Airgain Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 5 speakers on the call.

Operator

Good afternoon. Welcome to Airgain's Third Quarter 2023 Earnings Conference Call. My name is Sherry, and I will be coordinating for today's call. Joining us for today's call are Argaine's President and CEO, Jacob Sewan and CFO, Michael Elvess. As a reminder, this call will be recorded and made available for replay via the link found in the Investor Relations section question of Airgain's website at investorrelations.airgain.com.

Operator

Following management's prepared remarks, call. The call will be open for questions from Airgain's sell side analysts. I caution listeners that during this call, Airgain's management will be making forward looking statements about future events in Airgain's business strategy and future financial and operating performances. 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 cautionary statements contained in today's earnings release in Airgain's SEC filings.

Operator

This conference call contains time sensitive information that is accurate only as of the date of this live broadcast, November 9, 2023. 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 may include a discussion of non GAAP financial measures. Call. Please see today's earnings release for further details, including a reconciliation of the GAAP to non GAAP results.

Operator

I would now like to turn the call over to our CEO, Jacob Sewan. Jacob?

Speaker 1

Call. Thank you, operator. Welcome everyone and thank you for joining us. For today's call, call. I will first cover our operational highlights and achievements for Q3.

Speaker 1

Then I will hand it over to Michael to walk you through our financial performance for the Q3 and our guidance for the Q4. Afterward, I will provide an update on our strategic product and marketing initiatives for Q4 and beyond call. Before opening the call up for questions, I would like to start by briefly introducing who we are call. And what we do for those who may be new to Airgain in our industry. At Airgain, we simplified call.

Speaker 1

Wireless connectivity for the consumer, enterprise and automotive markets. Our technology spends across the value chain call. Our products fall under 3 sub brands including Airgain Embedded, call. Airgain Antenna Plus and Airgain Integrated. At the beginning of the year, we announced our initiative call.

Speaker 1

To improve the 5 gs customer experience by fixing coverage gaps, boosting performance call. In simplifying the delivery of 5 gs connectivity to the home, office and vehicle. Call. Earlier this year, we introduced our long term 5 gs fixed wireless access device and Lighthouse 5 gs C band smart repeater call. And we will be announcing a 3rd product initiative in the coming months that fits into our effort to improve call.

Speaker 1

Our goal is to begin shipping some of these innovative products to partners and end customers call in the first half of twenty twenty four. We work with a global network of VaaS, call. System integrators, distributors and large customers to help solve critical connectivity issues, call. Call. With Airgain's growing product portfolio, we offer complete wireless solutions to our channel partners and customers call.

Speaker 1

Now for our performance, 3rd quarter sales call. Came in at $13,700,000 which was close to the midpoint of our guidance range. Call. Macroeconomic conditions such as demand softness and inventory corrections have continued to create downward pressure call. In all three of our main markets consumer, enterprise and automotive.

Speaker 1

Call. While we focus on growing our customer base, we expect the continued inventory overhang in our channel call and that of our lead customers to persist in the 4th quarter. Coupled with the shift of a large call. Enterprise project from the Q4 to the Q1 of 2024. We are projecting a lower guidance range in the 4th quarter.

Speaker 1

However, we are nearing our turning point and are beginning to see signs of a market recovery. We call. We expect growth in our enterprise market in the first half of twenty twenty four with broader growth call in the second half of the year from our consumer and automotive markets, especially call. Moving to a review of each of our markets. Call.

Speaker 1

Our consumer market is comprised of our custom embedded antenna design for CPE devices, so call. In addition to demand softness and inventory corrections, call. There are additional forces within the consumer market creating downward pressure. First, call. As we discussed last quarter, service providers are on the cusp of a transition from WiFi 6E to WiFi 7.

Speaker 1

Call. They are counting on WiFi 7 to improve performance and user experience, and they are looking for ways to accelerate call. The Wi Fi 7 adoption and transition. In anticipation of this shift, our key OEM customers call. Upgrading cautiously in order to avoid excessive inventory.

Speaker 1

While the market is hesitant

Speaker 2

call. In the short term, this

Speaker 1

shift presents a compelling long term opportunity for Airgain to deliver its cutting edge call. We have invested heavily in our Wi Fi seven capabilities call. And we recently secured a design win from a Tier 1 cable operator for its next call. Generation WiFi 7 CPE. 2nd, consumer demand continues to shift call.

