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spk02: Good afternoon. Welcome to Airgain's second quarter 2023 earnings conference call. My name is LaTanya, and I will be your coordinator for today's call. Joining us today's call are Airgain's president and CEO, Jacob Suen, and CFO, Michael Elbaz. As a reminder, this conference is being recorded and made available for replay via a link found in the rest of relations section of Airgain's website at www.airgain.com. Following management's prepared remarks, The call will be open for questions from AirGain's sell-side analysts. I caution listeners that during this call, AirGain management will be making forward-looking statements about future events in 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 risk and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in today's earnings release in AirGain's SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 10, 2023. Air Gang 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 discussions of non-GAAP financial measures, Please see today's earning release for further details, including reconciliation of the GAAP to non-GAAP results. Now I'd like to turn the call over to our CEO, Jacob Suen. Jacob?
spk01: Thank you, operator. Welcome, everyone, and thank you for joining us. For today's call, I'll first cover our operational highlights and achievements for Q2. Then I will hand it over to Michael to what you do of our financial performance for the second quarter. Afterward, I will provide an update on our strategic product and marketing initiatives for 2023 and beyond, before opening the call up for questions. I would like to start by briefly introducing who we are and what we do for those of you who may be new to Airgame in our industry. At AirGain, we simplify wireless connectivity for the enterprise, automotive, and consumer markets. Our technology spans across the value chain, from embedded components to integrated systems. Our products fall under three sub-brands, including AirGain Embedded, which represents our embedded antennas, embedded modems, and IoT development kits. AirGain Antenna Plus, which represents our fleet, IoT, and networks antennas. And AirGain Integrated, which represents our growing stable of finished products, including cellular-based asset trackers, vehicle networking devices, and 5G connectivity products. As we evolve from being exclusively a components company to a systems company, we are creating unique solutions designed to improve and build upon the 5G customer experience. Earlier this year, we're introducing our 5G Fixed Wireless Access, or FWA, and 5G C-band smart repeater solutions, and are making significant progress toward the commercialization of these innovative products. Our goal is to begin shipping some of these products to partners and end customers in the first half of 2024. From a go-to-market perspective, we work with a global network of VARs, system integrators, distributors, and large customers to help solve critical connectivity issues, improve wireless performance, and effectively shorten time to market for their products. With Airgain's growing portfolio of products, were able to offer complete solutions to our channel partners and customers that helped them get connected quickly. Now for our performance. The second quarter sales came in at $15.8 million, which was near the lower end of our guidance range. Macroeconomic conditions have continued to create demand softness industry-wide, which when combined with inventory correction in our channel drove a sequential decline in our enterprise and automotive markets. While we underperformed in these two markets, we did see an increase in our consumer market with the deployment of Wi-Fi 6E and major cable operators, leading to a sequential growth in this category. That said, we do not expect this trend to continue as we project a sequential decrease in our consumer sales in the third quarter. Furthermore, we expect that the product shipments of a large enterprise project that was initially scheduled for a third quarter to be delayed to the fourth quarter, contributing to our lower third quarter guidance. Despite current headwinds, we remain optimistic that our sales expansion strategies, combined with new product introductions in fleet and 5G connectivity, pave a path to growth in 2024 and beyond. Some of these expansion strategies include adding channels of distribution, expanding geographies, and diversifying our customer base. We are already able to see tangible results from these strategies in key growth verticals such as rail, fleet, and shipping and logistics. Our enterprise market represents a mix of components and systems that include our embedded modems, asset trackers, enterprise antenna design, and custom products. While we experience demand softness and excessive channel inventories, in the first half of the year 2023 with our embedded modems, our asset trackers and custom products continue to grow. In particular, our asset trackers are gaining momentum in several vertical markets, including rail, shipping and logistics, and equipment rentals. With the design win we announced in the first quarter for the rail industry, our shipments to the customer started to ramp up in Q2 and we expect to secure further wins in this market. Ergan is well positioned in its capacity to offer a complete end-to-end solution that includes cellular-based asset trackers, embedded modems, and data management software to solve key customer problems. For the real industry, Ergan offers the ability to customize a solution to track conditions such as location, load status, door opened, handbrake