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spk03: Due to the successful initiatives we implemented to mitigate supply chain constraints and headwinds, consumer contributed greatly to the year-over-year improvement we saw on overall sales and gross margin expansion in Q3. Much of the positive momentum has been in the Wi-Fi 6 and 6E space as we continue to gain market share and reinforce AirGain's leadership in fast-growing and higher-margin technologies. Just in this past quarter, we have successfully won two new Wi-Fi 6 60 design contracts with global service providers, both of which will ship in 2023. We also engaged with key ecosystem partners, on the next generation Wi-Fi 7 system designs. At Ergan, we specialize in simplifying the growing complexity of wireless, and Wi-Fi 7 adds increased complexity in the IF design. This plays directly into our core strengths and will help fuel Ergan's sales in the future. In terms of the supply chain, As I mentioned, we continue to navigate the changing tides of the macroeconomic environment by mitigating risk in our supply chain. This includes simplifying our supplier network and adding supply redundancy to ensure stability. As you know, AirGain's brand is synonymous with innovation. Our vision for connecting the world is intertwined with a solution selling approach. We have identified three key differentiators in relation to the market as a whole in our competition. First, we simplify wireless for end customers across all our product lines. Second, our large breadth of products spans across the entire value chain. whether you are trying to solve a connectivity issue in your product design or your operating environment. The third is against technological capabilities, particularly in reference to our AI expertise. Together, these differentiators and capabilities all boil down to one key message. We simplify wireless. In engineering circles, RF design is known as black magic as it is often complex and difficult to optimize Eigen's foundation was built on complex antenna design where we would solve for signal issues not only within the device but within the environment as well As we integrated our acquisitions and added new product lines This specialty in simplifying wireless became a connecting theme. Moving forward, our focus is to leverage this core competency to move into a leadership position in the new wave of technologies and platforms as they become increasingly integrated and complex. Ergen is poised to make a significant impact in the wireless connectivity space. With that, I'll turn the call over to Michael. Michael.
spk05: Thank you, Jacob. I am excited to be part of the Ergen family. To quickly introduce myself to the audience, I bring over 25 years of experience in public corporate finance, primarily with semiconductor companies. The market served by these companies ranged from wired to wireless broadband solutions. AirGain has building blocks for making a significant impact in the wireless space, and I look forward to making a meaningful contribution to achieving its strategic and financial goals. My objective over the next six months is to improve our operational efficiencies and our communication with the investment community. Before diving into the numbers, please note that my review of our financial results and guidance refer to non-GAAP figures. Information about the non-GAAP financial measures, including GAAP to non-GAAP reconciliations, are found in our earnings release. Now, let's turn to this quarter's result. AirGain delivered another quarter of strong sales and profitability. Q3 sales were $19.2 million, $0.4 million higher than the midpoint of our guidance range of $18 to $19.5 million. Our sales were relatively flat sequentially, as higher consumer and automotive sales were offset by lower enterprise sales. Consumer sales totaled $7.3 million, reflecting a sequential increase of $1.4 million on easing supply chain shortages impacting a customer's product shipments. The $7.3 million in consumer sales was the highest point since the second quarter of 2021. Automotive sales were $5.1 million, reflecting a sequential increase of $0.9 million on the continued strength of our aftermarket product line. Enterprise sales were $6.8 million, which declined sequentially by $2.4 million on lower shipments of our industrial IoT product line. Q3 gross margin was 39.4% at the high point of our guidance range of 36.5 to 39.5%. Gross margin was flat sequentially, but it was up 290 basis points on a year-over-year basis because of improving consumer sales mix and automotive margins. Q3 operating expenses totaled $7 million, an improvement of $0.3 million sequentially. As a result, our Q3 adjusted EBITDA was $0.8 million, $0.6 million higher than the midpoint of our guidance, and $0.3 million higher sequentially. Adjusted EBITDA margin for the quarter was 4.1%. Non-GAAP net income was $0.6 million, resulting in non-GAAP diluted EPS of $0.06, $0.03 higher sequentially. Our cash balance as of September 30 was $9.2 million, relatively flat sequentially. Now moving to our outlook for the fourth quarter ending December 31, 2022. We expect sales to be in the range of $19.7 and $21.1 million, or $20.4 million at the midpoint of the range. We expect gross margins for the fourth quarter to be in the range of 37.5% to 40.5%. We project our operating expenses to be approximately $7.4 million, Adjusted EBITDA is expected to be $0.7 million at the midpoint of our guidance. Non-GAAP EPS is expected to be $0.05 at the midpoint of our guidance. Now, I would like to turn the call over to Murad, who will walk us through our strategic product and marketing initiatives. Murad?
