Airgain, Inc.

Good afternoon. Welcome to Airgain's second quarter 2024 earnings conference call. My name is Joe, and I will be your operator for today's call. Joining us today are Airgain's president and CEO, Jacob Swen, and CFO, Michael Albaas. 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 AIRGAIN's SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 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, operator. Welcome, everyone, and thank you for joining us this afternoon to begin today's discussion I will give some company background, followed by a review of our performance for the quarter, before handing the call over to our CFO, Michael Alvarez. He will review our financial results for the quarter in more depth, as well as provide our outlook for the third quarter. After that, I'll share some closing remarks before opening the call for questions. Before we dive into our quarterly results, I would like to take a moment to introduce AirGAN to those who may be new to our story. At AirGAN, we simplify 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, asset trackers, custom IoT products, 5G IoT antennas, our new 5G fixed wireless access device, and our 5G smart network control cellular repeaters. Our consumer market is comprised mostly of our embedded antennas business, a traditional area of expertise for AirGAN. Our consumer products include custom embedded antenna design for customer premises equipment, devices such as those that enable Wi-Fi 6E and Wi-Fi 7. Lastly, our automotive market encompasses both aftermarket antennas and vehicle networking devices, notably our AirGainConnect fleet solution. The global connectivity opportunity is substantial and enduring. We believe secular trends including increased adoption of connectivity technologies and expanding addressable markets across our product range, will drive industry and company growth. AGEN has consistently developed and delivered optimized wireless solutions, enabling our channel partners and customers to connect efficiently. As new technologies emerge, we are well-positioned to continue providing cutting-edge products to meet evolving demands. Turning now to a review of our recent operational results in three core markets, we generated $15.2 million in sales in the second quarter, above the midpoint of our guidance range and a 7% increase over the prior quarter. This increase was largely driven by higher consumer market sales to our cable broadband and mobile network operators. In second quarter, we deliver the first shipments of our fixed wireless access lantern solutions, along with the first shipments of Wi-Fi 7 antennas to a Tier 1 MSO partner. We also secure multiple design winds for our embedded modems and our 5G automotive and enterprise antennas. Still, we are paying close attention to the macroeconomic environment as industry-wide headwinds that we have faced in recent quarters continue to dissipate. Our indicators suggest that previously broad demand softness has become more product- and customer-specific as the industry recalibrates optimal inventory levels. While some key customers continue to adjust their inventories, affecting order timing, our broader product portfolio generally enjoys clear channels. We anticipate that fluctuating inventory levels will impact our business. However, we are confident that our existing design wins and the launch of our strategic product initiatives will lead to overall revenue growth. Taking a closer look at our three markets. our enterprise market performance in second quarter remained stable compared to Q1, albeit with a different mix of key drivers. Following a robust Q1 driven by a substantial shipment to a strategic partner in our custom products, we anticipated an inventory adjustment in Q2 affecting order volume. However, the expected softness in custom products was counterbalanced by sequential sales increases in our embedded modems, asset trackers, and enterprise antennas, along with the commencement of Lantern FWA product shipments, enabling us to maintain enterprise revenue compared to first quarter. we expanded our asset tracker portfolio with new real-car focus features with the design win we announced last year. The real-car segment provides us with a unique opportunity to leverage our asset tracker's competitive advantages, such as cellular connectivity and battery life. and customize them to meet the technical and environmental requirements of the sector. We expect to leverage our railcar product portfolio to the broader transportation segment. In addition, our RECOM 13 sales pipeline has continued to grow for enterprise applications, specifically with counties and municipalities. RECOM 13 is a low-profile, rugged outdoor antenna designed to provide high-performance LTE and 5G connectivity. Although the sales cycle for this antenna contracts is long, we are confident in the demand that we are seeing and believe that this is a growth opportunity for us through the rest of 2024. Looking ahead to Q3. We anticipate a slower quarter for design wins based on our product timeline and recognize that inventory with our strategic custom products customer will require time to normalize. Nevertheless, we believe our robust embedded modems product portfolio expanding IoT antennas and asset tracker sales pipelines and launch of the Lantern FWA solution strategically positioned us to offset the temporary softness in custom