pulls, wheel bearing status, rail car impacts, and several more. These critical features provide increased recurring revenue for air gain, which represents meaningful portions of our asset tracker sales. Recurring revenue growth and contribution to the top line has been an emphasis for our team to increase customer retention and loyalty, as well as strengthen our ability to maintain competitive advantage. With stable revenue streams in place, we believe we can continue our strategic investment in new product innovations to drive long-term growth. Our custom products offering features joint engineering collaboration with our customers to develop products for specific applications, while helping them reduce their time to market. This offering has been a bright spot for us. However, while we have seen momentum from this sector, we acknowledge that shipments can fluctuate from quarter to quarter based on the level of integration and customization. For example, as mentioned earlier, some product shipments scheduled to occur in the third quarter have now been delayed to the fourth quarter due to shifting timelines, often inherent in complex projects. In addition to video surveillance as a service, or VSAS, and EV charging, we are also seeing growth in industrial equipment, shipping and logistics, and equipment rentals for our enterprise products. These segments are generally looking for a shorter time to market, an easy path to connectivity, and better performance in challenging environments. With our focus on simplifying wireless connectivity, we appeal to these markets with products that help eliminate design bottlenecks, remove the need for RF expertise, and provide rugged and reliable connectivity complete with a long shelf life. Our automotive market includes both our aftermarket and vehicle networking devices. We saw a sequential decline in this market in Q2 due to customers' excessive inventory and forecasting changes. We mentioned last quarter a threefold channel strategy in automotive. that includes adding differentiation and flexibility to our product designs, implementing changes to the supply chain that make us more responsive to demand, and expanding our channels of distribution globally. We're executing on these strategies and believe this will lead to sequential growth in Q3 and beyond. In May, we announced the migration of our fleet and IoT antennas to the EZ-Connect platform, which simplifies the ordering and installations of our antennas. At the same time, we also announced another addition to our line of 5G mobile antennas, the Multimax 5G. Earlier this week, we announced two new products that we believe are highly differentiated. Our Recon 13 is designed for 5G connectivity and includes as many as 13 antenna elements in one device, all in a stealth design that measures less than two inches in height. This solution is combined with a universal mounting form that allows it to adapt to any roof surface. We believe this design will be a cutting-edge solution for both mobile and fixed applications. We also announced the Outram MaxGlass 5G, our first 5G-ready windshield or dashboard mounted antenna. Both products support our effort to build 5G-ready stealth connectivity for the fleet and first responder markets. While EG-Connect offers us flexibility in responding to general market demand, we have also implemented supply chain solutions to shorten lead times, a key differentiator in the aftermarket industry. Lastly, we are also expanding into several international channels to broaden our geographical reach. We expect that new product introductions combined with new channels and new customers will lead us to greater growth prospects starting in Q3. Finally, our consumer market is represented by our custom embedded antenna design for CPE devices sold primarily through major service providers. We saw an increase in Q2 in this market, primarily as a result of the deployment of Wi-Fi 6E devices by major US cable operators. However, we saw two trends that have negatively impacted this market. First, call cutting and the availability of FWA has caused subscriber loss at major broadband and cable operators. This has created demand softness for the cable industry, along with excessive inventory in the channel in the first half of the year. Second, cable operators are transitioning to offer Wi-Fi 7 technology as a key driver for growth in 2024. While this transition will create new opportunities for Airgame to deliver best-in-class antenna solutions. Operators are cautiously approaching the Wi-Fi 6E deployment on a needed basis to ensure that they don't accumulate excessive inventory during this technology transition. While we continue to work with major broadband and cable operators to produce CPE devices, with the highest level of performance. We are also securing design wins with mobile network operators, or MNOs, on their 5G wireless CPE devices for the broadband audience. We are currently working on an indoor FWA router opportunity with a Tier 1 US MNO. While we navigate a challenging demand environment this year, we believe our strategic focus on customer-based expansion combined with Y57 investment will drive growth next year. While 2023 has presented some challenges thus far, we believe we have the right product roadmaps and expansion strategies to drive future growth in Q4 and into 2024. While we're expanding our customer base, channels of distribution and geographies, we are actively investing in three major product initiatives. We believe that this will lay the foundation of our revenue growth as market conditions improve. With that, I will turn the call over to Michael. Michael.
