Airgain - Q1 2023

Transcript

Operator (participant)

Good afternoon. Welcome to Airgain's first quarter 2023 earnings conference call. My name is Doug, and I'll be your coordinator for today's call. Joining us for today's call are Airgain's President and CEO, Jacob Suen, and CFO, Michael Elbaz. As a reminder, this call will be recorded and made available for replay via a link found in the investor relations section of Airgain's website at www.airgain.com. Following management's prepared remarks, the call will be open for questions from Airgain sell-side analysts. I caution listeners that during this call, Airgain management will be making forward-looking statements about future events and Airgain's business strategy and future financial and operating performance. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business.

These forward-looking statements are qualified by the cautionary statements contained in today's earnings release and Airgain's SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, May 11th, 2023. Airgain undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. In addition, this conference call may include a discussion of non-GAAP financial measures. Please see today's earnings release for future details, including a reconciliation of the GAAP to non-GAAP results. Now, I'd like to turn the call over to our CEO, Jacob Suen. Jacob.

Jacob Suen (President and CEO)

Thank you, operator. Welcome, everyone, and thank you for joining us today. For today's call, I'll first cover our operational highlights and achievements for Q1. I'll hand it over to Michael to walk you through our financial performance for the first quarter. Afterward, I will provide an update on our strategic product and marketing initiatives for 2023 before opening the call for questions. As you saw from our earnings release, the first quarter sales came in at $16.4 million at the midpoint of our guidance range. As we communicated last quarter, a combinations of demand softness and technology transitions in the consumer market contributed to a slight year-over-year first quarter decline. However, we are optimistic that new product introductions and design wins will result in sequential quarterly sales increases in the second half of 2023.

We continue to see solid performance from our enterprise market, which represented just over 50% of our total sales for the quarter. We also see growth from our key verticals such as rail, video surveillance, fleet, and industrial IoT. Our enterprise market represents a mix of components and systems that include our embedded modems, asset trackers, enterprise antenna design, and custom products. With its increased revenue contribution, the enterprise business continues showing resiliency against volatile market conditions. This is a result of the increased demand for connectivity to improve productivity for end customers, combined with a growing number of applications in this space. A prime example of this is the recent customer design win we announced in Q1 with a leading provider of rail cars and services to the nation's top railways.

Airgain's cellular-based asset trackers and embedded modems, combined with our NLink software platform, offer a unique solution that solves key problems that have plagued this industry for years. We started shipments in Q1, which will continue to grow over the upcoming quarters. We're also in discussions with several other companies in this space to provide similar solutions. With our focus on simplifying wireless connectivity, we appeal to market segments needing RF expertise or those requiring a shorter time to market. These include video surveillance as a service or VSAAS, which requires high bandwidth and a broad deployment to provide real-time video data and processing. EV charging is another segment that continues to grow as connectivity provides its backbone, and it is struggling to keep up with market demand. Airgain's simplified connectivity solutions help markets such as these solve complex RF problems and get connected quickly.

Our automotive market includes both our aftermarket antennas and our vehicle networking devices, such as the AirgainConnect platform. Within automotive, we continue to see strong engagement from our large OEM relationships that bundle our fleet antennas with their offerings to provide a total solution to the market. We are rolling out strategies to expand market share within our distribution channels. Our automotive channel strategy is threefold. First, a differentiation and flexibility to our product designs. Second, implement changes to the supply chain that make us more responsive to demand. Third, expand our channels of distribution globally. We are already beginning to see the benefits of these changes in our strategic direction, and expect to make several announcements in the coming weeks. While the first responder market continues to be our primary focus for automotive, we're also seeing progress in other sectors.

This includes over the road or OTR fleets, utilities, agriculture, and other market segments that manage vehicles with internal equipment that need connectivity. This dependence on connectivity within commercial vehicles is fueling demand for better performance, simplified implementation, and simplified maintenance. All problems that Airgain helps solve. Shifting now to consumer. This market is represented by our custom embedded antenna design for CPE devices sold primarily through major service providers. Consumer remains an important part of our ongoing strategy, yet we continue to see near-term challenges as a result of the macroeconomic conditions and product transitions from Wi-Fi 6 to Wi-Fi 7 in several of our key customers. Despite these headwinds, we see growth opportunities to secure wins in this space. We recently won a design from a major OEM for their next generation Wi-Fi 6E device for a tier one service provider in The U.S.