spk04: Thanks, Michael, and welcome to the team. With our transition into selling IoT products and bundled solutions, we've seen many opportunities arise from existing and new customers, including more comprehensive and stickier contracts. From a sales perspective, this boosts retention and renewal rates, further demonstrating the long-term value of our products. In addition, the broadening of our markets from consumer only to Automotive and enterprise greatly expands our serviceable market from $330 million to well over $7 billion. As Jacob touched on, we saw significant wins this quarter that reflect the strength of our horizontal reach in multiple IoT and markets. The notable demand increase for connected EV charging, both in terms of consumer trends as well as governmental infrastructure investment resulted in a contract win that we're expecting to contribute to our results in 2023. Additionally, we secured purchase orders for our NimbleLink integrated modems coupled with antennas offerings from large customers in the medical device and oil and gas industries, further validating the effectiveness of the synergy of our products and our go-to market plan. We also secured wins for our next generation IoT products with new and existing customers in the video surveillance and public safety and markets. Cross-selling and upselling existing customers is an important initiative for Airgain and a key driver of sustainable sales growth going forward. This is an exciting time for Airgain, particularly in R&D. We began the transition to the next generation of vehicle networking platforms, an initiative in line with our goal to capture a much broader market share by producing international service provider agnostic products and solutions. We're building off the experience over the past three years of our AirGain Connect platform, and the focus in the future will be not only on HPE, but other product subcategories in order to broaden the offering and capture new branches of the market simultaneously. To this date, we've seen success not only in first responder markets, but also in fleet and utilities. We look forward to continuing that momentum and updating the market on these initiatives in the coming quarters. 5G represents a central focus for the company. as we work with ecosystem partners to develop both the hardware and software that will improve user experience. We are leveraging our expertise with in-home wireless and cellular technologies to develop the critical building blocks of next-generation CPE wireless systems in order to increase customer satisfaction and help operators reduce churn. We look to continue to build on our leadership in RF, taking advantage of the new wave of 5G product deployments, including C-band and beyond. We announced in September our work in fixed wireless access, which is a central application for many 5G deployments. This is a significant market expected to grow fivefold by 2026, according to industry estimates. Today, most fixed wireless access antennas, particularly those used in home gateways, are designed to prioritize simplicity over performance. With fixed wireless access and the addition of 5G, the complexity of embedded antenna system increases, which is the area where AirGain offers a differentiated advantage given our knowledge base and ability to solve complex radio frequency problems. Our offerings will continue to cater to more intensive demands in order to simplify the process of bringing higher quality solutions to the market. We're able to save customer costs and accelerate time to market by leveraging our methods of embedded antenna systems designed specifically for fixed wireless access. Over the next few months, we will be announcing several new products that we believe will highlight our market leadership in these key technologies I just described. This is a concerted effort by our company in line with our shift to becoming a wireless system solution provider with differentiated value for many focused markets that include fixed wireless access, vehicle networking, industrial IoT, and carrier network segments. Stay tuned as we look forward to unveiling our work in due time. Now I'd like to turn the call back over to Jacob. Jacob. Thanks, Maureen.
spk03: As exhibited in these quarter's numbers, we are seeing the results of our efforts to mitigate the headwind from the supply chain. We will continue to leverage our RF expertise in providing our customers with high-performance wireless solutions across our targeted markets. Areas of key focus remain 5G, IoT, fixed wireless access, and Wi-Fi development. In the near term, we expect to deliver sequential organic growth and another quarter of adjusted EBITDA profitability in the fourth quarter. We expect strong growth with our enterprise market as we continue to expand our product portfolio and international footprint with our IoT solutions. We also anticipate meaningful growth with our aftermarket automotive business. As for our consumer business, we expect continued recovery. Long-term consumer growth will be driven by our integrated product launches with the major global service provider customers that we have built great partnerships with throughout the years. Looking ahead to 2023, I am optimistic about the growth across our targeted markets. The innovative products we are launching point-to-company interactions of robust sales growth coupled with consistent gross margin expansion. With these developments on the horizon, we are focusing on execution and operational efficiency. We continue to remain resilient and flexible in order to provide end customers with market-leading and reliable solutions. driving lasting value for our shareholders in the process. And with that, we are ready to open the call for your questions. Operator, please provide the appropriate instructions.
