Airgain, Inc.

Good afternoon and welcome to Airgain's fourth quarter and full year 2023 earnings conference call. My name is Diego and I will be your operator for today's call. Joining us today are Airgain's president and CEO, Jacob Swen, and CFO, Michael Albaez. 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 investors.airgain.com. Following management's prepared remarks, the call will be open for questions from Airgain's covering analysts. I caution listeners that during this call, Airgain management will be making forward-looking statements about future events, as well as 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 Airegain's SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, March 6, 2024. 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 will include a discussion of non-GAAP financial measures. Please see today's earnings release for further details, including a reconciliation of GAAP to non-GAAP results. Now, I'd like to turn the call over to Airgain CEO, Jacob Swen. Jacob?

Thank you. Up later. Welcome everyone, and thank you for joining us this afternoon. To begin today's discussion, I will give some company background, followed by the review of our performance for the quarter and year, before handing the call over to our CFO, Michael Albats. He will review our financial results for the quarter and year in more depth as well as provide our outlook for Q1 2024. After that, I'll share some closing remarks before opening the call for questions. All right, let's begin. For those of you who may be new to our story at Airgame, we simplified wireless connectivity across the value chain, from embedded components to integrated systems. We have three core markets, enterprise, consumer, and automotive. Our enterprise market is comprised of integrated system solutions with a mix of components. Specifically, this market includes components such as our embedded cellular modems, custom products, and antennas for access points and internet of things applications. This market also includes system solutions, such as our ACID truckers and our upcoming Lantern fixed wireless access and Lighthouse smart C-band repeater products. Our consumer market is comprised mostly of our embedded antenna business, a traditional area of expertise for AirGAN. Our consumer products include custom embedded antenna design for customer premises equipment, or CPE, devices such as those that enable Wi-Fi 6E and will enable Wi-Fi 7. Lastly, our automotive market includes both our aftermarket antennas as well as our vehicle networking devices, highlighted by our recently announced AirGain Connect fleet device. We work with a global network of vast system integrators, distributors, and large customers to help solve critical connectivity issues, improve wireless performance, and effectively shorten time to market for their products. We believe the global connectivity opportunity is large and durable. Secular tailwinds, including increased connectivity technology adoption and growing serviceable, addressable markets across our product suite will continue to propel the industry and our company forward. At Airgain, we have a consistent track record of developing and offering optimized wireless solutions to our channel partners and customers that help them get connected quickly. As new technologies emerge, we are confident that we will continue to provide leading-edge products to match. Turning now to a review of our recent operational results in three core markets. As we look back on 2023, our team managed our business through several macroeconomic headwinds, including industry-wide demand softness. and inventory overhang and corrections that caused other push-outs, especially in the second half of the year. We generated $10.1 million in sales in the fourth quarter, in line with the midpoint of our guidance range, and closed 2023 with $56 million in full-year sales. However, our demand indicators including our backlog and channel point of sales data, show us that our markets are starting to recover. Although we'll still face some of the persistent headwinds in the first half of the year, we believe that we are primed for a strong 2024 with gradual growth. Moving to a closer look at our three core markets, 2023, was an important year of development in our enterprise business. Notably, we announced several new products, including our long-term fixed wireless access solution, which is set to begin shipping in the first half of this year, our Lighthouse smart repeater platform, for which we expect first revenue shipments by early next year, An expansion to our RECOM 13 5G antenna product line, specifically designed for IoT applications to improve our rugged outdoor 5G antenna offering. A bright spot as we began shipment in Q4 of 2023. And a new custom product offering developed through a joint engineering collaboration with a strategic customer for its transition to a new and sophisticated platform for its end markets. In addition, we secured a multimillion-dollar asset tracking opportunity with a real-car leader and an asset tracking alliance with Sensing and Control. Still, we faced several challenges in the second half of 2023. Our decline was largely driven by persistent inventory overhang in the channel on our embedded modems, combined with declines within our custom products and enterprise access points. Even as our challenges persisted through the end of the year, we believe we'll reach a trough in Q4, and that our enterprise market It's set for a gradual recovery in the first half of 2024. We see end customer demand growth in our embedded modems as evidenced by growing point of sales at our distribution partners as many of the inventory challenges subside, along with new sales opportunities. Also, in addition to the renewed shipments of our custom products and continued shipment ramp with our IoT antennas. Our asset tracker business continues to show growth potential with growing applications for pallet, packaging, and logistics tracking rolling in on a consistent basis. Revenue still tends to be uneven for our asset trackers, but our pipeline includes several opportunities in railways, warehousing, equipment management and rental, lot management and cold chain give us confidence that this is one of our existing product lines that presents a significant growth opportunity in the second half of 2024. Finally, we expect our long-term fixed wireless solution to start shipping in the first half of the year. In our consumer market, which again represents a vast audience utilizing wireless-enabled devices. A couple of key factors impacted our Q4 performance. First, as we have mentioned previously, service providers are on the cusp of a transition from Wi-Fi 6 and 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. Anticipation of this shift has caused widespread caution among our OEM customers