spk03: Thank you, Jacob. Before diving into the numbers, please note that my review of our financial results and refers 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 results. As Jacob mentioned, Q2 sales were $15.8 million at the low end of our guidance range of $15.7 to $17.3 million. Our sales declined 4% sequentially and 18% year over year, primarily due to inventory corrections with our channel and direct customers. Consumer sales were $6.2 million, reflecting a sequential increase of $1.1 million on a strong uptick of Wi-Fi 6E embedded antenna shipments. Enterprise sales were $7.3 million, which decreased sequentially by $1.1 million. The decline was driven by lower embedded modem sales due to channel inventory corrections, partially offset by higher asset tracker sales on new customer wins. Automotive sales were $2.3 million, reflecting a sequential decrease of primarily due to direct customer inventory corrections. Q2 gross margin was 40.4%, at the high end of our guidance range of 37.5% to 40.5%. Q2 gross margin was 130 basis points higher sequentially, driven by favorable consumer revenue mix, along with lower indirect cost of sales resulting from operational efficiencies. We are in the process of increasing the number of contract manufacturers from six to 10 in order to ensure adequate second source supply of our products and to reduce product cost. As mentioned in prior earnings calls, Leveraging our CM model is a primary driver of our gross margin improvement initiative. We completed the first phase of this leverage with our automotive antennas, which we expect will positively impact our gross margin by 100 basis points in Q4. Q2 operating expenses totaled $6.5 million, in line with our guidance of approximately operating expenses decreased sequentially by $750K, driven by lower employee expenses and lower marketing and professional fees. We are continuously driving operational efficiencies to reduce our expenses and make room for the investment needed for our three major initiatives. As a result, Our Q2 adjusted EBITDA was positive $37K, and non-GAAP EPS was negative 1 cent. Our cash balance as of June 30th was $9.3 million, $.5 million more sequentially. Our accounts receivables balance was $8.6 million, $.5 million higher sequentially due to revenue linearity in the quarter. Net inventory was $4.8 million, $0.3 million higher sequentially. Now, moving to our outlook for the third quarter ending September 30th, 2023. We project sales to be in the range of $13.25 and $14.75 million, or $14 million at the midpoint of the range. We expect non-GAAP gross margin in the third quarter to be in the range of 38.5% to 41.5%, or 40% at the midpoint of the range. We project our operating expenses to be approximately $5.8 million. Non-GAAP EPS is expected to be negative 2 cents at the midpoint of our guidance. Adjusted EBITDA is expected to be breakeven at the midpoint of our guidance. Despite the revenue challenge we faced in the third quarter, we remain committed to achieving a breakeven adjusted EBITDA model while we continue to execute on our strategic roadmap. Now, I would like to turn the call back over to Jacob, who will walk us through our strategic product initiatives. Jacob?