We also announced in Q1 that D-Link Corporation selected Airgain embedded antennas to power the Wi-Fi 6 signal in its VR Air Bridge. The VR Air Bridge was built to provide a dedicated ultra-low latency wireless connection between a VR headset and PC without the hassle of long cables or dependence on a Wi-Fi router. It is Airgain's design, testing, and manufacturing capabilities that allow innovative solutions such as this to deliver optimal connectivity. In addition, as we continue to design integrated 5G connectivity products in our various markets, we can better showcase how we solve complex RF problems with our superior RF design. While the first half of 2023 present some short-term challenges, we believe we have the right strategies and roadmap to deliver on our growth targets.

Not only do we see strategic opportunities in each of our existing markets, we have some exciting announcements from our advanced development team that I will discuss later in the call, that should position us for accelerated growth in the future. With that, I will turn the call over to Michael. Michael?

Michael Elbaz (CFO)

Thank you, Jacob. Before diving into the numbers, please note that my review of our financial results and guidance refers to non-GAAP figures. Information about the non-GAAP financial measures, including GAAP to non-GAAP reconciliations, are found in our earning release. Let's turn to this quarter's results. As Jacob mentioned, Q1 sales were $16.4 million at the mid-point of our guidance range of $15.7 million-$17.3 million. Our sales declined 6% year-over-year, primarily due to demand softness in our consumer markets. Enterprise sales were $8.4 million, which declined sequentially by $1.6 million on lower shipments of our Wi-Fi access and industrial IoT products. Automotive sales were $2.9 million, reflecting a sequential decrease of $0.6 million.

Consumer sales totaled $5.1 million, reflecting a sequential decrease of $1.3 million. Q1 gross margin was 39.1%, 860 basis points higher sequentially, as we recorded a one-time inventory charge in the prior quarter. We also experienced higher enterprise gross margins along with operational efficiencies. Q1 operating expenses totaled $7.3 million, higher than our guidance of approximately $7 million. The variance was due to higher than expected marketing communication expenses, including trade shows and professional services in the first quarter. We completed a workforce reduction at the end of the quarter, resulting in an approximately $0.5 million decrease in quarterly expenses. This action resulted in a $0.2 million one-time severance and exit costs, which is excluded from our non-GAAP results.

This decrease will lower our EBITDA breakeven point while allowing for increased investments for our initiatives in the second half of the year. In addition, we remain focused on streamlining our operational processes to reduce our operating expenses. As a result, our Q1 adjusted EBITDA was negative $0.7 million and non-GAAP EPS was negative at $0.08. Our cash balance as of March 31st was in line with our expectations at $9.8 million, $2 million lower sequentially, primarily due to annual variable compensation payments. Our account receivable balance was $8.1 million, $0.6 million lower sequentially. Net inventory was $4.5 million, $0.3 million higher sequentially. Now, moving to our outlook for the second quarter ending June 30th, 2023.

We expect sales to be in the range of $15.7 million-$17.3 million or $16.5 million at the midpoint of the range. We expect the gross margin for the second quarter to be in the range of 37.5%-40.5%. We project our expenses to be approximately $6.4 million. Adjusted EBITDA is expected to be $0.2 million at the mid-point of our guidance range. Non-GAAP EPS is expected to be breakeven at the midpoint of our guidance range. I would like to turn the call over to Jacob, who will walk us through our products and marketing initiatives. Jacob?

Jacob Suen (President and CEO)

Thanks, Michael. Q1 was an exciting quarter for us in terms of product announcements. Our advanced development team, under the leadership of our Chief Technology Officer, Dr. Ali Sadri, has spent the last two years developing new product lines that will help shape the futures of Airgain. We hosted an analyst and investor day on March 15th, where we discussed the impact of these new technologies on the market and our business trajectory. The feedback from the market and the investment community has been positive. We have made significant progress on these initiatives since that event, I wanna mention some of those milestones. At Airgain, we believe the advancement of 5G technologies presents a specific set of challenges that we are uniquely positioned to solve. With our ongoing efforts to simplify wireless, we focus on the entire customer experience. From customer to operator to identify unique opportunities to improve.