spk07: Thank you. And at this time, we will conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that 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 keys. Once again, to ask a question, press star one on your telephone keypad. One moment, please, while we pull for questions. Our first question comes from Scott Searly with Roth Capital. Please state your question.
spk09: Hey, good afternoon. Thanks for taking the questions. Nice job on the quarter. Hey, Jacob, maybe just to dive in on the consumer side with Wi-Fi. I'm not sure if I missed this in the call, but did you talk about component availability from a Wi-Fi standpoint, if that was impacting your ability to ship more to the service providers and if there was anything left on the table during the quarter? And then you know, while we're starting to increase, get into levels we haven't seen in a year or so, it's still below the peak levels of $10 million a quarter. I'm wondering if you see, what timeline you see getting back to those types of levels, and I think you indicated that there was a large service provider win that should start to contribute in 2023. Okay.
spk02: Hey, Scott. Yes, Jacob here.
spk03: As far as the component shortage issue, we are seeing improvement on the consumer side. One of the main chips that we learned previously that is still an issue as far as we know, although many other components have improved markedly in the last quarter or so. So anticipate the consumer recovery to continue and as far as when is it going to get back to normality, I would say we hope that sometimes next year that would happen.
spk09: Gotcha. Maybe, Jacob, just to follow up quickly, I think you referenced another big service provider win. I'm not sure what the timeline is on that or the color that you could provide around that, but I'd love to get a little bit more details if they're available.
spk03: Yeah. So a couple of these design wins surrounding Wi-Fi 6E, and we anticipate those designs, I mean, we have the incumbent, we have the sole source for those designs. So it's not a matter of are we going to, you know, when the design or not, it's a matter of when the service providers are actually going to be launching it. And right now they're projecting sometimes in, you know, late first half or early second half of next year.
spk09: Okay, great. And if I could, I think on the enterprise side, it was a little bit softer. I'm not sure if you differentiated what kind of end markets or otherwise what was going on there. I know NimbleLink is in that group, and there have been some component availability issues on that front. I was wondering if you could provide a little bit more color on that side of the business and also what the demand profile of that was looking like for NimbleLink.
spk03: Yeah, I'll start, and then maybe Maura can chime in. So overall, the demand is very strong. There was some movement, as we indicated, even in the last earnings call about just some of the shipment because some of the customers were concerned about supply shortage. So some of the shipment was moving to Q2 versus Q3. But we have very strong demand. In fact, I indicated that we have very strong backlog already for Q4 and next year. So we feel really good about the overall IoT business.
spk04: Yeah, so, hey, Scott, how are you? So just to kind of supplement what Jacob talked about, the health of business looks really strong for industrial IoT, and that's not only for cellular connectivity, but also in terms of what we're trying to do in the asset tracking. And so, like I mentioned on the script, we've seen wins in multiple verticals and EV charging and, you know, what's happening in there with the – how the market has really grown, not only through the demand from the consumer, but also the initiatives that the government is putting in place. And we're seeing that really starting to accelerate for us. Video surveillance as a service also is showing a lot of traction for us. We've also secured a nice wind that combines not only the cellular motors, but also with our antennas. So that takes in that synergy of the combined two companies, which is something that we're really excited about. And then also in parallel, we're starting to see a lot of traction in a logistics space, particularly in rail. And so I would say with the NimbleLink brand and those products going forward, it's looking pretty strong.
spk09: Very good, very helpful. And lastly, if I could, on the fixed wireless access front and moving towards solutions in general, I'm not sure if there are any timelines. I think you're talking about a lot of development there, but are we going to see some of the impact of that in 2023, or is that a little bit premature? And while on the subject of 23, I was wondering if you have any early thoughts in terms of how the year is shaping up and what we should be thinking about from a growth perspective. Thanks.
spk04: So I'll talk about FWN, and I'll let Jacob chime in on what the growth, and maybe Michael, if he wants to chime in on what that's going to look like through the year. So fixed wireless access for us is a really important initiative that really supplements or reignites our consumer business. And I'll tell you what's happening there. If you look at the traditional gateways that we had deployed or designed, helped OEMs design for deployments for wireline operators, I would say if you compare that to what's happening in fixed wireless access, and I would contend as many industry analysts are saying, fixed wireless access is really the killer app for C-band. What's happening is with the addition of cellular, the complexity increases in the box, right? Not only that provides room for air game, but also that allows us to double and sometimes triple the content per box on the ASP. And so in terms of wind, there are a couple of winds that we've managed to secure for fixed wireless access. I think one of those could contribute in the latter part of next year to our results, but I think that's looking really, really good for us in terms of reigniting the consumer space We are also supplementing that, and you can see what's happening with some of the operators that started to deploy the fixed wireless access and some of the turn. There is a lot of traction that we are seeing in their request to help them to increase the signal from the tower down so that you can increase the broadband speed, and that's exactly where Airgain excels. And so I think that plays nicely for us in terms of our capabilities and what we will be able to do with that business. Jacob, I don't know if you put some color on what the... The second part of what... Yeah, yeah.
