Airgain, Inc.

Good afternoon. Welcome to AirGain's first quarter 2024 earnings conference call. My name is Shamali and I will be your operator for today's call. Joining us today 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 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 four linking statements due to risks and uncertainties associated with the company's business. These four linking 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 8, 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, and 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 Suman. Jacob?

Thank you, Operator. Welcome, everyone, and thank you for joining us this afternoon. To begin today's discussion, I'll give some company background, followed by a review of our performance for the quarter, before handing the call over to our CFO, Michael Albats. He will review our financial results for the quarter in more depth, as well as provide our outlook for second quarter 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. Our primary markets encompass the enterprise, consumer, and automotive sectors. Within our enterprise market, our products include embedded cellular modems, custom products, asset trackers, 5G and IoT antennas, our new 5G outdoor fixed wireless access device, and our 5G smart network controlled cellular repeaters. Our consumer market is comprised mostly of our embedded antenna business. a traditional area of expertise for air gain. 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 AirGainConnect fleet device. 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 in our company forward. At AirGain, we have a 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 providing leading-edge products to match. Turning now to a review of our recent operational results in three core markets. We generated $14.2 million in sales in the first quarter, above the midpoint of our guidance range and a 41% increase over the prior quarter. Our indicators show that the macroeconomic headwinds and industry-wide demand softness that we have faced in recent quarters are continuing to dissipate, which we believe is a positive sign for the rest of the year. Specifically, we completed significant shipments in Q1 in a few of our product areas, such as our custom products and embedded modems. Additionally, while still behind where we would expect our typical runway to be, our consumer market performed better than we anticipated. above our usual seasonality for the beginning of the year. Also, as we have discussed in prior quarters, it is crucial for our long-term growth that we continue to invest in our R&D and sales efforts. We believe that cutting-edge products and experienced and trained sales teams are significant contributors to our growth. and we expect to continue investing in these areas as we grow our revenue. While headwinds remain in each of our markets, we believe that our Q1 sales result is a positive sign for our expected growth opportunity in the second half of the year. Taking a closer look at our three markets, our enterprise market performance in Q1 was largely driven by our custom products and embedded modems product lines. Our IoT antenna ramp-up is off to a good start, showing both an increase from Q4 and a strong pipeline of opportunities through the year. Although closing IoT antenna contracts sometimes take time due to the product's position within internal router solutions, we are confident in the demand that we're seeing and believe that this is a growth opportunity for us through the rest of 2024. Looking ahead to second quarter, we expect to hold total enterprise revenue steady, even as we expect a sequential decline in our custom products due to the large project for which we completed shipments in the first quarter. with our 5G product roadmap, asset tracker portfolio expansion with new real-car focused features, and strong IoT antenna pipelines. We are confident that we can offset this custom product law. In addition, we are pleased that our FWA products are set to ship in second quarter, a significant milestone, especially in light of the extensive efforts across our organization and the achievement of the key certifications that we require to get these products to ship. In our consumer market, our first quarter shows some encouraging signs, even with our typical seasonality for our consumer products, which tends to show a slower start to the year. We outperformed Q4 2023 in this market in the first quarter. Also, we believe that there are positive growth indicators in our consumer market. First, as we have mentioned in recent quarters, we expect a significant transition from Wi-Fi 6 and 6E to Wi-Fi 7 among MSOs. While this shift continues to cause cautious buying behavior among our OEM customers as they work to avoid excess inventory. the industry has indicated that this shift will likely start in the second half of the year, as MSOs are keen to improve performance and user experience. We believe this shift presents a compelling long-term opportunity for AirGames to deliver its cutting-edge Wi-Fi 7 antenna technology, as evidenced by the Tier 1 MSO design win we were awarded in March. Additionally, we expect to receive our first production purchase order from another Tier 1 MSO in the coming weeks. 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. As we announced last November, we have secured a design win with a DL1 mobile network operator for the antenna design in the indoor FWA router, and we began product shipments in Q1. We expect the shipment ramp of our MNO product, along with some market recovery with our MSOs, to generate sequential growth in the second quarter. Lastly, Our automotive market. As we expected, our automotive market continues to face industry-wide headwinds across our products in this market, which include aftermarket products that are deployed in a wide range of vehicles, mostly focused on public safety and transportation. Inventory corrections from lead customers have dampened growth. we continue to expect to face some challenges in this market in the second quarter as well. However, while we are still at least a quarter away from clearing our inventory challenges, we are pleased with the interest that we're seeing in our automotive market, especially for our AirGain Connect Fleet or AC Fleet product. We are reaching the last few important development milestones and are still on track to ship AC Fleet early in the second half. Overall, we were encouraged by the early indications of recovery that we witnessed in our enterprise and consumer markets. We understand that we are not yet fully clear of these persistent industry challenges and will remain responsive to the macroeconomic