anticipation of the contract manufacturing transition, the balance for finished goods.

Moving on to guidance, as previously stated, we are making investments in our product development and expanding the sales and marketing teams worldwide. At a macro level, I expect to see a dynamic where the second half growth exceeds the first half, as our go-to-market actions to bring on new customers in new geographies around the globe, reorganization of the Ctrack sales operation in South Africa, and a leadership change in Ctrack Australia combined with the expansions of 4G and 5G products and aviation wins bear fruit across both IoT and -- IoT & Mobile and Enterprise SaaS Solutions.

Q1 has been impacted by a single component supply shortage, unrelated to the move to Foxconn. That impacted our ability to ramp and ship the MiFi 8800 or gigabit hotspot early in the quarter. Additionally, the same component supply shortage caused a delay in the launch of a couple of new products we are bringing to market, pushing the rollout from Q1 into early Q2. Both of these have affected Q1 revenue. We continue to consume materials from our old contract manufacturer and have less engineering design services revenue, both of which will have the effect of compressing gross margins during the first couple of quarters.

I would expect Q2 and second half of 2019 to be in line with current consensus estimates. And we are reaffirming the year-end target adjusted EBITDA run rate of $40 million annualized.

As a result of the component supply shortage highlighted above, we expect our Q1 total revenues to be in the range of $45 million to $50 million and our consolidated adjusted EBITDA to be in the range of $2 million to $4 million. IoT & Mobile Solutions revenues are expected to be in the range of $30 million to $33.5 million, and Enterprise SaaS Solutions revenues are expected to be in the range of $15 to $16.5 million assuming a fairly limited impact of foreign exchange.

That ends my prepared remarks. At this point, I'll turn the call back to Dan for his closing comments. Thank you.

Thanks, Steve. We can all agree that 2018 was a year of tremendous progress across all areas of the business. 2019 is the year we gain much more momentum as we enter the middle innings of Inseego's transformation. With innovative new products, a much stronger salesforce and operations capabilities, Inseego is now in the strongest position in the history of the company. The company is firing on all cylinders and continues to get stronger every day. Most importantly, our customers and strategic partners are voting for Inseego with their wallets.

I want to once again thank all our employees for their tireless efforts. The strides we're making is the direct result of their skill and dedication. We have phenomenal teamwork, a culture of personal accountability and relentless execution. We're succeeding, and I can tell you, the energy levels in the company are sky high.

It was famously said, and I quote, great moments are born out of great opportunity. Inseego has a great opportunity, and I believe one that comes along once in a lifetime. 5G has been rightfully called general-purpose technology, which sounds kind of bland. But what that means is 5G is foundational to the Fourth Industrial Revolution, as was the steam engine, electricity and computing in prior generations. It is now clear that this is the greatest opportunity for Inseego in our history, and it's unfolding right now.

The Consumer Electronics Show was amazing, and Mobile World Congress last week was even better. We met with 24 global operators last week representing a combined mobile subscriber base of over 1 billion subscribers. To put a billion mobile subscribers into perspective, AT&T, Version, T-Mobile and Sprint combined have about 430 million subscribers. I'm confident that our pipeline measured by the aggregate number of mobile subscribers will continue to grow throughout 2019, and I expect it to approach 2 billion subscribers by year-end, as more operators complete their 5G planning and move toward deployment.

The numbers are simply staggering. The road to $1 billion in 5G revenue is now clear, and we're going for it. We are focused on continuing to plant flags with many more design wins.

So before I close, just a couple more things I want to mention. We have chocked] up more 5G success by partnering with a tier 1 Asia-Pac service provider, Optus in Australia, with our new sub-6 gigahertz 5G fixed wireless gateway. Also, our new Category M1, Cat M1 tracker product was selected by a top-tier North American mobile operator, which makes 2 design wins in this category.

Lastly, the global distribution agreement we announced with Aero Electronics this morning is to supply our entire Industrial IoT and Ctrack products to their network of resellers and end customers. Net net with the sheer size of our customer pipeline and number of new products coming to market, I can tell you that 2019 will be a year of many more exciting headlines. Inseego 2.0 is gaining momentum.

So that concludes my prepared remarks, and I'll turn it over to the operator to start the question-and-answer period.

(Operator Instructions) First question comes from Mike Walkley with Canaccord Genuity.

Congratulations on reaching your adjusted EBITDA targets exiting 2018. Actually, Dan, I just wanted to start with how you ended the call. Just can you help us think about the pipeline with the carriers you're meeting with? What's the feedback of your position relative to the competition, and how do you see 5G developing and what that means for Inseego revenue as 2019 plays out with the second half versus the first half?

Yes. So thanks, Mike. Well, I think first and foremost, the meetings and the number of meetings that came about themselves were from the ability to demonstrate actual live working products. It may sound rather obvious, but it is -- it is such that our competitors are there with products under glass cages. So it is that. It is some of our current customers being excellent reference accounts speaking with these. It is also a function of our expanding our international sales force and pure outreach into the Asia-Pac. So those are new geographies with new customers.