spk03: As far as 2023, as I indicated, I'm really optimistic. I expect growth across all three of our targeted markets. But in particular, I am really excited about what we're going to be able to do on the IoT front, which is part of our enterprise market, and what we're going to be able to do with the consumer side. You know, really alluding to, I expect the recovery to basically complete hopefully by sometime next year on the consumer side. We have several new design wins. I think that many of the service providers are really gonna complete their ramp up on the Wi-Fi 6, and many already are getting, launching on the Wi-Fi 6E, and also already working on some design on the Wi-Fi 7. So I really feel good about what we're gonna be able to do in these two particular markets. And also automotive, we also, you know, it's steady growth as well. So all in all, I feel really good about how 2023 is shaping life. And last but not least, I would expect the supply shortage issue, the pandemic, it's going to be in the rear view mirror, you know, sometimes next year.
spk09: Great. Thanks so much.
spk02: Great questions. Thank you, Scott.
spk07: Thank you. And a reminder to the audience, to queue up for a question, press star one on your phone or press star two to remove your question. Next, we have Alex Vecchi with William Blair. Please state your question.
spk01: Hi, this is Sabrina on for Alex. Thanks for taking my question. Earlier this year, there were targets of bringing gross margin back to the 40% range and then has been guided up sequentially. Could you provide some color on the contribution for end market for the next quarter and then possibly in 2023?
spk05: Sure. Hi, Sabrina. This is Michael Alvarez. So from a gross margin standpoint, and you're right, our gross margin in Q3 averaged 39.4%. Based upon the guidance that we just provided for Q4, our overall FY 2022 gross margin will average about 39.8%, which is really a slight improvement year over year of only about 40 basis points. This is not really the target and the focus that we have internally. as we are looking to really bump up that gross margin to the low 40s next year with a long-term growth margin target of about 45% beyond 2023. There's a number of reasons as to why the gross margin has been stable around the 40%, 39% level. And the key driver has been the pandemic, primarily because of the supply shortages, comes into a high-cost level from the operational support, but also because of higher cost of components. In addition to that, we also had the transition to a Fabless model that we started a couple of quarters ago. And from my past experience, such a transition takes at least about a year to complete and to fully realize the benefits. And so once those supply chain issues are resolved and once this transition to a Fabless model completely is finalized, then the team will be completely focused on leveraging the Fabless model to improve our efficiencies and really to reduce our operational costs. So what I do see right now is more of a gradual increase, most likely starting in the first half of next year as we go through our internal goal of about 45% in the long term.
spk01: Thank you. That was really helpful. And then kind of a follow-up to that. since you have been bringing the OPEX down a bit throughout the quarters. I was wondering how to think about that going forward and if it could reach 2020 levels.
spk05: So that piece of it, I think really the goal here is really to continue funding our R&D development. This is a key to our innovation and a key to our long-term success. Our SG&E expenses, on the other hand, As the revenue continues to grow, we expect to see the percentage of SG&E expenses to be reduced. So all in all, really the key focus is really on the adjusted EBITDA margin itself and building that up, and that will also result into free cash flow generation.
spk01: Okay, that was helpful. Thank you. I'll get back in queue.
spk05: Thank you.
spk07: Our next question comes from Tim Savageau with Northland Capital Markets, please say your question.
spk06: Hi there. Sorry. Good afternoon. A couple of questions. I'm going to go back to consumer, and you kind of touched on this, but it sounds like with the design wins and maybe some of the fixed wireless access activity that you feel like you might be able to get beyond previous peaks in consumer. Maybe in the second half of the year, I just want to kind of bounce that off you. And separate question, haven't talked to much about Airgate and Connect here on the call, either for the quarter or the outlook in 23. I wonder if we can get an update there of kind of what you're seeing. It seems like your focus is shifting more to aftermarket. Thanks.