We have tasked our advanced development team with building solutions to these challenges. The 5G experience begins in the home or office with the user. We believe fixed wireless access, or FWA, is a killer app for 5G, as it allows wireless technologies to compete with cable and wire solutions for the broadband connection into the home. In addition to our embedded and external antenna design to maximize the signal for FWA devices, we announced a reference design for an outdoor directional FWA device with an easy installation kit that would break the trade-off between performance and ease of installation. This product appeals not only to mobile network operators, but has strong interest from our system integrator partners for enterprise environments. We have completed validation and are moving into the product development phase, where we are finalizing our testing and verification.

The next challenge we set out to tackle in the customer experience was delivering the best 5G signal to the home or enterprise. In February, we announced the launch of our Lighthouse smart repeaters and showcased this technology at Mobile World Congress in Barcelona. While 5G delivers on its promises of lower latency, increased capacity, and higher throughput, it comes at the expense of a shorter signal distance from the base station because of the higher frequencies. Rather than solving this problem exclusively with the additional expensive base stations or small cells, Airgain's smart repeaters significantly reduce deployment costs and simplify implementation.

With both a network version and a small home office version called Lighthouse Micro, Airgain simplifies the delivery of the 5G signal to your home or enterprise. We completed an initial trial on a Tier 1 operator network and are in the middle of additional trials and optimizations on that network. The third challenge we set out to solve was delivering a better signal at the cellular base station itself. Massive MIMO generally adds a high number of antennas on the base station compared to standard MIMO, which improves data transfer speeds and increases network capacity. At the Mobile World Congress show in February, we announced a key partnership with MaxLinear, an industry leader in 5G wireless infrastructure, to pair Airgain's latest reference design for a 64 transmit, 64 receive antenna array with their transceiver and high-performance beamforming technology.

We built samples and are in the process of finalizing the implementation and go-to-market strategies. Finally, we needed to give operators and their service providers a way to manage all current and future Airgain devices on their network remotely, including configuration management, change tracking, graphing performance metrics, alert monitoring, two-way communications with devices, and more. With that in mind, Airgain announced its partnership with Errigal, an enterprise software company specializing in network operation automation and management for end-to-end network management. Airgain's firmware and middleware will push data to Errigal's platform for streamlined management and monitoring. Initial integration and testing is complete, and we are in the final stages of testing our devices within the integrated platform. In addition to improving the 5G customer experience from customer to operator, we have several other product innovations in the final stages of development that we will announce in the upcoming months.

With our 5G connectivity solutions and these new products, we believe the future looks brighter for Airgain. In closing, while we are facing expected near and short-term headwinds, we are optimistic about our long-term prospects and remain focused on growth in our three major markets. We expect the stability of our enterprise market to continue as we expand our product portfolio, expand into new verticals, and grow our international footprint. We also anticipate growth with our automotive aftermarket vertical as we add differentiation and flexibility to our new product designs, improve our supply chain strategies, and expand our distribution channels for our aftermarket antennas. For our consumer vertical, we expect performance will be driven by our continued ability to solve the growing complexity in RF and our integrated product launches with the major global service provider customers, with whom we have built great partnerships throughout the years.

Our roadmap is paved with ambitious product initiatives. Given the products we have and the breadth of systems-based solutions we have introduced, our service addressable market, or SAM, has more than doubled from $7.6 billion-$16.5 billion. These new products are designed to address coverage issues on the service provider side, reduce deployment costs, and improve the customer experience from customer to operator. I'm proud of the team at Airgain and how they have responded to challenging market conditions. We have a seasoned leadership team that has kept the company on solid footing and position us for future growth. I'm confident in our market strategies, our product deployment efforts, and our position in the market, and am excited for our future. With that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Scott Searle with Roth Capital Partners. Please proceed with your question.

Scott Searle (Managing Director and Senior Research Analyst)

Hey, good afternoon. Thanks for taking my questions.[audio distortion]

Operator (participant)

Mr. Searle, you're cutting in and out.