spk01: Thanks, Michael. While Q1 saw several exciting product announcements, Q2 was the quarter of executing on those growth initiatives. We have made significant progress since discussing the impact of these new technology initiatives on the market and our business trajectory at our Analyst and Investor Day in March. We believe that these initiatives will carry our growth into 2024 and beyond. While 5G delivers on its promises of lower latency, increased capacity, and higher throughput, it comes at the expense of a shorter signal range from the base station. Consequently, this creates coverage gaps for 5G customers. We believe AirGain is well positioned to solve these major coverage deficiencies, economically benefiting both the MNOs and the end customers. Improving 5G connectivity and customer experience begins in the home or office with fixed wireless access. These devices allow wireless technology to compete with cable and wire solutions for the broadband connection. In January of 2023, we announced our reference design for an outdoor directional FWA device with an easy installation hardware kit and its unique software tool that helps to solve the trade-off between performance and ease of installation. We're excited to announce that we have moved this product from reference design stage into production under the Lantern FWA brand and have shipped samples to major customers for trial, testing, and evaluation. This product not only appeals to the M&Os, but is also receiving strong interest from our system integrator partners for enterprise applications, such as broadband, failover, and remote access. Early market feedback has been positive, and we expect to begin generating revenue from this product in the first half of 2024. With the reduced transmission range of 5G signals, The cost of ownership for network operators increases significantly due to the infrastructure and equipment required to extend high-quality coverage. An active smart repeater can overcome this challenge by facilitating efficient use of existing infrastructure to ensure a stable and high-quality signal. Again, it's at the forefront of developing advanced smart repeaters. which aim to reduce the cost of wireless infrastructure for operators. The Lighthouse smart repeaters are a major initiative announced in Q1 and features single pole installation, carrier aggregation, active echo cancellation, support for multi-operator frequency bands, and active beam steering capability. We have completed lab tests and are conducting multiple trials on tier one operator networks to further optimize the performance of our products. We expect these products to begin generating revenue by the end of 2024. The third major initiative we are working on at Airgame involves delivering a better 5G signal for vehicles. We have been in the fleet and vehicle networking industry for many years. With the deployment of 5G, the use cases for higher data rate applications have multiplied substantially. This is especially important for several segments including public safety, transportation, aquaculture, utilities, and many more. We will provide additional information for this opportunity in the near future. While we continue to grow our core product lines and generate organic growth, we believe our focus on improving the 5G customer experience through these major initiatives can fundamentally offer cutting-edge solutions for the markets in which we compete, as well as create a strong growth trajectory for AirGain. In closing, while we are seeing short-term headwinds, Due to macroeconomic conditions, the major initiatives we have set into motion are nearing fruition. We are investing in three major product initiatives, which represent multi-billion dollar serviceable available market, while diversifying our customer base, expanding our channels of distribution, and entering new geographies. We are also making these investments while keeping our focus on positive EBITDA generation. We are pleased that we have made significant advancements in our multi-step go-to-market development process for our three major initiatives. Our fixed wireless access offering for both consumer and enterprise environments has thus far completed lab and field trial, field testing, and is now in customer trials with several domestic and international prospects. The projected timetable for this device to launch remains consistent at the first half of 2024. Our next generation vehicle networking platform is following a similar trajectory in terms of both partner and end customer demand. During this process, we have considered lessons from our previous offerings in this space and collected months of feedback from customers throughout the value chain. We look forward to updating you further as we get closer to market. Finally, our Lighthouse Smart Network repeater platform is also progressing steadily through trials and is now receiving direct interest from MNOs and installers, both domestically and internationally. This is representative of our slated demand goals and a testament to the quality of our offering, as our initiatives have the express intent to solve many of the common problems MNOs face in the deployment of 5G networks. I am proud of our team members for their passion and commitment throughout the company's transformation And I feel that the solid work our team has put forth is nearing materialization, and we should start to see its results soon. Transformation in technology, roadmaps, operations, and sales is an ongoing process for every successful company. And we feel that we have been effective in executing on that strategy that we have laid out over a couple of years ago. We are very confident in the substantial strides our team has made thus far on the development of our cutting edge solutions. With a dedicated commitment to simplifying wireless connectivity across a broad spectrum for our customers, we have set a course to deliver unparalleled products that cater to the evolving needs of our customers and partners. By driving innovation in the connectivity industry, we look to continue establishing ourselves, not only as a leader in the market, but as a company that shapes the industry in the process. We believe the future is bright for Airgain. And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.
spk02: Thank you. We will now take questions from Airgain's sell-side analysts. We will now be conducting a question and answer session. If you would like to ask a question, please 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 keys. Once again, that's star one to ask a question at this time. One moment while we pull for questions. Once again, to ask a question at this time, please press star one on your telephone keypad. Once again, that's star one to ask a question. One moment while we poll for questions. Once again, ladies and gentlemen, to ask a question, please press star one on your telephone keypad. That's star one on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one at this time. One moment while we poll for questions. There are no questions in queue at this time, so I would like to turn it back to management for closing comments.
spk00: Thank you for joining us on today's call. We look forward to updating you on our next call. Up later.
spk02: Thank you. If your questions were not taken, you may contact Air Gains Investor Relations at team at AIRG at gateway-grp.com. Thank you for joining us on today's call. We look forward to updating you on our next call.
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