Airgain, Inc.

Good afternoon. Welcome to Airgain's third quarter 2023 earnings conference call. My name is Sherry and I will be coordinating for today's call. Joining us for today's call are Airgain's president and CEO, Jacob Suen, and CFO, Michael Elbos. As a reminder, this call will be recorded and made available for replay via the link found in the investor relations section of Airgain's website at investorrelations.airgain.com. Following management's prepared remarks, the call will be open for questions from Airgain's sell-side analysts. I question listeners that during this call, Airgain's management will be making forward-looking statements about future events in Airgain's business strategy and future financial and operating performances. 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 questionary 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, November 9, 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 further details, including a reconciliation of the GAAP to non-GAAP results. I would now like to turn the call over to our CEO, Jacob Suen. Jacob?

Thank you, operator. Welcome, everyone, and thank you for joining us. For today's call, I will first introduce cover our operational highlights and achievements for Q3. Then, I will hand it over to Michael to walk you through our financial performance for the third quarter and our guidance for the fourth quarter. Afterward, I will provide an update on our strategic product and marketing initiatives for Q4 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 who may be new to AirGain in our industry. At AirGain, we simplify wireless connectivity for the consumer, enterprise, and automotive markets. Our technology spans across the value chain from embedded components to integrated systems. Our products fall under three sub-brands, including AirGain Embedded, AirGain Antenna Plus, and AirGain Integrated. At the beginning of the year, we announced our initiative to improve the 5G customer experience by fixing coverage gaps, boosting performance, and simplifying the delivery of 5G connectivity to the home, office, and vehicle. Earlier this year, we introduced our Lantern 5G fixed wireless access device and Lighthouse 5G C-band smart repeater. And we will be announcing a third product initiative in the coming months that fits into our effort to improve the 5G customer experience. Our goal is to begin shipping some of these innovative products to partners and end customers in the first half of 2024. We work with a global network of boss 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 product portfolio, we offer complete wireless solutions to our channel partners and customers that help them get connected quickly. Now for our performance. Third quarter sales came in at $13.7 million, which was close to the midpoint of our guidance range. Market economic conditions such as demand softness and inventory corrections have continued to create downward pressure in all three of our main markets, consumer, enterprise, and automotive. While we focus on growing our customer base, we expect the continued inventory overhang in our channel and that of our lead customers to persist in the fourth quarter. Coupled with the shift of a large enterprise project from the fourth quarter to the first quarter of 2024, we are projecting a lower guidance range in the fourth quarter. However, we are nearing our turning point and are beginning to see signs of a market recovery. We expect growth in our enterprise market in the first half of 2024 with broader growth in the second half of the year from our consumer and automotive markets, especially with the launch of our product initiatives. Moving to a review of each of our markets, our consumer market is comprised of our custom embedded antenna design for CPE devices sold primarily through major service providers. In addition to demand softness and inventory corrections, there are additional forces within the consumer market creating downward pressure. First, as we discussed last quarter, service providers are on the cusp of a transition from Wi-Fi 6E to Wi-Fi 7. They are counting on Wi-Fi 7 to improve performance and user experience. And they are looking for ways to accelerate the Wi-Fi 7 adoption and transition. In anticipation of this shift, our key OEM customers are operating cautiously in order to avoid excessive inventory. While the market is hesitant in the short term. This shift presents a compelling long-term opportunity for AirGain to deliver its cutting-edge Wi-Fi 7 technology. We have invested heavily in our Wi-Fi 7 capabilities, and we recently secured a design win from a Tier 1 cable operator for its next-generation Wi-Fi 7 CPE. consumer demand continues to shift from wired to wireless providers for internet service as they cut the cord and make the transition to FWA. We recognize this trend and focus our strategy on penetrating this growing market, which offers significant average selling price, or ASP, growth. We are pleased to announce we recently secured a large design wing with a tier one mobile network operator, or MNO, for the antenna design in their indoor FWA router, for which we expect to begin shipments in Q1. In addition, we are working on several other opportunities with cable operators and MNOs and look to secure these opportunities in early 2024. As we navigate a challenging demand environment, we expect declining consumer sales in the next two quarters, followed by gradual growth from our MNO design win and from our cable operator Wi-Fi 7 technology transition. Our enterprise market represents a mix of components and systems that include our embedded modems, asset trackers, enterprise antenna design, and custom products. Inventory overhang continues to dampen our embedded modem revenue, and while some of our distributors are back to normal buying patterns, others are still carrying inventory that will last a few more quarters. Despite the inventory overhang, we see end customer demand growth in our modems as evidenced by growing point of sales in our distribution partners. And we expect a gradual recovery in the first half of 2024. EV charging and visas continue to be strong markets for our modems. And we do see industrial, aqua business, energy, and managed IoT applications as growth opportunities. Our custom products offerings features joint engineering collaboration with our customers to develop products for specific applications while helping them reduce their time to market. These projects can often have shifting timelines depending on product requirements, engineering resources, certifications, and manufacturing schedules. Shipments can fluctuate from quarter to quarter based on the complexity of the product offering, which has had a material impact on our expected timing for such revenues. Specifically, one of our lead customers is going through a technically complex platform refresh, and the combinations of high inventory in its current platform and the completion delay in its new platform created a material shift of revenue from the second half of this year to the first half of 2024. Our asset tracker business continues to show significant growth potential. We continue to see growing applications for pallet, packaging, and logistics tracking. which represented a bright spot in our Q3 revenue. In addition, our pipeline includes several opportunities in railways, warehousing, equipment management and rental, lot management, and coaching. This is one of our existing product lines that presents a significant growth opportunity in 2024. Due to the market size, flexibility of applications, opportunity for recurring revenue, and our strategic product differentiators. Because of the size of the customers with which we are interacting in the established pilot process, the sales cycle for this product can be from 9 to 18 months, while our potential deal pipeline is strong. we are working to address our resource constraints, streamline our processes, and shorten the sales cycle to help create a more consistent revenue stream in 2024. Lastly, our automotive market includes both our aftermarket antennas as well as our vehicle networking devices. Our focus in the automotive market has largely but in the public safety, transportation, and municipalities. Inventory corrections from lead customers have dampened the growth in this market, and we expect this trend to continue in the first half of 2024. However, we are seeing signs that our combined strategic focus on new and differentiated products, supply chain flexibility, and global channel expansion is yielding results in Q4. We expect our previously announced RECOM 13 and Ultramax Glass 5G products will begin to ship this quarter, both of which fit into our new low-profile design focus. This is in addition to our EG Connect platform, which adds supply chain flexibility by separating the antenna from the cable harness, minimizing the variations in skews. In addition, we signed a new system integrator in the public safety and municipality market that we believe will contribute significantly to our automotive sales next year. Despite the downward pressure from macroeconomic forces that has persisted throughout 2023, We remain optimistic that our sales expansion strategies pave a path to growth in 2024 and beyond. By the end of 2023, we expect to have added five new distribution partners and a major system integration partner, greatly expanding our reach. We have also announced new products that should start to impact revenue in Q4. alongside two of our three major product initiatives to improve the 5G customer experience. All of which help provide an addressable market that should contribute significantly to 2024 revenue and beyond. We have expanded into two new key geographies and look to take advantage of the market needs in these regions. While 2023 has presented some significant challenges, we believe we have the right product role maps and expansion strategies to recover and grow in 2024. With that, I'll turn the call over to Michael.

