INSEEGO CORP INSG
June 06, 2019 - 10:06am EST by
Stelio
2019 2020
Price: 4.65 EPS 0 0.26
Shares Out. (in M): 79 P/E nm 17.6
Market Cap (in $M): 366 P/FCF nm 15
Net Debt (in $M): 110 EBIT 7 27
TEV ($): 0 TEV/EBIT 72 18

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Description

Summary
 
Inseego is a communications equipment company that has successfully restructured. After a very difficult period, new management successfully turned the company's finances and it's now facing several big market opportunities. Most notable among these is its 5G business where the company sells fixed and mobile hotspots and routers that are exactly in the first wave of the 5G opportunity. The company's 5G business is set to take off in the very near term, helped by several factors amongst others: 5G is a cable replacement business, making it several times bigger than the company's 4G business and Chinese competition (Huawei, ZTE) is in effect locked out of the market.
 
I think the shares have several very big opportunities, mainly 5G fixed and mobile hotspot, routers and gateway business and Ctrack fleet management and, more especially, their aviation segment. Management has argued these are $1 billion revenue opportunities each.
 
The shares still present a very good opportunity in my opinion, even if the shares have almost tripled in one year. Shares could easily double again over the next 2/3 years. New products with higher margins are being launched, with most costs already incurred. Bull case scenario is growth company multiples once Inseego is in full-fledged growth and generating good cash flow, which should be as of 2020. I see no reason why Inseego could not reach a billion $ market cap, compared to ca $400 million today. ‘Simply’ executing on the current product pipeline, Inseego could reach $70 million EBITDA in 2021, up from ca $13 million in 2018.
 
Background
 
Inseego, previously known as Novatel Wireless, is a long standing player in the cellular hotspot market. Today, the company sells IoT connectivity products, mobile hotspots, telecom subscriber management software and a telematics solution for asset tracking, commercial fleet tracking and airport ground service operations. New management took over in mid-2017 amid an aborted effort to sell its MiFi hotspot business, a brand of mobile connectivity products. This was historically the core business in addition to USB and PC Card cellular modems and embedded modules for cellular communications.
 
The company historically has attempted to diversify for years, mainly via acquisitions, as Verizon accounts for a large part of the business. The June 2015 acquisition of DigiCore added Ctrack to the product portfolio, a vehicle tracking system; more on Ctrack later.
 
The mobile broadband unit proposed for sale to TCL included the MiFi branded hotspot business and USB modem products. MiFi was heavily concentrated in Verizon and suboptimal designs forced Inseego into lower margins over the life of these connectivity products. The remaining business would concentrate on commercial fleet and airport ground operations telematics in addition to higher margin IoT connectivity products. In June 2017 Inseego announced the termination of the transaction with TCL after struggling to gain approval from the Committee on Foreign Investment in the United States for the sale of the business unit. This may have coincided with the beginning of the Trump Administration. The U.S. government had begun to sound the alarm on networking products sold by Chinese vendors that could be influenced by state poIrs during the Obama Administration, but pressure was ramped up significantly under President Trump.
 
The result was a significant erosion in the competitive landscape as ZTE and Huawei ceded parts of the international market to the remaining participants. Meanwhile, advancement of LTE to support gigabit wireless bandwidth and building hype around 5G offered a potential catalyst for increased demand for wireless hotspot type products.
 
In conjunction with the decision to terminate the sale to TCL, Inseego announced the appointment of Dan Mondor as CEO. The company set about a $15 million cost reduction plan, with an intention to reach an adjusted EBITDA run rate of $25-$30 million exiting 2017 and $30-$40 million exiting 2018. A focus on positive cash flow became more urgent.
 
