Sellers Of Inseego Are Missing The Shift Towards Enterprise And SaaS

Summary

• The market fears that the pandemic related work from home growth spurt in the company's sales has come to an end.
• While that might very well be true, we think there is plenty of growth in the company left; the 5G rollout has only just started.
• And fundamentally, the company is riding three different waves, which seem to be only in the first innings.
• These waves are the 5G rollout, the enterprise market, and the foothold the company is gaining in both with its SaaS solutions.
• Then there are the company's IoT solutions, which are also well positioned for further growth.
• This idea was discussed in more depth with members of my private investing community, SHU Growth Portfolio. Get started today »

The shares of Inseego (NASDAQ:INSG) are selling off as the pandemic play/work from home accelerated demand phase is tapering, producing a disappointing quarter. However, if your horizon is a little longer than just the next quarter, we see multiple favorable trends for the company.

We originally bought the shares at $1.52 in October 2017 for a public portfolio that isn't active anymore and added them to our marketplace portfolio at $8.81 last September and recently at $12.85.

Given the huge selloff (this was a $20 stock only a little over a month ago), it seems that the market is much more concerned with the quarterly figures than with the longer-term trends, and asset prices have a habit of overshooting as well as undershooting.

Source: FinViz

There are cases where focusing on the long-term trends provides benefits as you get into shares about to enter a secular rising trend. In the case of Inseego, it's now working against us with the timing as the shares had already risen and are now digesting the disappointing quarter.

Nevertheless, we think there are multiple secular trends in favor of the company:

• 5G build-out
• Enterprise market
• SaaS
• IoT

5G Carrier Market

The first trend the company is benefiting from is the carrier market which is using 5G as a way to take on cable companies with fixed wireless and mobile hotspot solutions.

The competitive landscape has greatly improved for the company with the problems the Chinese competition is confronting as their network products are deemed to have security problems in a number of Western countries.

So, this cycle will be a multiple of the previous (4G) cycle as whole new use cases will be opened up for mass adoption, from the 10-K:

The introduction of 5G technology is rapidly expanding new enterprise and consumer market use cases and opportunities, including residential broadband gateways, industrial automation, massive machine connectivity and autonomous vehicles

At the same time, the company has multiplied its carrier wins. In the previous cycle, only really Verizon (VZ) was a significant customer for the company but now the company has been chosen by multiple Tier 1 carriers from multiple continents. From the 10-K:

These wireless operators include Verizon Wireless, AT&T, T-Mobile and Sprint in the United States, Rogers in Canada, Telstra in Australia, as well as other international wireless operators... We are currently working with 11 wireless carriers globally and are involved in 21 5G trials, which could provide access to over 600 million wireless subscribers.

And in 2020, only 12% of revenue was coming from 5G products, and even when part of the 5G sales are replacement sales for 4G, the cannibalization is only minimal as:

• The company has many more 5G customers compared to 4G.
• The margin profile of their 5G products is much better.

And the 4G market isn't dead by any means, management believes it will coexist for many years alongside 5G (10-K):

we believe that 4G and 5G networks will coexist and remain complementary for many years. This means that operators will be able to service a significant share of the data traffic on 4G networks, leaving 5G with the dual remit of absorbing overflow capacity and underpinning consumer and enterprise services that require higher speeds and/or lower latency.

It might be surprising to some but the company is even gaining new customers for 4G, as it did with AT&T (T) in Q4.

5G Enterprise Market

This is basically a whole new market for the company, which is already benefiting from the huge increase in the 5G carrier market (compared to the 4G market). According to management, the enterprise market is 3x the size of the carrier market.

Management didn't provide a host of new information about the enterprise market in the Q4CC but we think the part of a previous CC remains relevant, so we reproduce it here, from the Q3CC:

we are launching a new 5G product portfolio specifically for enterprise customers, which will increase our addressable market to strengthen gross margins. We are convinced the enterprise adoption of 5G will be unlike anything we have seen before, including the deployment of private networks to manage their businesses.

Private networks are expected to be a particularly fast-growing part of this, raking in a GARG of 60%, growing from roughly $600M today to a whopping $65B by 2030. And the company is preparing for the particular requirements in this segment (Q3CC):

Enterprise customers have special requirements, including alternate WAN connectivity options, enterprise-based security, industrial-grade liability and low-latency applications... we are announcing a new portfolio of 5G enterprise products that will deliver connectivity for a wide range of private and public sector enterprise use cases.