Michael. 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 earnings release. Now, let's turn to this quarter's results. As Jacob mentioned, Q3 sales were $13.7 million, below the $14 million midpoint of our guidance range. The variance was primarily due to lower than forecasted consumer sales. Our sales declined 13% sequentially and 29% year-over-year, primarily due to the high inventories across both our channel and direct customers, coupled with demand softness in our consumer market. Consumer sales were $4.4 million, reflecting a sequential decrease of $1.8 million as our Q2 quarter had a strong uptick of Y56E embedded antenna shipments. Enterprise sales were $6.8 million, which decreased sequentially by $0.5 million. The decline was driven by lower sales of custom products, partially offset by higher sales of embedded modems, as some distributors are recovering from inventory overhang. Automotive sales were $2.5 million, reflecting a sequential increase of $2 million. Q3 gross margin was 39.1 percent compared to our guidance range midpoint of 40 percent. The variance was primarily due to the unfavorable consumer sales mix. Q3 gross margin was 130 basis points lower sequentially due to the unfavorable consumer sales mix and a lower enterprise margin driven by an unfavorable product mix change. Q3 operating expenses totaled $6 million, slightly higher than our guidance of approximately $5.8 million. Operating expenses decreased sequentially by $.5 million, driven by lower contractor and other variable expenses, resulting from G&A efficiencies. Our Q3 operating expenses at $6 million represent the lowest spend level since the acquisition of NimbleLink in Q1 of 2021. As we mentioned in prior earnings calls, we are focused on driving operational efficiencies to reduce our expenses and make room for the investment needed for the launch of our three initiatives that will help drive revenue in 2024. As a result, our Q3 adjusted EBITDA was negative $0.5 million, and non-GAAP EPS was negative $0.06. Our cash balance as of September 30th was $10 million, $0.7 million higher sequentially driven by working capital management. The $10 million cash balance was $0.8 million higher than the same quarter in the prior year despite lower year-over-year sales. Our accounts receivable balance was $6.3 million, $2.4 million lower sequentially due to strong cash collections and lower sales. Net inventory was $4 million, $0.8 million lower sequentially. Given our cash balance and our tight expense management, We believe we have sufficient resources to execute on our growth strategies. Now, moving to our outlook for the fourth quarter ending December 31st, 2023. We project sales to be in the range of $9.25 to $10.75 million, or $10 million at the midpoint of the range. The lower revenue guidance compared to prior expectation is due to lower than anticipated consumer sales and continued inventory corrections, coupled with a large enterprise project pushout Jacob mentioned. We expect non-GAAP gross margin for the fourth quarter to be in the range of 38.5% to 41.5% or 40% at the midpoint of the range. Leveraging our CM model is a primary driver of our gross margin improvement initiative, and we completed the first phase of this leverage with our automotive antennas. Despite the lower projected consumer sales mix, we expect our gross margin to improve sequentially as a result of our automotive product cost reductions. We project our operating expenses to be approximately $6 million. Non-GAAP EPS is expected to be negative 19 cents at the midpoint of our guidance. Adjusted EBITDA is expected to be negative $1.8 million at the midpoint of our guidance. Despite the revenue challenge we face in the fourth quarter, we remain focused on generating positive cash flows in the first quarter of 2024 while we'll continue to execute on our strategic product initiatives. Now, I would like to turn the call back over to Jacob, who will walk us through those strategic initiatives. Jacob? Thanks, Michael.