Among the new management’s first changes was to narrow focus of the Ctrack business to commercial telematics where deployments are stickier, have higher ARPU and higher margin relative to the consumer offering. Airport equipment tracking is a relatively untapped market with an addressable market (TAM) in the single digit billions of dollars as defined by Inseego, although I think a $500 million to $1 billion TAM estimate is reasonable in the intermediate term. Simultaneous with the narrowing focus on Ctrack was an evolution in the go to market strategy. Ctrack historically did not participate in the U.S. market while the hotspot and IoT connectivity businesses did not participate materially outside of the U.S. New sales management is orchestrating the effort to drive the IoT connectivity business through a channel, Ctrack to the U.S. and elsewhere through partners, and directly engage carriers for hotspot business ceded by competitors.
 
Growth story
 
1. Ctrack
 
Airport ground service telematics is expected to be an important growth driver. Inseego, through Ctrack, was an early entrant in the airport ground operations / telematics market and there is little by way of a scaled up capable competitor to challenge market capture. There is significant market to be captured in airport telematics. Airports and airlines operate hundreds or thousands of units of equipment, including ramps, refuelling trucks, baggage handling units, among others. A small sized airport may have 1,000 assets and a large airport about 5,000. Telematics tracking gives the airline or ground operator visibility into location and usage of these expensive specialized assets. Safety controls can be applied such as a remote immobilizer, fuel management, and access control.
 
In January 2018, Inseego announced a win at Hong Kong International Airport with Jardine Air Terminal Services; Hong Kong International is the world’s largest air cargo hub. Also in January, the company announced a deal with a major U.S. airline through a new partnership with Sprint; the Sprint relationship will apparently span aviation, transportation, and logistics, giving Inseego a considerable new channel into the U.S. market. Notably, Ctrack did not historically participate in the U.S. market, focusing on its home base in South Africa and other more peripheral markets.
 
In June 2018, Inseego announced a global strategic partnership with KLM Equipment Services. The companies will develop new specialized services for the global market while KLM ES will bring Ctrack to its airline customers. Since the inception of the relationship with KLM, the company has announced several associated wins and expansion of engagement. Furthermore, management talked about a pipeline of about 13 potential new customers on the earnings call in March 2019.
 
To get a feeling regarding the opportunity of Ctrack, Inseego estimates the addressable market for telematics systems for aviation ground services at about 4 million ground service assets. At a $20 per month ARPU (my estimate but potentially conservative), a fully penetrated market may generate ca $1 billion annual revenue. A 25% share of the ground service telematics market would more than double the Inseego’s 2018 revenue.
 
Inseego claimed 9 aviation customer deployments as of January 2019, up from 7 in Q1 18. Recently, Inseego claimed upcoming deployments with 2 of the top 10 largest global airlines.
 
2. Fleet Telematics
 
Tracking logistics fleets using cellular connected sensors is, in my view, one of the earliest applications of the industrial internet of things. The ability to use sensor data, even if just location of the truck to optimize routes, delivers efficiency at little incremental cost. Use cases have expanded to monitoring driver behaviour such as acceleration, speed, and hard braking, in addition to tire inflation, all of which can be managed to improve safety, performance, or fuel efficiency.
 
Several other companies provide such fleet telematics solutions, although geographic focus likely prevents all participants from competing head to head. Inseego’s Ctrack built its business in South Africa and Europe; it has virtually no penetration of the U.S. market. Globally, logistics companies are being forced to come to terms with the upcoming shutdowns of 3G and/or 2G cellular networks. While each carrier has its own plan and schedule, redeploying resources means fleets will be forced to refresh telematics connectivity solutions in the coming months to years. I think it is timely for Inseego to focus on improving the go to market of these solutions, as opportunities should be abound and any wins sticky for several years.
  
I also note that while tracking is the entry point, there will likely be opportunities for up sale applying more advanced analytics, visualizations, or driver monitoring. To the extent that some competitors are subscale or lack software competency, Inseego might be able to stand apart through any upcoming refresh.
 