products. The increasing demand we have seen across these product lines bolsters our confidence in their growth potential through the remainder of 2024 and into 2025. Our consumer market saw notable progress in second quarter. Over recent quarters, we have highlighted the anticipated industry transition from Wi-Fi 6 and 6E to Wi-Fi 7 among MSOs, driven by their desire to enhance performance and user experience. Our team has been diligently working to meet this demand. This quarter marked a significant milestone as we deliver our first Wi-Fi 7 router antenna system to a tier one MSO, a long anticipated achievement. While Wi-Fi 7 adoption rates vary among MSOs, with some moving swiftly and others targeting 2025, we believe that air game will play a significant role in driving this industry-wide shift in the coming quarters. Consumer demand continues to shift from wire to wireless internet service providers with a growing preference for FWA. Recognizing this trend early, we strategically focus on penetrating this expanding market A key milestone was our Tier 1 MNO design win for an indoor FWA router antenna, announced last November. While shipments began in Q1, we significantly ramped up production during the second quarter. We expect this positive trend to gain momentum in Q3, projecting further sequential growth in our consumer market. In addition, we recently secured a significant design win with one of Europe's leading telecommunications providers for our advanced embedded antennas. And we expect first shipments to occur by the end of the year. Now let's focus on our automotive product. which currently serves public safety and transportation vehicles with our advanced up-to-market products. While our growth in this sector has traditionally been driven by several key customers, the industry-wide excess inventory challenge that emerged late last year persisted through Q2. We project this inventory recalibration to continue through the end of the year, but we are actively implementing strategies to navigate this temporary market condition. In second quarter, our highly configurable RECOM 13 5G antenna continue to gain significant market traction in automotive applications. helping to offset inventory challenges and maintain revenue stability compared to Q1. We anticipate that Recon 13's projected growth will help mitigate ongoing inventory challenges in other areas of this product market in the coming quarters. One of our lead customers selected Recom13 for its transition from 4G to 5G in-car systems, further validating its capabilities and market potential. Additionally, our AirGain Connect fleet or AC fleet product is generating significant market interest. and we are in the final certification phase with trials currently in progress with multiple customer prospects. We anticipate this strong interest in ongoing trials to convert into material remedy streams, beginning in Q3 and ramping up in Q4. Overall, we are encouraged by the ongoing recovery across several of our product lines. While we recognize that industry challenges persist and require ongoing vigilance regarding the macroeconomic environment, we anticipate continued progress. Our robust and diverse product portfolio positions ask well for growth opportunities. reinforcing our confidence in a sustained rebound. As previously communicated, we are advancing our strategic transition from an exclusive component manufacturer to a comprehensive wireless system solutions provider. As such, our growth strategy is focused on two key elements. First, continued execution of our established business. Egan's traditional expertise lies in component-based products deployed across consumer, automotive, and enterprise applications, including embedded modems, custom products, embedded antennas, and aftermarket automotive products. We have cultivated strong relationships with partners throughout the value chain and achieved several significant milestones in recent quarters. Furthermore, we anticipate lucrative opportunities in these product categories, driven by upcoming shipment ramps for Tier 1 MSO Wi-Fi 7 and MNO embedded antenna design winds. Expansion of RECOM 13 antenna automotive and enterprise sales pipelines and new IoT custom products. Given our expanding product portfolio in customer sales pipeline, we are optimistic about the growth potential of our established business. Second, integrated wireless solutions expansion. while we continue to advance our existing components business. Our forward-looking indicators for 2024 and into 2025 highlight our wireless connectivity product lines as having the greatest upside potential. Specifically, our asset tracking and 5G connectivity solutions present the most significant strategic growth opportunities. On the asset tracking side, our trackers are deployed across transportation, supply chain, and other specialized applications. This segment offers recurring revenue opportunities through multiple subscription-based components, including our NimbleLink cloud-based device enablement platform and tracking information dashboards. In addition, we continue to make meaningful progress with a product portfolio designed for the transportation sector. Our 5G connectivity products include Lantern FWA, designed to enhance connectivity in homes and offices. Lighthouse Smart Repeater, engineered to expand high-quality coverage for mobile network operators. and our next