as they work to avoid excessive inventory. Still, while this has created near-term pressure on our consumer market growth, we are confident that this shift presents a compelling long-term opportunity for AirGain to deliver its cutting edge Wi-Fi 7 antenna technology as evidenced by the fact that we secure Wi-Fi 7 design wins with two tier one North American MSOs. Second, consumer demand continues to shift from wired to wireless providers for internet service as consumers transition to FWA. We recognized this trend last year and have focused our strategy on penetrating this growing market, which offers significant average selling price, or ASP growth, since we now provide both the Wi-Fi as well as the cellular antenna design. Even as this shift applies some downward pressure on our existing MSO revenue, It creates a greater opportunity for us in the long run as it opens up a new and exciting market. As we announced last November, we have secured a design win with a tier one mobile network operator, or MNO, for the antenna design in their indoor FWA router. We currently expect to begin shipments for this product in Q1. While we anticipate that these headwinds will continue in the first half, we remain committed to turning around our consumer market performance and are confident that the second half of 2024 is where we'll see this improvement. Lastly, our automotive market. As a reminder, our automotive market includes aftermarket products that are deployed in a wide range of vehicles. mostly focused on 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. Still, we saw several major accomplishments in 2023. We launched our EG Connect antenna platform to simplify external antenna ordering and installation, further develop our 5G product line of antennas, and launch Ultramax 5G high-performance windshields. As we shift into 2024, we expect that several of these products will ramp up as inventory correction delays dissipate, especially in our 5G antenna product lines. We are seeing signs that our combined focus on new and differentiated products, supply chain flexibility, and global channel expansions continues to yield results. And we are optimistic that our efforts will turn this market in the second half as well. In January, we announced our next generations of vehicle gateway AirGain Connect fleet or AC fleet, which is set to begin shipping in the second half of this year. Overall, we faced significant downward pressure in 2023 across our end markets, especially in the second half of the year. Several of the factors that caused these headwinds are yet to fully clear and will likely persist through the first and second quarters of this year. Still, while we remain responsive to the macroeconomic environment, our demand indicators have provided positive signs that our business is starting to turn. We are cautiously optimistic that we have reached a trough and are confident that our investments in our business have positioned a game for growth. especially in the back half of the year. As we have communicated in past quarters, we are transitioning from being exclusively a component manufacturer to a wireless system solutions provider. As such, our growth strategy is focused on two key elements. First, continued execution of our established business. Our embedded antennas are deployed in various consumer applications, including access points, wireless gateways, fixed wireless access devices, Wi-Fi routers and extenders, and smart home devices, just to name a few. We have developed strong relationships with our partners throughout the value chain, including chipset providers, carriers, original design manufacturers, or ODMs, and OEMs on the development side, and MNOs and service providers on the customer side. Over the last few years, we have invested in next-generation Wi-Fi 7 design and testing capabilities, and we have now reached the cusp of the expected widespread transition from Wi-Fi 6E to Wi-Fi 7. As we strategize for 2024, we intend to maximize our opportunities with our consumer market. Already, in addition to the design win we secured with a Tier 1 MSO for our next generation Wi-Fi 7 products in November, yesterday we announced another design win with another Tier 1 MSO. Both are expected to start shipping in the second half of 2024. Furthermore, the new line of products we launch in 2023 for our IoT custom products, automotive markets, and industry IoT antennas are expected to ramp up throughout 2024. With our customer agreements in final, we are confident that we will return to growth in our established business this year. Second, integrated wireless solutions expansion. While we continue to drive our existing components business forward, many of our forward-looking indicators for 2024 point to our wireless connectivity product lines as our solutions with the greatest upside. Specifically, our asset tracking and 5G connectivity products offer the largest strategic growth opportunities for our business. On the asset tracking side, our asset trackers are deployed across transportation, supply chain, cold chain, and other specialized applications. Asset trackers bring a recurring revenue opportunity as well, with multiple subscription-based components such as our NimbleLink cloud-based device enablement platform in our tracking information dashboards. We estimate an $800 million serviceable addressable market in 2024 alone and believe that we are poised for success in the back half of the year. Our 5G connectivity products include our Lantern FWA, built to improve connectivity at the home or in the office. Our Lighthouse Smart Repeater, designed to extend high quality coverage for mobile network operators. And our recently announced Next Generation AC Fleet 5G Vehicle Gateway, created to offer wide area cellular and local area Wi-Fi connectivity across public safety, transportation, and public and private vehicle fleets. Two of these products are expected to ship this year. We recently completed our product certification for Lantern FWA and expect to ship to a funnel of customers in the next quarter. For AC Fleet, we have several customers both in the U.S. and abroad that have samples today and are confident that we can begin shipments in the second half. These three product lines represent over $700 million of potential projected serviceable addressable market in 2024 and $1.7 billion of potential additional SEM in 2025, effectively doubling our foundational SEM of $1.8 billion for our existing product lines. Our connectivity product lines are the culmination of several years of investments in shifting air gain from exclusively components to full systems, and we believe that we have significant upside in these areas. With that, I will turn the call over to Michael to discuss our fourth quarter and full-year 2023 financial results and 2024 Q1 outlook in greater detail.