3. MiFi
 
MiFi connectivity tools are sold in both USB and wireless interfaces. Inseego has primarily sold devices through Verizon Wireless. Efforts are underway to bring such products to other carriers. While Verizon sales likely began materially in Q4 18, management noted additional Tier 1 carrier interest in the gigabit LTE hotspots. As 5G network penetration will take several years to play out, high speed LTE will likely appeal to carriers for years to come. Moreover, once Inseego is designed into a product, it is costly for both participant and carrier to deviate from that plan, making efforts relatively sticky.
 
In early 2017, the U.S. fined ZTE approximately $1.2 billion for breaching sanctions by shipping U.S. goods and technology to Iran. The U.S. imposed a ban on U.S. companies selling goods to ZTE. More recently, the Trump administration has waged a global campaign against Huawei, banning US government agencies from doing business with it and urging countries around the world to remove its telecom equipment from their mobile networks. The White House cites national security concerns, saying Beijing could use Huawei equipment to spy on other countries. The potential ramifications of this developing story are currently unclear. Nevertheless, for the time being, neither ZTE nor Huawei are present in the U.S. market with hotspot connectivity products. These companies are traditionally aggressive on pricing, and market conditions in their vacancy are considerably more favourable for a mature company like Inseego with a strong reference customer like Verizon.
 
In addition to market conditions, Verizon began a limited roll out of 5G in U.S. cities in Q4 18 with plans for the first 5G smartphone launch in H1 19. 5G offers the potential for gigabit (or greater) speed cellular data connections, which surpasses bandwidth available to most U.S. homes. Verizon is offering a home internet gigabit service poIred by an Inseego 5G wireless gateway/router. Inseego management noted that other large carriers are interested in the 5G home internet gateway/router, as it allows wireless carriers to compete with cable operators using infrastructure investments already being made. Management called out enterprise and SMB to be even larger use cases for 5G compared to home on the earnings call in March 2019.
 
Underpinning the probable expansion of the MiFi and hotspot business for Inseego, new management has focused on driving better margins in the design of new hotspot products. The result should be that as new products are launched and pervade the mix, gross margin from this line should improve from the low 23% today to >40% according to management. At current revenue levels that represent virtually no 5G home gateway business, minimal IoT penetration, and little of the carrier diversification effort in the hotspot business, the prescribed margin progression should drive strong EBITDA improvements.
 
4. (5G) IoT connectivity
 
Inseego’s multiple wins in 5G connectivity products reflects trust from carriers and differentiation among the peer group; this comes at a time that 5G is expected to significantly transform IoT and home internet connectivity. Inseego IoT connectivity solutions include modems, gateways, routers, connecting to major mobile carriers. These devices provide cellular data connectivity to fixed and mobile devices, including for telematics tracking, industrial IoT, and SD WAN failover. The
connectivity modules share common components with the currently larger hotspot business, allowing synergies in bringing new products to market. Inseego brings significant hotspot and cellular connectivity experience, in addition to being an early mover to 5G, to the emerging IoT realm.
 
The IoT market is highly fragmented and prone to small deployments. Therefore it is impractical, particularly for a company of Inseego’s limited resources, to directly address the market. Thus, the company engaged two North American distributors in Q3 18, Synnex and Novotech; a global distribution agreement with Arrow Electronics was announced in March 2019 and additional channel partners are likely in the coming quarters. Inseego noted 70% growth from Industrial IoT in Q4 17 prior to developing a channel strategy, and I think international is largely untapped.
  
The combination of the significantly improved approach to IoT connectivity market capture, Inseego’s differentiated 5G solutions that could enable quicker uptake of IoT and expanding geographic reach suggest this business could grow from a small portion of the IoT & Mobile Solutions business to a substantial earnings contributor.
 