environment. But we believe that we have line of sight into progress across our other products in these markets to anticipate a continual rebound. As we've communicated in past quarters, we're 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 across our embedded modems, custom products, embedded antennas, and aftermarket automotive products. AirGange's traditional expertise is in component-based products that are deployed in various consumer and enterprise applications. We have developed strong relationships with our partners through the value chain and believe that there are lucrative opportunities available ahead for these product categories. As I mentioned, we have already secured a design win this quarter with a Tier 1 MSO. And that is on top of the other tier one design win that we announced last year. We still expect to start shipments to both MSOs in the second half of 2024. Also, the new line of products we launched in 2023 for our IoT custom products, automotive markets, and industrial IoT antennas are expected to ramp up throughout the year as well. with our customer agreements and funnel will encourage 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, and other specialized applications. Asset trackers bring a recurring revenue opportunity as well. with multiple subscription-based components, such as our neighboring cloud-based device, enablement platform, and our tracking information dashboards. Our 5G connectivity products include our Lantern FWA, built to improve connectivity at home or in the office, our Lighthouse smart repeater, designed to expand 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. We have received significant interest for each of these solutions. For Lighthouse, we're making steady progress on the international strategic partnership that we mentioned last quarter, including a live network trial. Altogether, we currently have two active customer trials with formal plan for the second half of the year. Also, for AC Fleet, we have over 20 customer trials across our domestic and international customers schedule for second quarter. Again, 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 products are the culmination of several years of investments in shifting air game from exclusively components to full systems, and we believe that we have significant upside in these areas. Lastly, in February, during Mobile World Congress, we announced our Smart FWA technology, which is designed to transform the 5G customer experience by optimizing connectivity and reducing the number of truck rolls and customer returns the operators currently experience. Especially as we work to ship Lantern FWA, we believe that this is a strong market entry point to establish our demand base for the eventual delivery of smart FWA in 2025 and beyond. With that, I will turn the call over to Michael to discuss our first quarter 2024 financial results and second quarter 2024 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 earnings release. Now, let's turn to our first quarter results. As Jacob mentioned, Q1 sales were $14.2 million, above the $14 million midpoint of our guidance range. While our first quarter sales increased by 41% sequentially, they were still lower by 13.5% on a year-over-year basis, primarily because of continued headwinds in our consumer and automotive markets. Enterprise sales were $8.9 million, reflecting a sequential increase of $4.3 million, or 92%, driven by growth in our custom products, embedded modems, and IoT antennas product lines. In our custom products, we completed a large project along with shipments of production units for a strategic customer. In addition, our embedded modem sales increased to pre-2023 level as distributors continue to recover from excess channel inventory. On a year-over-year basis, enterprise sales increased by over 5%. Consumer sales were $3.5 million, reflecting a sequential increase of $0.3 million driven primarily by shipments of the Tier 1 MNO antenna design wind we announced last November. Automotive sales were $1.8 million, reflecting a sequential decrease of $0.4 million due to ongoing excess inventory correction. Q1 gross margin was 40.2%, 990 basis points higher sequentially due to a large inventory charge we recorded in the fourth quarter of 2023. On a year-over-year basis, Q1 gross margin was 120 basis points higher, primarily because of a higher automotive margin. Q1 operating expenses totaled $6.6 million, relatively flat sequentially q1 2024 operating expenses decreased by 0.7 million dollars from q1 2023 on a year-over-year basis engineering expenses increased by over 20 percent to support new product initiatives this expense increase was more than offset by our focus on efficiencies which resulted in a reduction of our G&A and marketing communication expenses of over 25% on a year-over-year basis. As a result, our Q1 adjusted EBITDA was negative $0.7 million, and non-GAAP EPS was negative $0.08. Our cash balance as of March 31, 2024, was $7.2 million, $0.7 million lower sequentially, resulting from negative cash flow from operations of $1.3 million, partially offset by net proceeds from the ATM offering we launched two months ago. Our accounts receivable balance was $9.6 million, $2.3 million higher sequentially, primarily due to higher sales. Net inventory was $2.6 million, $0.2 million higher sequentially. Now, moving to our outlook for the second quarter ending June 30, 2024. As a reminder, we provide quarterly guidance for sales, non-GAAP cost margin and expenses, non-GAAP EPS, and adjusted EBITDA as we believe these metrics to be key indicators for the overall performance of our business. We project sales for the 2024 second quarter to be in the range of $14.25 million to $15.75 million, or $15 million at the midpoint of the range. We expect a sequential growth of approximately 5% at the midpoint of our guidance, driven by growth in our consumer markets from both our MNO and MSO customers. We expect our enterprise sales to be relatively flat sequentially, with an anticipated decline in our costume products due to the large project shipments in Q1, offset by growth in our asset trackers, embedded modems, and IoT antennas, as well as first shipments of our FWA solution. We expect non-GAAP gross margin for the second quarter to be in the range of 39.5% to 42.5% or 41% at the midpoint of the guidance. We anticipate the sequential increase in gross margin to be driven by higher enterprise margin due to differentiated new products and applications. We expect our operating expenses to be approximately $6.8 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 back over to Jacob for his closing thoughts. Jacob? Thanks, Michael.