Airgain Inc

NASDAQ:AIRG

Earnings Call Transcript 2024-Q1

[Operator]

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 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, May 8, 2024. Airgain undertakes no obligation to revise or update any forward-looking statements to reflect the 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's CEO, Jacob Suen. Jacob?

[Jacob Suen, executive]

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 Elbaz. He will review our financial results for the quarter in [indiscernible] as well as provide our outlook for second quarter 2024. After that, I'll share some closing remarks before opening the call for questions.Let's begin. For those of you who may be new to our story, at Airgain, 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 cell repeaters. Our consumer market is comprised mostly of our embedded antenna business, a traditional area of expertise for Airgain. Our consumer products include custom embedded antenna design for customer premises equipment, or CPE, devices such as stores that enable WiFi 6 and well-enabled WiFi 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 believe the global connectivity opportunity is large and durable secular tailwinds, including increased connectivity technology adoption and growing serviceable, addressable market across our product suite will continue to pretail the industry and 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 too much. Turning now to a review of our recent operational results in 3 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 sold at 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 run rate 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 experience and train 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 3 markets. Our enterprise market performance in Q1 was largely driven by our custom products and embedded modems product lines. Our IoT in [ Canada ] ramp-up is off to a good stock, showing both an increase from Q4 in 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 through to the large project for which we completed shipments in the first quarter. With our 5G product [ Roma ], as tracker portfolio expansion with new real cloud-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 will require to get these products to ship. In our consumer market, our first quarter show some encouraging signs, even with our typical seasonality for our consumer products, which tends to show a slower stock 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 WiFi 6 and E6 to WiFi 7 among MSOs. While this shift continues to causes 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 Airgain to deliver its cutting-edge WiFi 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 wire to wireless providers for Internet service as consumers transition to FWA. We recognized this trend last year and help focus our strategy on penetrating this growing market. As we announced last November, we have secured a design win with a Tier 1 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 the customers have strengthen growth. We continue now 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 products. 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 continued rebound. As we've 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 2 key elements. First, continued execution of our established business across our embedded modems, custom products, ended antennas and aftermarket automotive products, Airgain'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 1 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 in panel, we're increase 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 over 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 NimbleLink cloud-based device enablement platform and our tracking information dashboards. 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 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 WiFi connectivity across public safety, transportation and public and private vehicle fleets. We have received significant interest for each of these solutions. For Lighthouse, we are making steady progress on the international strategic partnership that we mentioned last quarter, including a live network trial. Altogether, we currently have 2 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 scheduled for second quarter. Again, these 3 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 additional SAM of $1.8 billion for our existing product lines. Our connectivity products are the combination of several years of investments in shifting Airgain 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 in 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?

[Michael Elbaz, executive]

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 $40 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 the growth in our custom products, embedded modems and IoT antennas product lines. In our costing 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 win 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 from Q1 2023. On a year-over-year basis, engineering expenses increased by over 20% 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 2 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 gross margin and expenses, non-GAAP EPS and adjusted EBITDA, as we believe this metric 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 $50 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 custom 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 $0.06 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?

[Jacob Suen, executive]

Thanks, Michael. A few closing thoughts before we have Q&A. First, I am proud of our team's effort and dedication to our strategic road map initiatives. We have several highly innovative products that our own time lines. And as of today, I can confidently say that we are executing on what we have promised and are still on schedule. This is only possible with our team's strong commitment in a highly effective and experienced management team. Second, we remain optimistic about our market potential and industry recovery. Even as we continue to face significant headwinds, we have made real progress along many aspects of our business. including new products, new partners and new geographies, we continue to invest in our growth as well, including the expansion of our sales force as a probably more aggressive growth strategy in response to progress across several of our product initiatives in improving market demand. Especially after rebounds in several product lines in Q1, we believe that our industry has started to turn a corner, and I am confident our resiliency while effectively navigate these headwinds will pay off in the coming quarters. Third, our products are at the heart of our value proposition for our customers, especially with the many emerging trends within our industry, including transitions to WiFi 7, increased demand for asset tracking capabilities and long-standing 10 points in the 5G coverage space, we are confident that the worldwide connectivity opportunity is vast and growing in that many geographies around the globe represent undertapped markets for our industry and our business. For example, our next-generation Smart FWA, AC Fleet and Lighthouse Smart Repeater products aim to solve key challenges in the connectivity space, and each has generated strong interest from several major players. We believe that innovations like this sell us apart as a key player in our industry. So far in the second quarter, we have maintained our existing business execution and continue making progress on our strategic initiatives. We believe in our team have confidence in our overarching strategy and look forward to the path ahead for Airgain. And with that, operator, please open the call for Q&A.

