Airgain, Inc.

Good afternoon. Welcome to Airgain's third quarter 2024 earnings conference call. My name is Sherry, and I will be your operator for today's call. Joining us today are Airgain's president and CEO, Jacob Schoen, and CFO, Michael Albez. As a reminder, this call is being recorded and will be 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 Air Gains covering analysts. I question listeners that during the call, Air Gains management will be making forward-looking statements about future events as well as Air Gains 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 with the company's business. These forward-looking statements are qualified by the questionnaire statements contained in today's earnings release and Aragain's SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, November 12, 2024. Aragain 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 would like to turn the call over to Ergain's CEO, Jacob Schoen. Jacob?

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. I'll begin with a brief overview of the company and our quarterly performance before handing the call over to our CFO, Michael Abbas, who will walk you through our financials and Q4 outlook. I will then return for closing thoughts before we open the floor for questions. Before we dive into our quarterly results, I would like to introduce AirGain to any investors and analysts who may be less familiar with us. At AirGain, we simplify wireless connectivity across the entire value chain, from product design and carrier certification to integrated connectivity solutions. Our mission is to make wireless straightforward, creating connectivity solutions that are easy to understand, deploy, maintain, and integrate, ultimately enhancing the experience for our partners and customers. With over 20 years of experience in custom cellular and antenna design, we have developed a robust product portfolio ranging from embedded modems and antennas to comprehensive systems for asset tracking, fixed wireless access, vehicle networking, and smart network repeater solutions. Today, we are a global leader in wireless connectivity solutions, serving consumer, automotive, and enterprise markets worldwide. Demand for connectivity is surging. And we are confident that our expanding addressable markets and commitment to innovation will fuel sustainable long-term growth. With emerging technologies, we are well-positioned to address the market's evolving needs through industry-leading wireless solutions. Turning to our Q3 performance. we achieved strong sequential revenue growth despite continued macroeconomic challenges, which, while less severe than last year, remain a factor. We reported sales of $16.1 million, a 6% increase over second quarter, which slightly exceeded the midpoint of our guidance range. This growth was largely driven by robust sales in consumer embedded antennas and the successful launch of our AirGain Connect fleet for automotive applications despite software sales in our enterprise market this quarter. We also saw an uptick in sales of our Wi-Fi 7 router antenna systems to a Tier 1 MSO partner as well as the initial sales of our AirGate Connect Fleet 5G Vehicle Gateway. I am pleased to share that AC Fleet achieved certification from major operators, including T-Mobile and AT&T, along with key industry bodies. This certification is a critical milestone. validating our technology's performance, ensuring network compatibility, and opening broader commercialization opportunities across U.S. markets. Turning to our three core markets, our consumer market delivered exceptional growth in Q3. marking our best performance in this market since Q3 of 2022. After initial shipments of our first Y57 router antenna system to a T01 MSO last quarter, Q3 saw us ramp up shipments significantly. Additionally, our T01 MNO Embedded antenna shipments continue to accelerate following initial shipments in Q1, generating $6.9 million in revenue, an impressive $2 million increase over second quarter. This growth highlights the strong demand for advanced connectivity solutions. with Wi-Fi 7 adoption steadily gaining momentum across the industry. While adoption rates vary among MSOs, they again remain at the forefront of the transition to cutting-edge wireless technologies. Looking ahead, we are optimistic about maintaining this momentum with planes to begin shipments to another Tier 1 MSO in early 2025, further solidifying our leadership in this evolving space. We anticipate a moderation in demand during Q4, which will result in a reduction in Wi-Fi 7 shipments for the upcoming quarter. However, following the typical seasonal impact in Q1, we remain optimistic about the robust growth prospects driven by the ongoing Wi-Fi 7 industry transition and the accelerating adoptions of our M&O solution. We believe these factors collectively strengthen our long-term growth trajectory. In our automotive market, where we concentrate on delivering advanced aftermarket solutions for public safety in transportation vehicles. We achieved strong progress this quarter, even amid persistent inventory challenges. Despite these headwinds, we are encouraged by the positive momentum we are establishing. reflecting the growing demand for our solutions and our ability to effectively navigate industry uncertainties. In