The company just launched a special enterprise solution of their 5G FWA solution with USM, a powerful 5G platform that incorporates the latest Wi-Fi 6 technology and can be easily set up utilizing the Inseego mobile app, and (Q4CC):

the reception has been extremely positive. In addition to these indoor solutions, we are working on launching several other indoor-outdoor and industrial FWA solutions in the next few months.

SaaS

Another reason why we're bullish on Inseego, despite getting the second entry timing wrong, is that they use the hardware they sell to carriers and enterprise as a foot in the door to sell SaaS software, which generates recurring revenues at much higher margins.

Their cloud-based SaaS offering Inseego Manage consisting of four modules:

• Inseego Subscribe (this used to be their DMS business, subscription management services)
• Inseego Connect (remote configuration, analytics)
• Inseego Care
• Inseego Secure (coming in Q1)

Inseego Subscribe was already experiencing strong growth, increasing 27% and 65% sequential growth in Q2 and Q3, and the customer base seems to be broadening, from the Q4CC:

T-Mobile is very strong Inseego subscribed customer, they - they've adopted Inseego Connect. And that's going gangbusters. We're starting to see adoption into other carriers. And we're starting to see adoption into enterprise customers. This is our pre-5G products, guys. So we see it as a very strong component of our growth strategy and our margin expansion strategy.

T-Mobile (TMUS) seems to have selected the whole Inseego Manage SaaS portfolio and after the merger with Sprint it can roll this out to 100M customers. As a side note, they are also the only mobile hotspot in the T-Mobile lineup.

We don't know about you, but in the world we're living in, gaining SaaS business from the likes of T-Mobile used to count for something.

Inseego Manage grew from 1M in subscribers at the start of the year to over 3.5M subscribers. In Q4 the growth was 18% sequentially and it's up 231% y/y.

So, it's only scratching the surface of the opportunities here, which are both in the carrier as well as the enterprise market. Here is management with the game plan (Q4CC):

Our focus is on three types of recurring revenue, complex carrier subscription management, cloud management services for carrier and enterprises and 5G edge enablement. All these areas have a large TAM associated with them.

The company is also aligning their Ctrack asset tracking business with this corporate market.

IoT

The company also has an IoT business that will also experience tailwinds from the 5G buildout. From the 10-K:

We have developed IoT solutions that address key market needs for asset tracking applications, telematics, SD WAN failover management, retail, remote monitoring and various other industrial automation applications. In addition, our cloud solutions can turn the data that our solutions provide into actionable insights for our customers so they can develop new services and create revenue growth... With many enterprise customers using our solutions, we believe that we already have a solid footing in this market

It sells the Skyus brand wireless gateways, routers, and modems serving as connectivity solutions.

Q4 figures

At first sight, the figures didn't seem that bad but there was a 4.6% sequential decline in revenue (albeit a 64.5% increase y/y) to $86.1M, which nevertheless beat expectations by $2.2M, so this didn't come all that unexpected.

It was the non-GAAP EPS of -$0.07 which seemed to have tanked the shares as break-even was expected. Cost is running higher than what was assumed by analysts, we're not sure that warrants a 30% sell-off though, the company is obviously investing in growth, and can afford to do so.

Cash

Despite significant investments in growth, the company isn't bleeding lots of cash,

Source: 10-K

There was a huge increase in accounts payable, from $26.5M at the start of the year to $52.3M at the end, with a $10.3M increase in accounts receivables and a $8.6M increase in inventories (due to the scarcity and lengthening lead-times for certain components).

The company closed the year with $40M in cash and equivalents, and subsequently, they sold 1,516,073 shares at $20.11 per share, for net proceeds of $29.6M.

And they are selling the South African Ctrack business for roughly $36.2M, depending on approvals. This business generated $28.2M or about half of the Ctrack revenue but suffers from low margins (due to legacy consumer business) and currency volatility (although lately, this was a net positive). The deal is expected to close in Q2.

Valuation

The company has $165M in outstanding (2025) notes and just under 100M outstanding shares and 35K dividend-paying Preferred Series E shares (dividend was $0.9M in 2020).

So, the company is trading on an EV/S of 3.88, but this is the backward-looking 2020 multiple, although it remains to be seen what revenue growth will be this year.

Conclusion

The market is clearly worried that the sales bump from the work-from-home pandemic circumstance is coming to an end and that could be the case. However, underneath we find the company is cementing itself as the premier supplier of mobile hotspots and fixed wireless gateways for carriers worldwide and is leveraging this position to gain carrier SaaS business.

Then the company is levering their technology prowess to do the same in the much larger enterprise market and offers a host of IoT solutions on top of these.

While the shares might not be an immediate winner, we think the longer-term outlook remains pretty convincing.

Analyst’s Disclosure: I am/we are long INSG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.