Speaker 1

From wire to wireless providers for Internet service as they cut the cord and make the transition call. We recognize this trend and focus our strategy on penetrating this growing market, call, which offers significant average selling price or ASP growth. We are pleased to announce we recently secured call. A large design win with a Tier 1 Mobile Network Operator or MNO for the antenna design call. In the indoor FWA router, for which we expect to begin shipments in Q1.

Speaker 1

Call. In addition, we are working on several other opportunities with cable operators and MNOs call and look to secure these opportunities in early 2024. As we navigate a challenging demand environment, We expect declining consumer sales in the next two quarters, followed by gradual growth from our MNO design win call. And from our cable operator, Wi Fi 7 technology transition. Our enterprise market represents a mix call.

Speaker 2

Call.

Speaker 1

Inventory overhang continues to dampen our embedded modem revenue and while call. Our distributors are back to normal buying patterns. Others are still clearing inventory call. That will last a few more quarters. Despite the inventory overhang, we see end customer demand growth call.

Speaker 1

In our modems, as evidenced by growing point of sales at our distribution partners, and we expect call. A gradual recovery in the first half of twenty twenty four. EV charging in VSAS call. Continue to be strong markets for our modems and we do see industrial, agribusiness, call. Energy and managed IoT applications as growth opportunities.

Speaker 1

Call. Our custom products, offerings, features, joint engineering collaboration with our customers to develop products call. For specific applications, while helping them reduce their time to market, these projects call. Can often have shifting timelines depending on product requirements, engineering resources, call. Certifications and manufacturing schedules.

Speaker 1

Shipments can fluctuate from quarter to quarter call. Based on the complexity of the product offering, which has had a material impact on our expected call. The timing for such revenues, specifically one of our lead customers is going through a call. Technically complex platform refresh and the combinations of high inventory in its current call. And the completion delay in this new platform created a material shift of revenue from the second half of this year To the first half of twenty twenty four, our Asset Structure business continues call.

Speaker 1

To show significant growth potential, we continue to see growing applications for pallet, packaging and logistics call. Trucking, which represented a bright spot in our Q3 revenue. In addition, call. Our pipeline includes several opportunities in railways, warehousing, equipment management and rental, Lot Management and Co Chain. This is one of our existing product lines that presents a call.

Speaker 1

Significant growth opportunity in 2024 due to the market size, flexibility of applications, call. Opportunity for the recurring revenue and our strategic product differentiators. Because of the size of the customers with which call. We are interacting in the established pilot process. The sales cycle for this product can be from 9 to call.

Speaker 1

While our potential deal pipeline is strong, we are working to address our resource constraints, call. Streamline our processes and shorten the sales cycle to help create a more consistent revenue stream in 2024. Call. Lastly, our automotive market includes both our aftermarket antennas as well call. Our focus in the automotive market has largely call.

Speaker 1

In the public safety, transportation and municipalities, inventory corrections from lead customers call. Has lengthened the growth in this market, and we expect this trend to continue in the first half of twenty twenty four. Call. However, we are seeing signs that our combined strategic focus on new and differentiated call. Product supply chain flexibility and global channel expansion is yielding results in Q4.

Speaker 1

Call. We expect our previously announced RECOM 13 and Ultramax Class 5 gs products

Speaker 2

call. We'll begin to shift

Speaker 1

this quarter, both of which fit into our new low profile design focus. This is in addition to our EG Connect platform, which adds supply chain flexibility by separating the antenna call. From the cable harness, minimizing the variations in SKUs. In addition, we signed a new system integrator call. In the public safety and municipality market that we believe will contribute significantly call.

Speaker 1

To our automotive sales next year. Despite the downward pressure from macroeconomic forces that has call. Persistent throughout 2023, we remain optimistic that our sales expansion strategies pay call. A path to growth in 2024 and beyond. By the end of 2023, we expect to have added call.

Speaker 1

Five new distribution partners and a major system integration partner, greatly expanding our reach. Call. We have also announced new products that should start to impact revenue in Q4 alongside call. 2 of our 3 major product initiatives to improve the 5 gs customer experience, call. All of which help provide an addressable market that should contribute significantly to 2024 revenue and beyond.