Q3, automotive market sales reached $2.5 million, a $0.8 million increase over the second quarter, driven primarily by higher sales of Recon 13 antennas, and initial shipments of AC Fleet. This rising demand for our innovative solutions gives us confidence in a sequential increase in sales in this market for fourth quarter. This quarter, a key achievement was completing the final production certification phase for AC Fleet. including approvals for use on AT&T and T-Mobile networks. Customer feedback from trials has been highly positive, particularly regarding the solution's performance, ease of use, and compact form factor. We believe this all-in-one concept provides our customers with a time-to-market advantage and a lower total cost of ownership. We have extended customer trials to nearly 40 across domestic and international markets, with shipments expected to increase as these trials progress. Additionally, we anticipate further carrier certifications in the coming months. both domestically and internationally, which should unlock new revenue streams. Our rugged outdoor antenna, RECOM 13 5G, designed to deliver high-performance 5G connectivity for fleet and public safety vehicles, continue to gain momentum in Q3, specifically with counties and municipalities. While the longer sales cycle for Recon 13 warrants cautious optimism, the strong interest of this product is highly encouraging. Looking ahead, we are confident the automotive market is primed for continued growth, fueled by the strong momentum of AirGain Connect fleet. We anticipate additional certifications and customer trials in Q4, setting us up for a strong finish to the year. Finally, our enterprise market saw a larger than anticipated decline in Q3 compared to Q2. While we continue to expand our asset tracker portfolio, enterprise sales decreased to $6.7 million, down $1.9 million from the previous quarter. This drop was primarily due to lower sales of embedded modems and custom products. The dip in embedded modem sales reflects a temporary slowdown after a surge in Q2 driven by multiple new design wins. Additionally, custom product sales were impacted by excess inventory, with two major customers indicating this surplus may extend into the first half of 2025. While these inventory challenges aren't new, they continue to pressure our revenue, but we are actively taking steps to lessen the impact as we move forward. We continue to make strong progress with our asset tracker strategy. broadening our focus beyond logistics and railcar sectors to include healthcare IoT applications, specifically in the aerial transport of high-volume, temperature-sensitive assets. Our newly launched AT Flight Asset Tracker, powered by advanced artificial intelligence, is designed to autonomously detect takeoff and landing events. This AI-driven functionality ensures seamless compliance with FAA regulations by automatically switching to airplane mode, a critical feature that removes the need for any manual intervention and significantly enhances user convenience. The AT Flight is built for the unique demands of the healthcare IoT sector, offering extended battery life of over a year and a broad operating temperature range down to minus 20 degrees C, ideal for tracking temperature-sensitive medical assets like vaccines and hormone protocols. This device has already received strong market validation with an initial purchase order from a major healthcare provider, and we anticipate beginning shipments in Q1 2025. In the railcar sector, we have expanded our portfolio with specialized real-car focus features that built on the design wins announced last year. This sector provides us with a unique opportunity to leverage our asset trackers' competitive advantages, including cellular connectivity, battery longevity, and tailor configurations to meet the stringent technical and environmental demands of the market. Shipments of our Lantern FWA product, which began last quarter, contributed minimally to Q3 revenue due to a slower than expected transition from indoor to outdoor solutions in American markets. We believe Lantern's primary opportunities lie in failover applications for small enterprises and network extension for commercial and residential uses. While the design-win-to-sell cycle is lengthy, we are actively pursuing these applications. Looking ahead to the rest of 2024, we expect a modest quarter-over-quarter uptake in enterprise sales as inventory levels normalize. Despite some temporary softness in custom products, we are confident our expanding product portfolio and sales pipeline position as well to navigate these short-term challenges. Overall, we are encouraged by the strong momentum demonstrated across several key product lines this quarter. Our broad and diverse product portfolio positions as well to capitalize on emerging growth opportunities, reinforcing our belief in a sustained rebound. As we have previously communicated, we are actively advancing our strategic shift from being solely a component supplier to becoming a comprehensive provider of wireless system solutions. This transformation highlights our commitment to delivering end-to-end solutions that meet the evolving demands of the market, positioning Airgame for long-term success. Our growth strategy centers on two primary pillars, maximizing our