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, can be found in our earning release. Now, let's turn to our fourth quarter results. As Jacob mentioned, Q4 sales were $10.1 million, in line with the $10 million midpoint of our guidance range. Our fourth quarter sales declined 26% sequentially and 49% year over year, primarily due to excess inventory across both our channel and direct customers, coupled with demand softness in our consumer market. Consumer sales were $3.2 million, reflecting a sequential decrease of $1.2 million due to continuing demand softness with cable operators. Enterprise sales were $4.6 million, reflecting a sequential decrease of $2.2 million driven by lower sales of custom products and access points. Sales of embedded modems were flat sequentially, as some distributors continued to recover from inventory overhang. Automotive sales were $2.3 million, reflecting a sequential decrease of $.2 million. Q4 gross margin was 30.3%. largely due to an inventory charge of $1 million we recorded in the quarter. This charge related primarily to the end of life of our AirGainConnect HPUE product lines. A year ago, we recorded a partial excess inventory reserve as a result of a lower demand forecast. In Q4 2023, the HPUE product line is fully reserved as we transition to the next generation of AirGAN Connect vehicle networking product that we announced two months ago. Excluding the non-cash inventory charge, our gross margin would have been approximately 40% in line with the midpoint of our guidance range. Q4 operating expenses totaled $6.5 million, $.5 million higher sequentially and 0.5 million dollars higher than our guidance. The increase was driven by higher project development expenses. Sequentially, our GNA sales and marketing expenses decreased, while our engineering expenses increased as we focused on the development of our Lantern FWA and Aragon Connect fleet solution. As a result, Our Q4 adjusted EBITDA was negative $3.3 million, and non-GAAP EPS was negative 33 cents. Our sales for 2023 totaled $56 million, $19.9 million, or 26% lower year over year. Enterprise sales declined by $7.3 million, driven by excess channel inventory corrections specifically in our embedded modem product line, as well as by our maturing and declining access points product line. Consumer sales declined by $6.9 million due to soft demand from cable operators, as well as excess inventory. Automotive sales decreased $5.7 million, driven by the lack of air-gain connect HPE sales in 2023, and excess inventories that impacted our lead aftermarket customers. Full year 2023 gross margin was 37.9%, 30 basis points higher than our full year 2022 gross margin of 37.6%. Full year 2023 operating expenses totaled $26.4 million, 9% lower year over year driven by reduced marketing and GNN expenses, considering the sequential revenue declines, even as we prioritize our investments in our strategic initiatives. Full year 2023 adjusted EBITDA was negative $4.5 million compared to positive $0.1 million in 2022, driven by the impact of the material sales decline which was partially offset by decreased operating expenses. Our cash balance as of December 31, 2023 was $7.9 million, $2.1 million lower sequentially, driven by lower cash flows from operations on lower sales. Our account receivable balance was $7.4 million, $1.1 million higher sequentially due to a sales linearity issue in the fourth quarter. Net inventory was $2.4 million, $1.5 million lower sequentially, resulting from the excess and absolute inventory reserve, along with inventory consumption. Now, moving to our outlook for the first quarter ending March 31, 2024. As a reminder, AirGain provides quarterly guidance for sales, non-GAAP gross margin and expenses, adjusted EBITDA, and non-GAAP EPS, as we believe these metrics to be key indicators for the overall performance of our business. We project sales for the 2024 first quarter to be in the range of $13.25 to $14.75 million, or $14 million at the midpoint of the range. We expect the sequential sales growth of approximately 40% at the midpoint of the guidance range, driven by the enterprise market. We expect growth in our embedded modems product line after a year of inventory overhang, along with growth in our custom products, asset trackers, and IoT antennas product lines. We anticipate the enterprise market growth to be partially upset by a sequential decline in our automotive market. due to continued inventory correction, while our consumer market sales will remain relatively flat sequentially. We expect non-GAAP gross margin for the 2024 first quarter to be in the range of 39.5% to 42.5%, or 41% at the midpoint of the range. Despite the projected decrease in the consumer sales mix, from 32% in Q4 2023 to approximately 20% in Q1 2024, we expect our gross margin to increase driven by differentiated new products and applications in our enterprise market. We anticipate the enterprise consumer and automotive gross margin to converge around the corporate gross margin reducing the impact of market sales mix changes, and opening a path to gross margin increases in future quarters. We project our operating expenses to be approximately $6.4 million. We continue to invest in our engineering and sales teams as we focus on our strategic initiatives in fixed wireless access, vehicle networking, and smart C-band repeaters markets. Non-GAAP EPS is expected to be negative six cents at the midpoint of our guidance. Adjusted EBITDA is expected to be negative $0.5 million at the midpoint of our guidance. Now, I would like to turn the call over to Jacob for his closing thoughts. Jacob?