Scott Searle (Managing Director and Senior Research Analyst)

An update on the timeline of when we expect that to contribute, and, you know, in terms of introduction of the product and the ramp of that product from a revenue standpoint, and also the latest update on NimbeLink, both from a supply chains perspective and a demand perspective. This has been one of the areas where I think there's been a lot of end market demand, but we're working through some channel inventory, what the latest thoughts were on that front, and then I had a couple follow-ups.

Jacob Suen (President and CEO)

Hey, Scott. Yes, good to hear from you. Jacob here. We missed the first part of your questions. We understand the second part of your questions is regarding to NimbeLink product, you know, inventory, which we addressed. What was the first part of your questions regarding new product introduction?

Scott Searle (Managing Director and Senior Research Analyst)

My apologies. On the auto front, AirgainConnect 2.0, as you're expanding beyond AT&T and Band 14, you know, the timeline of when that would be introduced, and when we start to see that ramping up from a revenue standpoint.

Jacob Suen (President and CEO)

Okay. Next generation AirgainConnect. Yes. Great questions. I'll address the first one, and then I'll have Michael help chime in on the NimbeLink side. Regarding next generation AirgainConnect, we have not formally made the announcement. Certainly, we have been informing the investment community. It's something that we've been working on, I would say for almost a year and a half now. You know, we actually learned quite a bit from the initial, you know, AirgainConnect HPUE, and I think that we feel really good about the prospect and we already got great feedback from the customers. As far as when is it gonna be available is something that we are still working on and hope to be able to update you in the, you know, in the near future.

At this point, you know, the product is under development and it's, you know, it's got a lot of great features that customers were wanting and we really feel good about the prospect. Again, hope to update you shortly.

Michael Elbaz (CFO)

Scott, this is Michael. On the NimbeLink question, the NimbeLink product, as you know, is a part of our enterprise markets. The majority of our enterprise markets actually are industrial IoT products. The good news here is that the supply chain has really eased significantly. We have been plagued in FY 2021 and FY 2022 through all eight quarters with a large PPV or purchase price variances, basically higher material cost, which we were able to pass through, pass through to our customers. Also, the lead time cycle, some of those parts were months and months of overall lead time. We do see a few components that had some lead time issues. However, the PPV have disappeared entirely.

In Q4 of 2022, with the shipments that we had, on the enterprise devices, we did release quite a bit of that PPV. That was one of the reason why the margin was lower than our expectation in Q4. We are done with that. Our balance sheet is pretty clean on that. The resumption of the shipments and the supply chain have come back.

Scott Searle (Managing Director and Senior Research Analyst)

Perfect. Lastly, if I could, you gave some updates on the fixed wireless access solution. It sounds like you're going from reference design and moving into the product development. When would be the earliest of when we could expect field trials and revenue from that? I think you talked about the 2024 timeline, if that has changed at all. Secondly, just bringing all the products together, it sounds like there's optimism going into the second half of this year. I wonder if you could address each of the main product categories in terms of the expectation for growth into the second half, you know, consumer Wi-Fi, you know, auto, if we start to see a pickup there. It certainly sounds like NimbeLink is starting to improve as well on the enterprise front. Thanks.

Jacob Suen (President and CEO)

Yes. Great questions, Scott. I'll first talk about the prospect for second half. Again, we don't provide guidance outside of the, you know, the next quarter. Although I think that it's important to let you know what we're seeing the second half is gonna play out. I can talk a little bit about the FWA as well and about the prospect. Regarding the second half, as indicated, we do think that consumer, it's, you know, the transition from Wi-Fi 6 to Wi-Fi 7, we do expect that to really, you know, start really happening at the latter part of this year.