established business and expanding into integrated wireless solutions. First, we are committed to executing our established business, where Ergan's traditional strength lies in component-based products deployed across consumer, automotive, and enterprise applications. This includes our embedded modems, custom products, embedded antennas, and aftermarket automotive solutions. Over the years, we have built strong partnerships across the value chain and achieved significant milestones in recent quarters. Looking ahead, we see substantial opportunities within these established product categories driven by several key factors, including the ongoing ramp-up of Tier 1 MSO Wi-Fi 7 shipments and embedded antenna design wins with mobile network operators. and expansion of the RECOM 13 antenna sales pipeline across both automotive and enterprise markets. With our expanding product portfolio and growing customer pipeline, we are optimistic about the growth potential of our established business. This strong foundation allows us to leverage our expertise and market presence for long-term success. Alongside growth in our established components business, we see our wireless system solutions as the main driver of upside potential in 2025 and beyond. key areas of focus include asset tracking in 5g connectivity solutions which represent our roadmap solutions and the most significant strategic growth opportunities for us our advanced Asset tracking solutions are increasingly utilized in transportation, supply chain management, and other specialized applications. Over the past year, we have refined our strategy to focus on sectors where we can leverage our innovation and brand to expand our product portfolio with premium higher margin offerings. This suite offers strong recurring revenue potential through multiple subscription-based components, including our neighboring cloud-based device enablement platform and tracking dashboards. These services enhance value for our customers while establishing a foundation for sustainable long-term revenue streams. Our 5G connectivity products open up substantial growth opportunities across multiple sectors, with our largest growth drivers in smart network control repeaters. Leading the way, our Lighthouse smart repeater series significantly enhances network coverage for mobile operators. addressing connectivity challenges in difficult-to-reach areas and accelerating 5G adoption across the industry. Vehicle networking, another key growth area. Our AirGain Connect fleet vehicle gateway is designed for public safety and fleet management. Delivering essential cellular, GPS, and Wi-Fi connectivity to support mission-critical communications. Fixed wireless access. Learning about our growth opportunities. The Lantern FWA product suite is designed to improve broadband connectivity for homes and small offices. meeting the rising demand for accessible high-speed wireless internet. While this product shows strong potential, we are taking a measured approach as the market shifts toward outdoor solutions. Together, AIG and systems solutions enable us to meet diverse connectivity needs. from residential and commercial settings to public safety and transportation within the fast evolving 5G landscape. Interest in our 5G offerings is strong, giving us confidence in its growth potential for 2025. At AirGain, our vision of connecting the world by making wireless simple is steadily becoming a reality. our expanding suite of innovative solutions is designed to seamlessly connect devices from the core network to the edge. By delivering high-performance intelligent wireless technology, we are simplifying connectivity across a broad range of applications, from enhancing in-building and outdoor cellular coverage to enabling precise asset tracking in challenging environments. With products that optimize signal quality, extend coverage, and ensure stable connections, AirGain is breaking down the complexities of wireless technology, bringing us closer to a world where connectivity is both effortless and ubiquitous. As our vision becomes reality, we're also capturing significant opportunities in a rapidly expanding market landscape. Collectively, our product line positioned us within a serviceable, addressable market projected at $1.1 billion in 2024, with substantial expansion to $2.6 billion in 2025, and $5.5 billion by 2028. This remarkable growth is driven by our strategic entry into high growth markets, such as vehicle gateways and smart network control repeaters, which capitalize on the increasing demand for advanced connectivity solutions. This expanded SAM reflects our transformation from a component provider to a comprehensive wireless systems solutions company, underscoring our ability to capture significant market share as these sectors rapidly evolve, reaching $5.5 billion by 2028. our growth strategy sets a strong foundation for substantial long-term success across high demand connectivity markets. Overall, Our multi-faceted growth strategy underscores our commitment to capitalizing our current demand while actively positioning Airgame for substantial long-term growth as a leader in advanced wireless connectivity solutions. With that, I will turn the call over to Michael to discuss our third quarter 2024 financial results and outlook for the fourth quarter.