Speaker 1

Call. We have expanded into 2 new key geographies and look to take advantage of the market needs in these regions. Call. While 2023 has presented some significant challenges, we believe we have the right product roll maps call and expansion strategies to recover and grow in 2024. With that, call.

Speaker 1

I'll turn the call over to Michael. Michael?

Speaker 3

Thank you, Jacob. Before diving into the numbers, call. Please note that my review of our financial results and guidance refers to non GAAP figures. Call. Information about the non GAAP financial measures, including GAAP to non GAAP reconciliations are found in our earnings release.

Speaker 3

Call. Now let's turn to this quarter's results. As Jacob mentioned, Q3 sales were $13,700,000 call. Below the $14,000,000 midpoint of our guidance range. The variance was primarily due to lower than forecasted consumer sales.

Speaker 3

Our sales declined 13% sequentially and 29% year over year, call. Primarily due to the high inventories across both our channel and direct customers, coupled with demand softness in our consumer market. Call. Consumer sales were $4,400,000 reflecting a sequential decrease of $1,800,000 call. As our Q2 quarter had a strong uptick of WiFi 6E embedded antenna shipments.

Speaker 3

Call. Enterprise sales were $6,800,000 which decreased sequentially by $500,000 the decline in inventory overhang. Call. Automotive sales were $2,500,000 reflecting a sequential increase of $200,000 call. Q3 gross margin was 39.1% compared to our guidance range midpoint of 40%.

Speaker 3

Call. The variance was primarily due to the unfavorable consumer sales mix. Q3 gross margin was call. 130 basis points lower sequentially due to the unfavorable consumer sales mix call. And a lower enterprise margin driven by an unfavorable product mix change.

Speaker 3

Call. Q3 operating expenses totaled $6,000,000 slightly higher than our guidance of approximately $5,800,000 call. Operating expenses decreased sequentially by $500,000 driven by lower contractor and other variable expenses, call, resulting from G and A efficiencies. Our Q3 operating expenses at $6,000,000 represents the lowest spend level call since the acquisition of NimbleLink in Q1 of 2021. As we mentioned in prior earnings calls, call.

Speaker 3

We are focused on driving operational efficiencies to reduce our expenses and make room for the investment needed for the launch call. Our 3 initiatives that will help drive revenue in 2024. As a result, call. Our Q3 adjusted EBITDA was negative $500,000 and non GAAP EPS was negative $0.06 call. Our cash balance as of September 30 was $10,000,000 $700,000 higher sequentially driven by working capital management.

Speaker 3

Call. The $10,000,000 cash balance was $800,000 higher than the same quarter in the prior year call despite lower year over year sales. Our accounts receivable balance was $6,300,000 call. $2,400,000 lower sequentially due to strong cash collections and lower sales. Call.

Speaker 3

Net inventory was $4,000,000 $800,000 lower sequentially. Call. Given our cash balance and our tight expense management, we believe we have sufficient resources to execute on our growth strategies. Call. Now moving to our outlook for the Q4 ending December 31, 2023.

Speaker 3

Call. We project sales to be in the range of $9,250,000 to $10,750,000 or call. $10,000,000 at the midpoint of the range. The lower revenue guidance compared to prior expectation is due to lower than anticipated call. Consumer sales and continued inventory corrections coupled with a large enterprise project push out Jacob mentioned.

Speaker 3

Call. We expect non GAAP gross margin for the 4th quarter to be in the range of 38.5% to 41.5% call. Or 40% at the midpoint of the range. Leveraging our Centimeters model call. Is a primary driver of our gross margin improvement initiatives and we completed the first phase of this leverage with our automotive antennas.

Speaker 3

Call. Despite the lower projected consumer sales mix, we expect our gross margin to improve sequentially as a result of our automotive product cost reductions. We project our operating expenses to be approximately $6,000,000 call. Non GAAP EPS is expected to be negative $0.19 at the midpoint of our guidance. Call.

Speaker 3

Adjusted EBITDA is expected to be negative $1,800,000 at the midpoint of our guidance. Call. Despite the revenue challenge we faced in the Q4, we remain focused on generating positive cash flows in the Q1 of 2024, call. We'll continue to execute on our strategic product initiatives. Now I would like to turn the call back over to Jacob, call, who will walk us through those strategic initiatives.

Speaker 1

Jacob? Thanks, Michael. During Q3 and Q4, call. Our team has spent a significant amount of time and effort on our strategic planning process. Call.