Competition
 
The fleet management and telematics tracking market revenue opportunity is estimated in the tens of billions of dollars. There are significant regional variations in the competitive landscape. IoT connectivity is a less mature market with smaller competitors and a likely faster growth rate in the coming years.
  • Fleetmatics is an Ireland based SaaS fleet management platform acquired by Verizon in 2016.
  • TomTom agreed to sell its fleet management business to Bridgestone Europe in January 2019 for approximately $1 billion. The asset describes an installed base of 860,000 vehiclesof which around 575,000 are commercial. TomTom generated revenue of 162 million euro from Telematics in 2017.
  • Cradlepoint, a U.S. based company founded in 2006, is a privately held provider of LTE cellular connectivity solutions designed for use in fixed, mobile, and IoT environments,touching applications such as SD-Wan failover. The company also has a 5G strategy.
  • ID Systems participates in the logistics tracking market and the industrial truck management market, with a particular focus in forklift management. (As a side note, IDSY itself is a very interesting investment case, particularly after the acquisition of Pointer Telecation. I suggest readers to take a look at IDSY as well).
  • Cartrack and MiX Telematics are leading providers of fleet management and asset tracking in South Africa. Individually, both are larger than Ctrack in the domestic market.
  • ZTE and Huawei are large Chinese companies with plays across mobile handsets, telecom and wireless infrastructure, network transformation, and mobile hotspots.
  • Sierra Wireless is a long standing player in the cellular connectivity market. The company sells modules, routers/gateways, with a significantly bigger presence in IoT than Inseego today. In addition, Sierra has an expanding IoT services platform that includes global connectivity management and an array of vertical solutions.
  • Franklin Wireless sells wireless connectivity solutions, including IoT modem/gateway applications and mobile hotspots. Franklin Wireless generates around $36 million revenue annually.
 
Estimates
 
Inseego management has provided operating targets of 25% CAGR for revenue, an adjusted EBITDA margin of 15%-20%, and free cash flow yield from adjusted EBITDA of over 60%. Also note that management discussed difficulty timing the ramp up of revenue from new announced engagements. There are a few important dynamics that suggest the 25% top line growth CAGR target is within the realm of possibility:
  • With new and expanded Tier 1 carrier engagement in the hotspot and 5G home gateway business, the potential for new contributors at least in the $30-$50 million annual range are likely. Management recently highlighted two new U.S. Tier 1 engagements plus Rogers Communications (10 million subscribers) and U.S. Cellular (approximately 5 million subscribers), in addition to other engagements.
  • Inseego announced several large airport telematics wins in 2018; these could generate around $10-15 million of recurring revenue when live in addition to several million of discrete product revenue. Moreover, with another 10+ in the pipeline, the recurring revenue potential could be in the $20-$30 million range. These are rough estimates as management has not provided granular detail.
  • Inseego announced expansion of the telecom subscriber management business with Tier 1 customers into private enterprise from an original position in government. This expands the TAM by 5x to 10x.
Taking the above factors into consideration, and considering that timing is difficult to pin, it is reasonable to expect the $202.5 million of 2018 revenue grows to $250-$300 million as existing engagements are executed. If the pace of new business additions keeps up, aviation alone could reach annual recurring revenue of $25 million by the end of 2020.
 
As of next year (2020), I expect revenue growth of >20% as the timing of new revenue capture is more likely to impact the out year and supply chain constraints felt in late 2018, early 2019 abate. Gross margins should continue to improve year over year as enterprise SaaS revenue picks up and higher margin designs expand in the IoT and Mobile Solutions mix. Management targets >40% gross margins longer term. Operating leverage should also be a main driver of growth as Inseego has product launches ramp up and most costs (R&D and sales) have been incurred in 2018 and H1 2019; however, I do not rule out that higher expenses could chase faster revenue growth. The impact of the higher revenue, expanded gross margin, higher efficiency and operating leverage is that EBITDA
could easily triple in 2020 compared to 2018 levels. After 2020, the continued ramp up of product releases and higher share of recurring revenue in combination with operating leverage will continue to lead to strong growth in operating profits.
 