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 third quarter results. As Jacob mentioned, Q3 sales came in at $16.1 million, just above our guidance midpoint of $16 million. This marks a 6% sequential increase and an 18% year-over-year growth driven largely by the strong performance of our consumer market. Consumer sales reached $6.9 million, a sequential increase of $2 million driven by strong demand for our Tier 1 MSO Wi-Fi 7 antennas following initial shipments in Q2. Additionally, we experienced continued momentum in our Tier 1 MNO FWA antenna sales in the third quarter. Automotive sales came in at $2.5 million, up $0.8 million sequentially, driven by increased aftermarket sales and the initial shipments of our AirGain Connect fleet. Enterprise sales were $6.7 million, reflecting a sequential decrease of $1.9 million. This decline was primarily due to lower sales of our custom IoT products impacted by excess inventory levels with two strategic customers. Q3 gross margin came in at 42.8%, up 130 basis points sequentially, primarily due to a favorable sales mix. Year-over-year, gross margin improved by 380 basis points, reflecting stronger margins in our enterprise and automotive markets. This improvement was the result of continuous cost reduction initiatives and the launch of high-performance aftermarket and enterprise products over the past year. Looking ahead, we expect our AirGain Connect and Lighthouse solutions to further support gross margin expansions in the coming quarters. Q3 operating expenses totaled $6.9 million, remaining flat sequentially. Year over year, however, expenses rose by $0.9 million, primarily due to increased investment in our engineering and sales functions, while G&A expenses remained stable. This increase reflects higher project development expenses, including prototypes, certifications, and testing, as well as a roughly 25% increase in engineering and sales personnel expenses. The year-over-year increase was driven by our investment in the Aragon Connect and Lighthouse platforms. As we enter a new phase in their growth, we expect to further invest in these two platforms. Q3 adjusted EBITDA was $0.1 million, an improvement from negative $4 million in the prior quarter. This sequential increase was driven by higher sales and improved gross margin, while operating expenses remained flat. Non-GAAP EPS came in at break-even. As of September 30, 2024, our cash balance was $7.3 million, down $1.1 million sequentially. Despite positive adjusted EBITDA, Revenue linearity challenges led to a negative operating cash flow of $1.2 million. Our account receivable balance was $11.8 million, $3.2 million higher sequentially because of the revenue linearity challenges. Net inventory was $2.6 million, which was $0.5 million lower sequentially. Now, moving to our outlook for the fourth quarter ending December 31, 2024. As a reminder, we provide quarterly guidance 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. For the fourth quarter of 2024, we project sales between $16.2 and $18.2 million, with a midpoint of $17.2 million. The midpoint represents a 7% sequential growth and a 71% increase over Q4 last year. We expect non-GAAP growth margin for the fourth quarter to be in the range of 41.5% to 44.5%, or 43% at the midpoint. The midpoint represents the fourth sequential increase in gross margin. We expect operating expenses to be approximately $7.2 million as we remain focused on developing the AC fleet and Lighthouse platforms, supporting customer trials, and driving design wins. Nungap EPS is expected to be $0.02 at the midpoint of the guidance. Adjusted EBITDA is expected to be $0.03 million at the midpoint of the guidance. Now, I would like to turn the call back over to Jacob for his closing thoughts. Jacob?