So I think it's a combination of things, but I think first and foremost, once we spend time with these customers and go through our product portfolios and tell them where we are and where we're going, they come away extremely impressed, and literally, from that point on, there's follow-ups and engagements, such as MOUs, et cetera, et cetera, to begin testing and trials and early stage of deployment.

Great. And just building on that, just how we think about the model, how should we think, Steve, just about OpEx levels exiting the year maybe from where you're entering the year, you're given the investments going on, and how should gross margins trend maybe in your business as new hardware ships on the better platform at Foxcomm?

Great question, Mike. So I expect that we'll see some increase especially in the second half as we start shipping more of the higher-end 5G products and so on. We'll see an uptick in the gross margin. As far as OpEx, we'll eventually see it asymptote. We haven't provided much guidance in terms of exact OpEx numbers. But as I stated, we are keeping in line with the stated goal of the $10 million in fourth quarter or leaving the year at a $40 million annualized run rate. So you can form your opinion from that.

Okay, that's helpful. And then the last question from me, and I'll pass the line. Just any color on -- can you tell us what component was short, timing of how it's ramping now and is there an impact also to Q2 for this short component? Or Q2 should be a nice step up from Q1, consistent more I guess with consensus numbers back maybe in the [50 to 5 million] range.

Yes. Mike, it's Dan here, and I'll make a comment and ask Steve to chime in. But it's interesting how you can run into situations in what would consider to be very relatively minor tech, low-tech components that you can get a worldwide shortage. And in that instance, it was a situation and literally was an LED driver part that is less than $1.00. So there's the irony of it. But nonetheless, so what can you do about it? Well you can dual source with your design, and so that's what we've done, and rectified that particular issue. I will say it happens in this tech market. It does. Of course you can never see it coming, but that is exactly what happened. So it's what you do to mitigate it and get around it.

And in that instance then, what happened in January, we got slow out of the gate in being able to supply to demand on our new gigabit hotspot, as well as the same component was a common component used in some of our new product launches. So they moved from Q1 to Q2.

So it's definitely a bump in the road, one that we've overcome, and now we're moving forth and our design, in fact, is now dual source. So should we run into again with one, we've got another supplier in place.

Yes, Mike. As Dan said, it was a very inexpensive part, and it caught us all off guard. What happened is the vendor had a problem at their fab, and they basically lost the recipe on it. So it impacted more than just us, and we obviously had to spend extra money to buy parts on the open market to fulfill demand. But since that time, we, as Dan said, we brought on a second source, and we're scouring all our (inaudible) to make sure we don't get caught with other single-source products anymore. And as a matter of fact, Doug coming online is pushing that mantra forward as well.

The next question comes from Scott Searle with ROTH Capital.

And I appreciate all the color and the detail in terms of the outlook. Maybe just to follow up on that point and some of Mike's questions, I'm not sure I heard a quantification of the component impact in terms of dollar sales in the first quarter. Kind of curious on that front.

And then the gross margin impact near-term. Before it sounds like we start to see that ramp, or that continued trajectory, right, on the gross margin front on the product side over the course of this year with new product, especially on the 5G front. And then I had a couple follow-ups.

So on the component issue -- Scott, sorry. Suffice it to say, we would have been in a position to meet or beat first quarter consensus easily if we hadn't have had this problem. I'm not going to give you the exact quantification of it, but that's pretty much where we would have been. We've given you the guidance, 45 to 50. As far as the size of it, you can run your own math on that.

As far as the second question, can you repeat that?

Gross margin impact related to that, and how we should think about the first half before some of the new products start to kick in and give you a better blended mix.

Yes. So probably there will be a little bit of a compression in the gross margin in Q1, obviously because we had the shortages and had to go out on the open market to find the parts and pay more than we would have otherwise.

I think there's other aspects, if you want to use the term workaround and expedited shipments and alternate ways to shipping the product, because we were compressed in the first part of the quarter and needed to make up with volume after we got this resolved later in the quarter. So I think there was a couple of factors in there that led to -- that will lead to margin compression in Q1.

And Dan, maybe to follow up on the excitement level related to design activity engagement with new carriers, because it sounds like it's multiple fronts. It's gigabit LTE, it's 5G and/or both mobile hotspot and fixed products. I think you threw out a number of over 20 carriers that are currently looking or in evaluation stage. Can you give us an idea how many you've won maybe at this point in time, or once we get into the second half of this year, what are your current expectations in terms of the number of carriers that are going to ramp? I would assume most of that is probably hotspot focused, but is fixed wireless really starting to come in and contribute later this year? Can you give us a little bit more color on that front? Thanks.

Yes. Thanks, Scott. So going back, previously we of course talked about the Verizon home gateway product, the R1000. We previously announced the Verizon 5G hotspot selection. Last quarter we announced Telstra, and we discussed Optus on the call today. So that's -- you can think about that in terms of where we are under our belt, so to speak.

Going forward, it's very interesting. There is interest across the board. It depends on the service provider, but there is interest in the 5G hotspot, there's interest by some in leading with the 5G home gateway and there's interest in doing both from the get-go. So it's a mix. But it's well distributed. There's very good balance.