spk04: So, hey, Tim. How are you? This is Murad. So in consumer, we really hope that you are right, and we expect it to be so, because what's happening is that not only we continue to see the refreshes in our traditional wireline business, but here comes this wave of fixed wireless access with the MNOs trying to compete for that piece of business, and that provides us with a wave that we can ride and then help to regrow that business. The design wins are there. It's just a matter of how the rollout is going to look like on the operator side. We're seeing that the supply is getting better. There's 10 fabs that are coming online right now. TSMC is saying that they don't have any problems with the roadmap. Then you read some other, you know, literature and it says that maybe there could be still some issues. But other than the macros and what the operators wind up doing and the timing of how they deploy that product, we feel pretty good about what's going to happen in that business. And just to address your point about AirGain Connect, I think you asked about what's going on there. When we built that product, the initiative was to really simplify how those products are built and deployed, simplify the installation by taking everything to the top of the car, and also to increase performance. That product, that first AGCHP, was designed specifically for AT&T's FirstNet. And so by the sheer number, the market potential was limited by what we can do with AT&T. What we plan to do going forward is to build products that are a derivative of that SKU that allows us to win in markets that address the needs of other operators, not only here in North America, but also at the world stage. What I can tell you, the positive that we've seen from the deployments that we've seen on AirGain Connect is that not only we saw success with first responders, police, fire, and ambulance, but also with utilities, and that's really exciting. And so as we look at what we do with the roadmap going forward, we're going to pay attention to what we do with the feature set, with the price, to make sure that what we release winds up being something that gives a higher value proposition and expands the market for us.
spk07: Thank you. And just a reminder, to ask a question, press star 1 on your telephone keypad. To remove yourself from queue, press star 2. Once again, to ask a question, press star 1 on your telephone keypad. Our next question comes from Michael Mani with B. Riley. Please state your question.
spk08: Hi, this is Michael Mani on for Craig Ellis. Thanks for letting us ask a few questions. So to start on the consumer segment, and nice to see the progress on the supply chain side, but my question is more on how you would characterize demand in the first half of next year. I was just wondering, as you talk to your service provider customers, are there any changes in tone in how they talk about demand or how they place in their order patterns as well? And I guess, how would you gauge the risk of a product launch being delayed further than you expect. Thank you.
spk02: Hey, Michael. Yeah, Jacob here. I'll take it and either Michael or Maura can chime in. So, you know, we do see the demand being there.
spk03: As I alluded to earlier, they still haven't fully deployed the Wi-Fi 6, which is really should have been fully deployed back in 2021. But because of the pandemic, because of the supply shortage issue. I really believe that they really start to ramp up 2022. We expect 2023 to be the year they fully ramp up. And already, they already, as I indicated earlier, deploying some of the Wi-Fi 6E. So I think that the supply shortage issue is still gonna be in play for the first half of the year and expect that to gradually subside. It's still there for certain. As I indicated earlier, we know one main chipset for Wi-Fi chipset is still in shortage issue. So we expect that second half to be improved substantially.
spk08: Got it. Okay, thank you. And turning to gross margin, so I think you mentioned part of the improvement this past quarter was that you were able to raise auto margins above what you expected. Could you talk about, I guess, your initiatives to raise margins in that segment and perhaps also in the enterprise segment as well? How much could that unlock and, yeah, how much of that is a kind of tailwind to get us back into the low 40% range next year?
spk05: Hi, Michael. This is Michael. So from a gross margin standpoint, the upside to the guidance that we provided at 39.4% was primarily driven by the consumer revenue mix that we had, consumer being a bit of a positive surprise to our revenue and gross margin. But at the same time, it's also the impact of lower operational cost. Compared to sequential or year-over-year, what I mentioned about the aftermarket margin improvement, this is a direct result of the One of the benefits of the closure of our Arizona site and moving into a Fabless model. And so we're starting to see some of our aftermarket products margins really improving on that. One of the items on the enterprise segment or market itself, It's more driven out of a diverse mix of different product and product line. So this is definitely a key focus area for us, especially with the growth in demand that we're seeing to be able to really improve our overall gross margin.
spk08: Okay. Thank you very much.
spk05: Thank you.
spk07: Thank you. And at this time, this concludes our question and answer session. If your question was not taken, you may contact AirGames Investor Relations at team at AIRG, once again, AIRG, at gatewayir.com. I'd now like to turn the call back over to Mr. Suen for his closing remarks.
spk02: Thank you for joining us on today's call. We look forward to updating you on our next call. Up later.
spk07: Thank you. Thank you for joining us today for Ergain's third quarter 2022 earnings call. You may now disconnect.
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