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BT

Borqs Technologies, Inc. (BRQSF)·Q1 2018 Earnings Summary

Executive Summary

  • Q1 2018 delivered strong topline growth with net revenue of $58.3M (+86.7% YoY) and a swing to net income of $1.4M, driven by Connected Solutions hardware shipments, predominantly to India .
  • Gross margin improved to 15.2% from 13.3% YoY, as MVNO margin expanded to 33.6% on economies of scale and China Unicom policy changes, partially offset by competitive pricing pressure in Connected Solutions (12.3% vs. 12.9% YoY) .
  • Liquidity tightened: cash fell to $3.0M, with significant working capital needs and going-concern risk flagged; management contemplates an equity offering to fund operations and the KADI acquisition .
  • Guidance was qualitative: management expects a similar strong trend in Connected Solutions and moderate MVNO growth for 2018; no numeric guidance provided .
  • Potential stock catalysts: financing execution to address going concern; MVNO licensing transition under China’s new official framework; sustaining India-led hardware demand; and progress on KADI/Colmei investments .

What Went Well and What Went Wrong

  • What Went Well

    • Connected Solutions revenue rose 103% YoY to $50.4M on large hardware orders in emerging Asia; company expects similar strength through 2018 (“We expect a similar strong trend…”) .
    • MVNO margin improved sharply to 33.6% (vs. 14.9% YoY), benefiting from scale and the removal of minimum charges by China Unicom since Oct 2016 .
    • Net income improved to $1.4M (vs. ~$18K YoY), and EBITDA nearly doubled to $5.0M (vs. $2.5M YoY); adjusted EBITDA reached $5.0M (vs. $2.3M YoY) .

  • What Went Wrong

    • Connected Solutions gross margin declined to 12.3% (from 12.9% YoY) due to competitive pricing on large orders; overall mix remains hardware-heavy (95.5% of BU revenue) .
    • Liquidity constraints: cash and equivalents fell to $3.0M; management disclosed substantial doubt about going concern absent external financing .
    • Regulatory/credit headwinds: MVNO operations must transition to official licensing by May 2020; past covenant breaches and tight lender terms pose refinancing risk .

Financial Results

MetricQ3 2017Q4 2017Q1 2018
Revenue ($USD Millions)$44.9 $56.6 $58.3
Net Income ($USD Millions)($11.6) N/A$1.4
Operating Income ($USD Millions)N/AN/A$3.189
Gross Profit ($USD Millions)N/AN/A$8.856
Gross Margin (%)N/AN/A15.2%
EPS (Diluted, $USD)Q1 2017Q1 2018
Diluted EPS($0.05) $0.04
EBITDA ($USD Millions)Q1 2017Q1 2018
EBITDA$2.481 $4.981
Adjusted EBITDA$2.296 $4.987

Segment breakdown (revenues and margins):

SegmentQ1 2017 Revenue ($USD Millions)Q1 2018 Revenue ($USD Millions)Q1 2017 Margin (%)Q1 2018 Margin (%)
Connected Solutions (Software + Hardware)$24.763 $50.374 12.9% 12.3%
MVNO (incl. traditional telephony)$6.447 $7.882 14.9% 33.6%
Total$31.210 $58.256 13.3% 15.2%

Connected Solutions components:

ComponentQ1 2017 ($USD Millions)Q1 2018 ($USD Millions)
Software Revenue$3.084 $2.256
Hardware Revenue$21.679 $48.118
Connected Solutions Gross Profit$3.195 $6.206
Software Gross Profit$0.754 $1.487
Hardware Gross Profit$2.441 $4.719

Geographic mix:

GeographyQ1 2017 Revenue ($USD Millions)Q1 2018 Revenue ($USD Millions)
PRC$12.759 $11.179
United States$1.553 $4.196
India$2.088 $42.074
Rest of the world$14.810 $0.807
Total$31.210 $58.256

Balance sheet KPIs:

KPIDec 31, 2017Mar 31, 2018
Cash and Equivalents ($USD Thousands)$13,060 $3,026
Accounts Receivable ($USD Thousands)$65,720 $39,856
Inventories ($USD Thousands)$17,031 $20,784
Total Borrowings ($USD Thousands)$18,080 $17,271