One cautionary element to my projections is the $120 million face value convertible note due June 2022. This issue could produce about 25 million of shares on top of the ca 73 million basic outstanding. Also, note that the company raised approximately $180 million in a PIPE in Q3 18 and filed a $78 million shelf in Q4 18; I believe the latter is intended to maintain flexibility.
 
Valuation
 
I think there are few companies operating at Inseego’s scale in the cellular connectivity market, let  alone with the significant portfolio of 5G product options and reference customers. Although it remains difficult to pin granular revenue estimates from the current customer development activity, I think there is potential for revenue to double from 2018 levels (~$200 million) by 2021 based on the current pipeline. Indeed taking the 25% growth rate CAGR target linearly over three years, revenue would reach around $395 million in 2021. At that level, the company could generate $70 million of EBITDA.
 
Market Multiples
Applying an 15x EV/EBITDA multiple and assuming net cash of $100 million (incl cash generated) and shares outstanding of around 100 million after conversion of the convertible note I derive an approximately $11.50 target. That is a >35% CAGR from current levels. Applying a higher (growth) multiple of 20x (I expect EBITDA to grow >30% over 2019-2023) would lead to a share price of $15 per share, up almost 3x from today’s levels in 2.5 years.
 
I don’t use multiples of companies in the same sector as I don’t deem them representative. Peers are either private or not comparable in terms of growth of revenue / operating profits, scale and/or geographical diversification.
 
DCF
In order to provide more some sensitivity to the estimates and their impact, I valued Inseego also discounting cash flows estimates in a base/bull case. Note that my base case is (much) more conservative than managements base case estimates.
 
Base case
  • I assume a ca 18% revenue growth CAGR over 2019-2023, after which is simply let revenues drop linearly to a residual value growth of 2.5%. Compared to management long term target of 25% revenue CAGR and “multi-billion revenue potential, this is obviously much more conservative.
  • Gross margin jumps to 39% in 2020 as new products with higher margins are launched (the current pipeline); after 2020, gross margins slowly grow towards 44%. Keep in mind that management is targeting 40% gross margins for IoT & Mobile Solutions in the long term, which would bring overall gross margins up to >50%.
  • The company has strong operating leverage, particularly given its recent investments in order to scale growth. I conservatively assume some op leverage up to 2020, after which is assume constant opex.
  • Note that most investments are R&D, a part of which has been/will be capitalised. Depreciation and amortisation hence are higher than capex for the coming years as amortisation will increase as revenues ramp; I assumed a convergence in the longer term.
  • WACC of 9.5% (could arguably be lower as I double count conservativism in both cash flow and discount rate).
 
All this leads to the picture below, indicating >100% upside from current levels (excl. dilution from the 2022 convertible)
 
 
USDm   2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 RV
                               
Total revenues          243.6        219.3        202.5        227.6        274.9        329.9        395.9        463.9        530.3        591.3        642.6        680.1        700.5        718.0
% growth    n.a.  -10.0% -7.7% 12.4% 20.8% 20.0% 20.0% 17.2% 14.3% 11.5% 8.7% 5.8% 3.0% 2.5%
                               
EBIT, adj   (0.7) (17.3)            1.8            3.8          22.3          34.3          44.5          56.6          69.3          82.4          98.7        110.2        119.4        128.5
% of sales   5.5% -1.4% 7.7% 8.4% 14.9% 16.8% 17.3% 17.9% 18.4% 18.9% 19.4% 19.9% 20.4% 20.9%
% growth     n.m. n.m. 111.8% 490.3% 53.5% 29.9% 27.2% 22.4% 18.9% 19.8% 11.6% 8.4% 7.6%
                               
Taxes         (0.9) (5.6) (8.6) (11.1) (14.2) (17.3) (20.6) (24.7) (27.5) (29.9) (32.1)
ETR         25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
NOPLAT                    2.8          16.7          25.7          33.4          42.5          52.0          61.8          74.1          82.6          89.6          96.4
% growth         n.m. 490.3% 53.5% 29.9% 27.2% 22.4% 18.9% 19.8% 11.6% 8.4% 7.6%
                               