[Operator]

Thank you. We will now take questions from Airgain [ cell side ] analysts. [Operator Instructions]. Now our first question will come from the line of Anthony Stoss with Craig-Hallum Capital Group.

[Anthony Stoss, analyst]

Nice progress. Jacob, I wanted to focus in on the fleet products, just to confirm what I heard or believe are, did you say that you've got -- it seemed like over a dozen, is it trial that are going on? At one point in the call you talked about you'll be shipping to revenue in the second half of the year? And then I had a follow-up for Michael.

[Jacob Suen, executive]

Yes. So we are going to the last stage of the product development cycle and the product is due to shipping in the early second half of the year. But meanwhile, we actually have 20-plus customer trials, both domestically and internationally scheduled in this quarter, second quarter to go through the process.

[Anthony Stoss, analyst]

Okay. Is that a short trial? Or do you think this is many, many months? Or how do you handicap when you think it converts into revenue?

[Jacob Suen, executive]

I think it varies. It could be from a couple of weeks to potentially 1 or 2 months.

[Anthony Stoss, analyst]

And then, Michael, I'm curious if you want to peak into the future, do you think you'll be potentially positive EBITDA in Q3? Or it seemed like maybe is a better shot in Q4? Any thoughts on that?

[Michael Elbaz, executive]

Tony. Yes, we don't give that much of a guidance together. But I think from a direction standpoint, we certainly would like to be breakeven in Q3. They might be in Q4 in terms of a positive EBITDA at this point.

[Anthony Stoss, analyst]

Got it. If I can sneak one more in on WiFi for the MSOs, Jacob. It seems like everything is being teed up for the second half of this year. Do you think you'll have a meaningful revenue on WiFi 7? Or is that more a 2025 event?

[Jacob Suen, executive]

Yes. Based on the current feedback, I think that we have one major MSOs, Tier 1 MSO in the U.S., but already has already indicating that we're going to be receiving PR from them and then they're going to be shipping in the, I would say, Q3. So that one, we're expecting material revenue contribution for the second half of the year. The second major U.S. Tier 1 MSO seems to be a little bit high. And the situation is that we'll be able to ship maybe some in the latter part of the year.

[Operator]

Our next question comes from the line of Scott Searle with Roth MKM.

[Scott Searle, analyst]

Jacob, maybe to dive in on Airgain Connect, the next-gen product. Could you give us an idea of how that's shaping up for the second half of this year, what you're looking like from a channel and dealer perspective and the early expectations on that front? And then, Michael, just to dive in a little bit more consumer in the second half of this year. Are you seeing enough in the pipeline that the consumer business with WiFi gets back to doing $5 million a quarter? And then I had a follow-up or two.

[Jacob Suen, executive]

Good to hear from you, Scott. So I address the and Connect first before I turn it over to Michael. So because of our previous experience, we feel really confident to talk about how do we going to go to market with the AC Fleet. So right now, we are targeting really 3 major aspects. One is on the bus, the disputes, the channels, and those are the ones we have dealt with previously. And so this is on one partner relationship, I guess, the market. And then the second one is what we talk about direct accounts. We're actually currently targeting roughly about 80 customers right now that we're focusing on. These are mostly private free companies such as the utility companies as an example. And so these are the ones who are actually engaging in directly. And third, there's another, the capital in what we call strategic partners. And this should be the likes of somebody like [indiscernible], Motor Solution, that type of names. And those then that don't buy directly from us, but they can work with us the life of AT&T as well. So those are the 3 partners or customers that we are actively engaging. And we do expect that to really generate material revenue for the second half of the year.

[Michael Elbaz, executive]

And to answer your question, Scott, on the consumer market, the lead time cycle is very short on this market. So data or backlog data is not very meaningful to predict what will happen for the second half of the year. However, what I can say for sure is that the current backlog that we're sitting on right now is definitely promising for the second quarter. It will be the main driver of the increase on a sequential basis. We do have a first PO for WiFi 7, small, but first nonetheless, and that's promising as well too. And the one thing that is also encouraging for us is the MNO Tier 1 design win that we have announced that is in the process of ramping up at this point. And so we do see the growth taking place, so somewhat of a recovery as to what shape it will be in the second half of the year, it might be a bit early to tell right now.

[Scott Searle, analyst]

Great. Helpful. And if I could follow up on the Lantern front. You had some news this week, I believe, with AT&T and T-Mobile activity on that front. And it seems like there's a lot of other trial activity going on I wonder if you could walk us through the paces of certification and time line to deployment with some of the more advanced carriers. And if you could give us an idea from a pilot perspective, the geographies that you're seeing a lot of that activity and what you're baking in is the lower end of the range for contribution in the second half of this year?