Speaker 1

As a result of this analysis of our products and markets, we developed a product roadmap that stretches call. Into 2025 and captures our strategic product launches that we believe will shape our revenue in the future. Call. Of our current product lines, we believe that our asset trackers offer the greatest strategic growth opportunity. Call.

Speaker 1

When we narrow the market to cellular connected asset truckers, we estimate the 2024 call. Serviceable available market was same to the $900,000,000 In addition, we have been in the market call for over 3 years and have built a strong pipeline of deals. As mentioned previously, because of the pilot process and size of the end customer. The sales cycles can be longer than some of our other products. Call.

Speaker 1

However, the deals are larger, more sustained and involve a significant component of recurring revenue. We continue to make very good progress and are optimistic that our asset tracking offering will become call. And even greater revenue contributor to the overall business. In addition, we have call. Previously discussed our initiative to improve the 5 gs customer experience.

Speaker 1

While 5 gs call. On its promises of lower latency, increased capacity and higher throughput. It comes call. At the expense of a shorter segment range on the base station. Consequently, this creates coverage gaps for 5 gs customers.

Speaker 1

Call. We believe Airgain is well positioned to solve these major coverage deficiencies call. And we have identified 3 key areas where we believe we can make an impact. These areas include the network itself, call. Customer Premises and the Vehicle.

Speaker 1

Improving 5 gs connectivity and customer experience begins at the edge call. These devices allow wireless operators call. To compete with cable and wire solutions for the broadband connection, this year we announced call. Our entry into this market with the introductions of an enterprise grade CPE called Lantern FWA. Call.

Speaker 1

Lantern is an outdoor ruggedized sub-six gigahertz 5 gs device that breaks call. The trade off between performance and ease of install. It is equipped with directional high gain antenna call. That is optimized for mid band and high band frequency range, offering superior performance for all MNO customers. Call.

Speaker 1

It also includes a patent pending EEG installation kit that comes with a mobile app that significantly call. Reduces installation time and eliminates the need for professional installation. Call. When we narrow our focus to 5 gs outdoor nonmillimeter wave devices in the regions call. Where we plan to compete, we estimate the same is over $500,000,000 in 2024 alone, call.

Speaker 1

While most WA devices are indoor solutions currently being sold to consumers through MNOs call. And are subsidized as part of a monthly fee. Our enterprise grade device is coming call. It's all niche in the market. Our global MNO partners see this product as a pathway call.

Speaker 1

To help them clock into the B2B market in a meaningful way, even calling it a needle mover for them. Call. In addition, the product is receiving significant interest from our channel partners who have had call. To piece together enterprise FWA solutions from multiple expensive components, call. Aegon's lantern FWA offers a simpler and less expensive option, call, allowing them to better compete in the market.

Speaker 1

There is a myriad of use cases call. Where the device can be used. However, broadband failover and mobile up call. Congratulations. Seem to be the 2 gaining the most early interest.

Speaker 1

The product has been in trial with several channel partners call. And MNOs and we are targeting a Q1 ship date for the first versions of this product. The feedback from trial customers call. Has been positive, and we are pleased to announce that we have secured early purchase orders for the LANTURN FWA products, call. Showing the market potential for the device.

Speaker 1

With the reduced transmission range of 5 gs signals, the cost of ownership call. For network operators, increases significantly due to the infrastructure and equipment required call to expand high quality coverage. An active smart repeater can overcome this challenge call by facilitating efficient use of existing infrastructure to ensure a stable and high quality signal. Call. Earlier this year, AEG introduced the Lighthouse Smart Repeater, which offers a single pole installation, call.

Speaker 1

Carrier aggregation, active echo cancellation, support for multi up later frequency bands, call. Active beam steering capability and requires no fiber backhaul. It is a cost effective way call. To deliver a targeted 5 gs signal in areas that lack quality coverage. Call.

Speaker 1

Based on the global number of base stations to the regions we plan to serve, in factoring rollout, we estimate call. The same for 2025 to be around $600,000,000 for this product, making this a lucrative market in which we can compete. We have completed multiple field trials on Tier 1 operator networks call. And our own truck for product launch by the end of 2024. Additionally, another call.