The other thing I would say in our engagements, there's a ton of interest in the gateway product, quite frankly, to serve SMB markets. There's a very economical broadband access for SMB and up the stack with enterprise. So insomuch as we describe it in the whole new gateway context, it has purposes we're seeing in other parts of the end customer market. So it's really exciting, it's a very broad front, and there's a great distribution between engaging on our 5G hotspot and the home gateway.

And you go around different markets, there are millimeter wave markets and there are sub-6 gigahertz markets depending on the carrier bands. So we took the choice -- we took the maybe the decision to build both of those in so we could be flexible in addressing the opportunities, since you couldn't fully predict what was going to unfold over the past 12 months.

So I think we're in a great position. The outcome of Mobile World Congress was way beyond anyone's expectation. We were super buys. And I think having live product on the Ericsson booth, on the Verizon booth and these other demos with robotics and augmented reality did really create a whirlwind of interest and customers coming through the door.

I would say additionally, as we're having those discussions, we have everything on display. We have our industrial gateways, we have our trackers, we have other products there. So it's actually -- the entry point, then, is leading to broader conversations on our product line, which of course is great.

Okay. Great color. Just lastly, and then I'll get back in the queue, Industrial IoT and the industrial gateway, I think that was one of the stars in general and Mobile World Congress, and you guys have been talking more about it. It sounds like there's a lot of engagement on that level with some of the new products. I'm just kind of curious when you expect to see first meaningful revenue from that, right? You just really launched the product, kind of big debut, I think, and push at the show. What are the broad base thoughts in terms of how that contributes in 2019?

Yes. Thanks very much, Scott. So yes, on the industrial gateway, it was one of those aforementioned product that this particular component impacted us. So what was to have been a kind of end Q1 launch for those, it's now kind of early Q2. So I think that answers the question relative to start of revenue. You know, and it's a ramp thereafter from our direct sales effort as well as our channel distribution effort. So at any rate, that's when we expect to see the -- that's when the beginning will happen, and then we'll ramp from there. But I think as -- yes. Steve generally positioned, the story is one of the second half will look quite a bit different than the first half. I think we've underlined that point fairly well. And there's a number of contributing factors. We've discussed 5G, IoT, aviation, et cetera. So that's the target we're going after, and that's where we're heads-down executing.

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

Congratulations on the quarter there. It looks great. In terms of the growth drivers in the second half of the year, should we still think about 4G LTE being the majority of the revenue with 5G building? Just trying to get a sense of the mix of 4G LTE versus 5G exiting the year.

Yes. Thanks, Mike. So 5G is still in the early innings. We're beginning deployments now. They will build up through the year, as we've stated and everyone I think would expect. Early days, the mix is tilted towards 4G LTE is the dominant, if you will, technology deployment. We're very happy that we've come out with a, kind of a world-beater gigabit LTE 4G product, so it's not run of the mill, and there's a ton of interest.

And we'd mentioned the 6 tier 1 operators that we've expanded into, it's really a function of -- with the design wins, it's really a function of the capability of that 4G product.

So that will occur through the year. In fact, as a matter of fact, what we will see, because of the broadening of our customer base with 4G plus 5G kicking in, it's a combinational effect. It's not a substitution or a swap effect. So again, we're pointing to a much more promising looking second half of the year, because all of these things are coming together in combination.

Yes, that makes sense. Is the thought that your Enterprise SaaS business will be growing in the second half of the year year over year?

Yes. Yes. If you look back, taking cost out and you see the year-over-year EBITDA improvements, there was a function of that. And so that was sort of phase 1. Phase 2 is we've talked about some of the restructuring of South Africa and Australia. I will say this, putting those aside for a second, Europe is performing very well. We're overhauling, if you will, sales leadership in South Africa. That's been put in place. And new leadership has just been appointed in Australia. That's been put in place.

So again, put those in combination, there's nothing fundamentally wrong with the business. I would say we have the FX impact and we have some execution issues in a couple of the geographies that we've taken corrective action on. So that's a really long way to answer, it will build up through the year. We expect a much better looking second half than first half.

And then just last on product development, did the network -- in the past, we've talked about network certifications for your products and the costs associated they're with. Does that go through product development, or is some of that capitalized?

I'm going to let Steve field that question. Product certifications as far as the accounting of expense versus capitalization.

That'll be expensed, and it'll be running about $1 million apiece.

Per carrier cert. The good news is we're not having to redo the products. It's literally certification because the bands are on the universal platform.

Got it. And that would go through the product development line?

Yes.

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

Thank you, operator. So thank you all for joining us today. I greatly appreciate your attention and questions. And before we wrap up the call, I just want to let you know a couple of things. We'll be at the 31st Annual ROTH Conference in a couple of weeks and at the Cowen 47th Annual Media & Telecom Conference in May.

Also, you'll see us at the Big 5G conference in Denver in May followed by the 5G World conference in London in June. I look forward to seeing many of you at these events and continuing the conversation on Inseego's transformation. Thanks again.

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