[Jacob Suen, executive]

Yes. Great question, Scott. So this is, as I indicated, I'm just so proud of the team's effort. It's not easy. There's a lot of uncertainties and for the team to be [ clinacious ] and navigate to the various certification, the trials has phenomenal done a phenomenal job. Now the certification, it takes anywhere from several weeks to several months, depends on the different types. We talk about PTCRB, we also to get the specifications from the actual mobile network operators, such as [indiscernible] you just mentioned. As far as the trials we have, I would say, majority of the trials is happening right now in North America, including U.S. and Canada. We also have some internationally in Latin America and also in EMEA as well.

[Operator]

Our next question comes from the line of Tim Savageaux with Northland Capital Markets.

[Timothy Savageaux, analyst]

I wanted to follow up on the 5G repeater, the Lighthouse trials. I think you mentioned 2 active network trials and 4 more plans in the second half. Let me you've talked about the strategic partnership. But in terms of the trials that you have upcoming, I wonder if you could characterize what carriers you're planning on working with those trials either U.S. and international Tier 1, et cetera.

[Jacob Suen, executive]

Jim, good to talk to you again and do the great questions of 5G initiatives that we're doing. So there are 2 active trials right now. One is the one that we mentioned last quarter. And that one is international. And here, when we talk about with this thing, we're making nice progress. We're going from a, what I call, [indiscernible]trial now to what I call a live network trial. What I mean by that is that they're actually having customers that we're actually going to and they're actually going to install our system into their network and going to stay there supposedly permanently if they didn't go well. So this is, I would say, the final trial before they go ahead and close with the purchase holder. So from that perspective, we are very encouraged by the progress and that's the international customers. We also have another active trial domestically here in the U.S. with the Tier 1 MSOs as well. And that one is still early stage. We have 4 more planned for the second half of the year. We have one in the U.S., one in EMEA and then 2 in Latin America. And all of the 4 are either mobile network operators or power companies.

[Timothy Savageaux, analyst]

Okay. Great. And then can I just try and summarize what we're hearing here with regard to the second half it looks like you've got some growth drivers in consumer. As you talk about the ramp of the fixed wireless antenna, I guess you saw some of that in Q1. But I guess, how long does that take to get to what you might consider a full run rate deployment throughout the year? And a follow-up to that.

[Jacob Suen, executive]

Yes. So we've started seeing what we call this IoT antennas, certainly really for the enterprise market, and for different applications, some of them put up for what you call the fixed wireless access applications, some of them actually for some other unique applications such as smart city traffic like applications. So all in all, we are really seeing a nice demand in a couple of these markets, and we expect that to continue. And then Michael can get more color about some of the specific numbers.

[Michael Elbaz, executive]

Sure. Thank you, Tim. This is actually a very good question. So just to summarize, overall, from a consumer standpoint, as we mentioned, that we do see growth in Q2, and we expect continued growth in the second half of the year driven by the MNO design win along with the MSOs, WiFi 5 7 early adoption rate. The strength of that rebound in the second quarter is just too early to tell right now. On the aftermarket part of automotive, there is still some ongoing excess inventory at this point, and we expect that to be sorted out at the end of the year during probably the last quarter of the year. Now on the enterprise business, we came up with $8.9 million of revenue in Q1. A large part of the growth was due to the large project that we had mentioned in the past of custom products. That one, not having that anymore in Q2, we are very pleased with the offsetting growth that we are seeing on the embedded modems on the asset tracker, the first shipment of the FWA solution. And on this, what you just mentioned, the IoT antennas, which is really those products that we had mentioned about 6 to 8 months ago as introduction, and they are finding their way a very nice thing in those communities in terms of -- it's a bit of a long sale cycle altogether, but it definitely helped us with the ramp or the increase in Q1. We're seeing in Q2, and we expect some more in Q3 and Q4. So enterprise, we expect it to be relatively flat for the time being, but the unknown right now are going to be the contribution of the AC Fleet but also Lantern, as we mentioned. And hopefully, some light us at the end of the year.

[Timothy Savageaux, analyst]

And just one final thing on that front of you. To the extent you're looking for the growth in include be consumer driven. Is it fair to say that's primarily the MNO design win?

[Jacob Suen, executive]

It's actually both the MNO and the MSO, we start to see some recovery. I mean the level that we were at in Q4 and even Q1, were just really some of the lowest level that we've seen. So we do expect some recovery there.

[Operator]

At this time, this concludes our question-and-answer session. If your answer was not taking you may contact Airgain's Investor Relations team [e-mail]. I'd now like to turn the call back over to Mr. Olin for his closing remarks.

[Jacob Suen, executive]

Thank you for joining us on today's call. I especially want to thank our dedicated employees for their ongoing contributions and our investors for their continued support. We look forward to providing additional updates at our next opportunity.

[Operator]

Thank you for joining us today for Airgain's First Quarter 2024 Earnings Call. You may now disconnect.