generation ac fleet 5g vehicle gateway developed to provide wide area cellular and local wi-fi connectivity for public safety transportation and various vehicle fleets we have garnered significant interest across these solutions for lighthouse We are progressing steadily with the previously mentioned international strategic collaboration, having conducted successful live network trials for in-building service and outdoor coverage solutions. We are working on committed trials with three international mobile network operators and one domestic power company through the end of this year. Regarding AC Fleet, We are working on over 25 customer trials domestically and internationally in third quarter. And we anticipate initial shipments by the end of this 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 SAM in 2025, effectively doubling our foundational SAM of $1.8 billion for our existing product lines. Our connectivity products are the culmination of several years of investments in shifting A-game from exclusively components to full systems. and we believe that we have significant upside in these areas. We shipped the Lantern FWA in second quarter, and we continue to advance our smart FWA technology announced earlier this year. Our focus is on transforming the 5G customer experience by optimizing connectivity and minimizing operators, truck rolls, and customer returns. With that, I'll turn the call over to Michael to discuss our second quarter 2024 financial results and third 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 second quarter results. As Jacob mentioned, Q2 sales were $15.2 million, above the $15 million midpoint of the guidance range. Our second quarter sales increased sequentially by $1 million, driven by strong contributions from our consumer market. While sales increased by 7% sequentially, they were lowered by 4% year-over-year, primarily because we are still addressing an excess inventory environment. Enterprise sales were $8.6 million, reflecting a sequential decrease of $.3 million, or 3%. The slight decrease in sales was due to the large shipment of costume products in Q1, which was mostly offset by increases in our embedded modems, asset trackers, enterprise antennas, and first shipments of our Lantern FWA product. Consumer sales reached $4.8 billion, representing a sequential increase of $1.3 million. This growth was primarily driven by a broad-based market recovery and the ramp-up of Tier 1 MNO shipments. Additionally, we completed our first shipments of Tier 1 MSO Y57 antennas. Automotive sales were $1.7 million, reflecting a sequential decrease of $0.1 million. Future gross margin was 41.5%, 130 basis points higher sequentially due to a higher enterprise margin and a favorable market sales mix. On a year-over-year basis, Q2 gross margin was 110 basis points higher as a result of continuous margin improvement in our automotive and enterprise markets. These improvements more than offset the unfavorable year-over-year market sales mix. Q2 operating expenses totaled $6.9 million, relatively flat sequentially. On a year-over-year basis, Q2 expenses increased by $0.3 million. Our first half of 2024 expenses amounted to $13.4 million, reflecting a decrease of $0.4 million, or 3%, from our first half of 2023 expenses. Despite the relatively flat year-over-year OPEX, our G&A and marketing communication expenses declined by approximately 25% year-over-year as we drove process and system efficiencies. Our engineering and sales expenses increased by approximately 20% year-over-year as we focused on the development and launch of our strategic product initiatives. Q2 adjusted EBITDA was negative $0.4 million, and non-GAAP EPS was negative $0.05. Our cash balance as of June 30, 2024, was $8.4 million, $1.2 million higher sequentially, resulting from net cash proceeds of $2.5 million from the ATM offering, partially offset by negative free cash flows of $1.3 million. Our account receivable balance was $8.6 million, $1 million lower sequentially. Net inventory was $3.1 million, which was $0.5 million higher sequentially. Now, moving to our outlook for the third quarter ending September 30, 2024. As a reminder, we provide quarterly guidances for sales non-GAAP gross 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 third quarter to be in the range of $15.25 to $16.75 million, or $16 million at the midpoint of the range. We expect a sequential sales growth of approximately 5% at the midpoint of our guidance range, driven by continued growth in our consumer market and by the launch of our next generation AirGain Connect or AC fleet by the end of the third quarter. We expect our enterprise sales to be down primarily because of inventory normalization with a lead custom products customer. We expect non-GAAP gross margin for the third quarter to be in the range of 41% to 44%, or 42.5% at the midpoint of the range. We anticipate the sequential increase in gross margin to be driven by a favorable market-sales mix and continuous margin improvements. We project our operating expenses to be approximately $6.9 million as we continue to focus on the AC Fleet product launch and Lighthouse customer trials. Non-GAAP EPS is expected to be negative one cent at the midpoint of the guidance. Adjusted EBITDA is expected to be breakeven at the midpoint of the guidance. Now, I would like to turn the call back over to Jacob for his closing thoughts. Jacob?