D&A                  15.4          18.6          21.2          24.0          26.4          28.2          29.3          25.9          25.2          23.5          21.5
WC investments         (5.0) (5.0) (3.0) (2.0) (1.0) (1.0) (0.9) (0.8) (0.6) (0.3) (0.3)
CAPEX         (6.0) (9.1) (11.5) (13.9) (16.2) (18.6) (20.7) (22.5) (23.8) (24.5) (25.1)
                               
FCF                    7.3          21.3          32.3          41.5          51.6          60.7          69.5          76.7          83.4          88.2          92.5
% growth         n.m. 193.2% 51.6% 28.4% 24.4% 17.6% 14.6% 10.3% 8.7% 5.7% 4.9%
% conversion         37.8% 52.0% 58.3% 60.6% 62.2% 62.2% 62.2% 61.5% 61.6% 61.7% 61.7%
                               
Period                    0.6            1.6            2.6            3.6            4.6            5.6            6.6            7.6            8.6            9.6            9.6
WACC 9.5%                            
Discount rate         95.0% 86.7% 79.2% 72.3% 66.1% 60.3% 55.1% 50.3% 45.9% 42.0% 42.0%
PV FCF                    6.6          18.5          25.6          30.0          34.1          36.6          38.3          38.6          38.3          37.0        554.6
                               
Enterprise value        858.3                            
Net debt (108.5)                            
Shareholder value        749.8                            
                               
Market cap        350.0                            
% upside 114.2%                            
 
Bull case / Management case
 
So what would management assumptions look like in a DCF?
  • I assume a ca 24% revenue growth CAGR over 2019-2023, approximately in line with managements long term target of 25% CAGR. I assume good execution of the current pipeline and a continued ramp-up and monetisation of new opportunities which lead to a stellar 2021. After 2021 revenue growth declines linearly.
  • Gross margin moves up quickly during 2020 and 2021 as new products new products with higher margins are launched (the current pipeline). After 2020, gross margins slowly towards 51%, in line with management expectations.
  • I assume some operating leverage up to 2021, after which is assume constant opex.
  • Investments are in line with the base case as % of revenues (though higher on an absolute basis)
If Inseego pulls it off, the valuation indicates >300% upside (excl. dilution from the 2022 convertible).
 
USDm   2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 RV
                               
Total revenues          243.6        219.3        202.5        227.6        274.9        357.4        446.8        542.1        637.8        727.1        802.3        855.7        881.4        903.5
% growth    n.a.  -10.0% -7.7% 12.4% 20.8% 30.0% 25.0% 21.3% 17.7% 14.0% 10.3% 6.7% 3.0% 2.5%
                               
EBIT, adj   (0.7) (17.3)            1.8            3.8          22.3          46.8          73.0        102.0        135.1        160.3        187.4        207.0        220.7        234.0
% of sales   5.5% -1.4% 7.7% 8.4% 14.9% 19.5% 22.4% 24.5% 26.5% 27.0% 27.5% 28.0% 28.5% 29.0%
% growth     n.m. n.m. 111.8% 490.3% 109.4% 56.2% 39.6% 32.5% 18.7% 16.9% 10.5% 6.6% 6.0%
                               
Taxes         (0.9) (5.6) (11.7) (18.3) (25.5) (33.8) (40.1) (46.8) (51.8) (55.2) (58.5)
ETR         25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
NOPLAT                    2.8          16.7          35.1          54.8          76.5        101.3        120.2        140.5        155.3        165.6        175.5
% growth         n.m. 490.3% 109.4% 56.2% 39.6% 32.5% 18.7% 16.9% 10.5% 6.6% 6.0%
                               
D&A                  15.4          18.6          22.9          27.0          30.8          34.0          36.1          33.2          32.6          30.5          28.0
WC investments         (5.0) (5.0) (3.0) (2.0) (1.4) (1.4) (1.3) (1.1) (0.8) (0.4) (0.3)
CAPEX         (6.0) (9.6) (14.3) (17.9) (21.7) (25.5) (29.1) (32.1) (34.2) (33.1) (31.6)
                               