And that's one of the reason why, you know, because of they wanna clean up the inventory with the transition, that's why you're seeing some of the short-term headwind, so to speak, on the consumer side. Although we are pleased to see that the supply chain issue that's been plagued us in the last two years or so, it's really start to come to its finishing line. We're very happy to see that. As far as the enterprise, we do see that, you know, the again, some of the inventory issue on the channel side is gonna resolve, I would say, by the first half. Expect the second half to really pick up.

we're expecting, you know, both on the IoT side as well as our, you know, Wi-Fi AP business is gonna pick up in the second half. That's an area where we're really seeing a lot of momentum. On the automotive, specifically, we're seeing a growing demand on the aftermarket antenna products. we expect that to continue with our new product introduction as well as the flexibility we're providing to our customers. Expect that to also start to really improve in the second half of this year. Now, regarding fixed wireless access design, we, you know, made the announcement during CES. We actually are able to work with our partners such as Errigal and provide an end-to-end solution.

Eventually, that's what we really foresee Airgain to be, to be able to not only provide customers with bits and pieces, but a complete end-to-end solution. With the fixed wireless access, we can target towards major network operators, MNOs, such as T-Mobile, AT&T, Verizon, where they're really having a need to address the coverage issue. We are also able to target that product for enterprise infrastructure customers, for, you know, for even a campus environment. We are already got a lot of interest, and we're in the process of working with them on trials. Again, I'd rather be conservative in not saying we're gonna be able to ship much this year, but we do see a really good traction and position the company well for next year. Does that help, Scott?

Ethan Widell (Senior Equity Research Associate)

Great. Thank you. Perfect.

Operator (participant)

As a reminder, it is star one to ask a question. Our next question comes from the line of Ethan Widell with B. Riley Securities. Please proceed with your question.

Ethan Widell (Senior Equity Research Associate)

Hi, this is Ethan Widell calling in for Craig Ellis. Thanks for taking my questions. I was hoping you could elaborate on your Lighthouse product and what you expect for timing to sales there. Thanks.

Jacob Suen (President and CEO)

Yes. Good to hear from you, Ethan. On the, you know, product, Lighthouse is really our really innovative 5G smart repeaters. We have the network smart repeater side as well as the smart SOHO repeater. As I indicated in the call that we're already doing a trial. We already complete the lab trial. We're into live field trial with one of the major mobile network operators in The U.S. We also receive quite a bit of interest internationally as well. We actually demo this product or marketing this product during Barcelona for MWC. We already receive interest, you know, from some of the network operators in Europe, you know, in Middle East as well as in Asia as well.

Now the product is still, you know, it's not a finished product. It's still a product that's more for demo. We intend to work with our customers closely to make sure we're creating the features that meets what they need. Several key things with this product that we already have. One is what we call, you know, smart. You know, as you know, Airgain was founded based on our smart antenna technology, and we're able to adapt that into this product. That's a major differentiations of Airgain smart repeater. The other thing, it's what we call echo cancellation, and that's another unique feature that we have. Last but not least, we're also able to do channel aggregation, and this is another features that many network operators would really like to have.

We'd be the first one to market with this particular feature. We have many other things. Again, some of the nice differentiation were created with our product, we really feel good about. We intend this product to not be able to deploy this year. I would say next year will be what we are, you know, what we're aiming for.

Ethan Widell (Senior Equity Research Associate)

Got it. Thank you. Between consumer auto and enterprise, I was wondering if you are targeting a certain mix there and the implications for gross margin going forward, if that's the case. Thank you.

Michael Elbaz (CFO)

Sure. Hi, Ethan, this is Michael. So on the overall mix, in Q1, we had a slightly over 50%, 51% to be exact, on the enterprise sales market. This has been actually a mix that has been growing steadily over the past couple of years. This was definitely deliberate in terms of diversifying our portfolio. It is certainly the market that is very resilient, especially to the current conditions, with economic conditions and at the expense of the automotive and also the consumer mix. Consumer happens to be a higher margin market, so there is an impact on the overall gross margin. So far, we've been able to offset that with operational efficiencies and really focusing on gross margin improvement initiatives.

Ethan Widell (Senior Equity Research Associate)

Got it. Thank you.

Operator (participant)

There are no further questions. As a reminder, it is star one to ask a question. There are no further questions in the queue at this time. I'd like to hand it back to Jacob Suen for closing remarks.

Jacob Suen (President and CEO)

Thank you for joining us on today's call. We look forward to updating you on our next call. Operator.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.