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Total RevenueFY 2018None provided“Expect a similar strong trend in Connected Solutions” N/A
MVNO RevenueFY 2018None provided“Anticipate moderate growth in MVNO mobile services” N/A
Gross MarginFY 2018None providedNo numeric guidance; commentary on competitive pricing and scale N/A
OpEx, OI&E, Tax rate, DividendsFY 2018None providedNo guidance disclosedN/A

Earnings Call Themes & Trends

TopicQ3 2017 (Nov 20)Q4 2017 (Apr 2)Q1 2018 (May 15)Trend
Product performance (hardware)Large HW mix; CS revenue $36.6M; HW $34.7M HW $43.5M in Q4, strong demand HW $48.1M, demand from emerging Asia (India) Strengthening HW shipments
Regional trendsMVNO stabilization after security activation changes Continued MVNO growth India revenue $42.1M; PRC $11.2M; US $4.2M India concentration increases
MarginsCS margin 16.6%; MVNO 33.2% Not disclosed by quarterCS margin down to 12.3% on pricing; MVNO margin 33.6% on scale CS margin pressure; MVNO margin expansion
Supply chain/competitive pricingCompetitive pricing affected CS margins N/A“Competitive nature” lowered CS margin; scale aided MVNO Ongoing pricing pressure
Regulatory/legal (MVNO)Operating under trial framework MVNO relies on China Unicom wholesale rates Official Notice requires licensing by May 2020; risks outlined Elevated regulatory focus
R&D execution/techAndroid platform capabilities; Qualcomm Wear ecosystem N/AEmphasis on Android-based platform and device designs; increased R&D expense Continued platform investment
Liquidity/financingMerger-related costs impacted GAAP loss Annual net loss; adjusted EBITDA positive Going concern disclosure; planned equity offering Financing pivotal

Note: The Q1 2018 call was scheduled for May 16, 2018; a transcript was not available in our document set .

Management Commentary

  • “We expect a similar strong trend in the Connected Solutions sales and anticipate moderate growth in the MVNO mobile services for the rest of the year 2018.” — Exhibit 99.1 press release .
  • “Quarterly Revenue jumped 87% over the same period in 2017; Overall Gross Margin Improvement.” — Exhibit 99.1 headline framing .
  • Q4 context: “We expect a similar strong trend in the Connected Solutions sales and anticipate moderate growth in the MVNO mobile services in the year 2018.” — Annual/Q4 2017 press release .

Q&A Highlights

  • No Q&A transcript found; the call was scheduled for May 16, 2018 at 9:00 am ET with replay through May 24, 2018 (dial-in and conference ID provided) .
  • As no transcript was available, any guidance clarifications or tone shifts versus prior quarters could not be assessed.

Estimates Context

  • Wall Street consensus (S&P Global) for Q1 2018 revenue and EPS was unavailable; therefore, estimate comparisons could not be provided. Values would have been retrieved from S&P Global if accessible.

Key Takeaways for Investors

  • Revenue momentum is robust and diversified by BU, but highly concentrated geographically: India contributed $42.1M of Q1 revenue; sustainability of this demand is key to the near-term thesis .
  • Gross margin improved to 15.2% driven by MVNO expansion, but Connected Solutions margins face competitive pricing pressure; watch customer mix and contract pricing on large hardware orders .
  • Liquidity and going-concern risk are central: cash at $3.0M and plans for equity offering; monitor financing execution timelines and lender covenant negotiations for downside protection .
  • Regulatory transition for MVNO under China’s Official Notice (licensing by May 2020) introduces execution risk; MVNO remains margin-accretive but dependent on China Unicom wholesale rates .
  • EPS improved to $0.04 diluted (from a ($0.05) loss YoY), with EBITDA/adjusted EBITDA nearly doubling; continued operating leverage depends on mix and cost control .
  • Strategic actions (KADI EV control modules, Colmei/Crave stakes) may broaden the portfolio but demand capital; evaluate capital allocation against liquidity constraints .
  • Near-term trading implications: sensitivity to financing headlines, MVNO license progress, and India shipment cadence; medium-term thesis hinges on stabilizing margins and diversifying geographic/customer concentration .