FCF                    7.3          20.8          40.7          61.9          84.2        108.3        125.8        140.6        152.8        162.6        171.6
% growth         n.m. 185.7% 96.0% 52.2% 35.9% 28.6% 16.2% 11.7% 8.7% 6.4% 5.5%
% conversion         37.8% 50.7% 58.4% 61.9% 63.4% 64.1% 64.1% 63.7% 63.8% 64.7% 65.5%
                               
Period                    0.6            1.6            2.6            3.6            4.6            5.6            6.6            7.6            8.6            9.6            9.6
WACC 9.5%                            
Discount rate         95.0% 86.7% 79.2% 72.3% 66.1% 60.3% 55.1% 50.3% 45.9% 42.0% 42.0%
PV FCF                    6.6          18.0          32.2          44.8          55.6          65.3          69.3          70.7          70.2          68.2    1,028.3
                               
Enterprise value    1,529.4                            
Net debt (108.5)                            
Shareholder value    1,420.9                            
                               
Market cap        350.0                            
% upside 306.0%                            
 
 
Note that the shares could be volatile in 2019 as the ramp in revenue is strongly H2 loaded. In addition, as Inseego continues to generate leads, management may decide (again) to scale up opex (mainly R&D and sales) to monetise these leads. While Inseego’s financials remain a show me story, it is difficult to ignore the positive traction. With the company positioning itself as a pioneer and leader in a $500+ million TAM IoT application, emerging as a preeminent IoT  connectivity provider, and delivering leading 4G and 5G hotspot and home internet products through U.S. and international operators as Chinese competitors are forced to cede the market, I think Inseego is positioned to benefit from a sizable improvement to revenue, earnings, and cash flow.
 
Risks
 
Although on the operating side much has been improved, revenue in 2018 is down versus 2017. Churn out of a legacy telematics customer segment and transient supply chain and demand pattern issues are partially to blame for the revenue decline, but granular metrics around subscriber breakdown and/or recurring revenue are not provided.
 
The absence of Chinese competitors from the hotspot market is a significant tailwind, but it is unclear whether dynamics will revert if/when trade tensions cool. In the long run, should the traditional Chinese competitors re-enter the global hotspot market, price pressure could Iigh on gross margins.
 
The balance sheet is strained, which limits management’s flexibility. I believe Inseego is Ill positioned to service its debt as the business transforms, but the heavy debt load combined with cash outflow heightens the risk of dilutive equity issuance if the economy or business Ire to take a significant leg down. It also limits the potential to enact M&A and likely limits Inseego’s ability to execute on its complete pipeline of hotspot opportunities.
 
Fleet telematics is a competitive space, and if Inseego does not win a share of the market amid a 3G shutdown fueled refresh cycle, opportunities to scale that business outside of M&A will likely be limited for several years. Still, this is a fragmented market with pockets of regional strength. I do not necessarily think Inseego needs to succeed in the U.S. market for fleet tracking to maintain at least a steady state position in foreign markets where it is currently strong.
 
With around 50% of revenue generated from Verizon, deterioration in the customer or relationship could be detrimental to Inseego’s results. Although this risk is admittedly catastrophic if realized given the business today, I think it is a highly unlikely outcome. Inseego hotspot products help Verizon to drive revenue and there are few viable competitive alternatives; the relationship has spanned over a decade.
 
Almost 60% of shares are held by three entities, Aviva, Golden Harbor and North Sounds Management. Though these entities have been long-term shareholders and recently added to their position, I note that there currently are no lockups. If Inseego’s share price continues to increase, these shareholders might lock in some profits, putting pressure on the share price.
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Pipeline execution; ramp up as of H2 2019

Huawei, ZTE ban

Strong industry investments in 5G

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