Speaker 1

Key area where we feel that we can include the 5 gs customers' experience is in the vehicle. Call. We have been in the fleet and vehicle networking industry for many years. With the deployment of 5 gs, the use cases call. Higher data rate applications have multiplied substantially.

Speaker 1

This is especially important call. For several segments, including public safety, transportation, agriculture, utility and many more. Call. Based on vehicle routers and focusing on 5 gs, we estimate a same in 2024 of call. $200,000,000 We will be announcing the next generations of our vehicle networking device in early Q1 call.

Speaker 1

To tackle this market and provide opportunities for growth, we have seen early excitement call. From several major customers on this next generation product, our current target ship date will be Q2 of next year. Call. Between these three major product initiatives, we estimate over $700,000,000 in call. Potential additional same in 20.24 $1,700,000,000 in 2025, call.

Speaker 1

Effectively doubling our foundational same of $1,800,000,000 for our existing products. Call. This gives us not only the ability to grow organically from our existing product lines, but also to call. Our growth opportunities by adding value to our existing markets and exploring new markets. Call.

Speaker 1

It is also the combinations of the strategy we announced 2 years ago to shift from exclusively components call. In closing, 2023 has been a challenging year call. For Airgain, along with the rest of the industry in which we compete, market forces have created a downward pressure call. On our traditional lines of business that will persist through the end of this year. Call.

Speaker 1

While we anticipated a challenging environment in 2023, we underestimated the severity of its impact call. On our business, we are disappointed with our revenue and EBITDA guidance for Q4 as we expect call. Stronger headwinds resulting from the combinations of lower than previously anticipated consumer sales, Continued inventory correction and customer project push out. However, call. Despite these significant challenges, we believe we have made the right strategic moves and now have a line of sight to revenue recovery call.

Speaker 1

Starting in Q1 of 2024, our Q1 backlog is currently higher than that of our Q4 backlog. Call. We are maintaining our existing customer base and are adding new customers as evidenced by our recent design wins in our consumer, automotive and enterprise markets. And we have a strong pipeline call. Of opportunities that should accelerate our future growth.

Speaker 1

We are focused on being EBITDA positive in call. In 2024 in generating positive cash flows based on the resolution of inventory issues in the market, call. Expenses of channels and geographies, the demand for Wi Fi 7 and AWA devices call. By major operators in the launch of our new products. While our strategy call.

Speaker 1

This is ambitious. We believe we have the right team in place to execute. We are very pleased to have the new additions of Evan Jones call as our VP of Engineering. Evan spent over 23 years at Sierra Wireless as their VP of IoT System call. Engineering and Customer Experience.

Speaker 1

Evan is an industry veteran who has joined Airgain at this pivotal time call because he believes in our vision and product role model. He is also very excited to work with the seasoned executive team already in place at call. Call. Aegion has undergone a fundamental transformation in our technology, product roll ups, call. Operations, sales approach and brand to shift from components to systems.

Speaker 1

As is often the case, call. Transformations can be difficult and painful for organizations, and we are no exception. I would like to thank our team call. For continuing to persevere and execute despite the challenges. While we look to recover and generate organic growth call.

Speaker 1

From our core products and customers, we believe our strategic focus on growing our RC Truckers business and improving the 5 gs call. Through these major initiatives, offers a pathway to larger growth in 2024 and beyond. Call. As these initiatives begin to come to market in early 2024, we believe they will begin to help call. And with that, we're ready to open the call for your questions.

Speaker 1

Operator, call. Please provide the appropriate instructions.

Operator

Thank you. We will now take question from Airgain's sell side analysts. Question. Call. Call.

Operator

Our first question is from Craig Ellis with B. Riley Securities. Please proceed.

Speaker 4

Call. Hi, this is Stacy calling on behalf of Craig. And I was just wondering if you could provide some color as we call. Move the product mix towards higher volume new clients and services and call. In a top macro, what are the some products in the consumer and enterprise that can drive meaningful revenue to 4Q or potentially Q2024.

Speaker 4

And is there any changes in the segment gross margin like consumer gross margin or enterprise gross margin? Thank you.

Speaker 3

Call. Hi Stacy, this is Michael. I hope I can answer your question if I understand it correctly. From the consumer standpoint, as we mentioned, call. The revenue level is a bit depressed.

Speaker 3

We saw it in Q3. We're expecting a further decline in Q4, call. Primarily because of OEMs trying to manage their inventories or excess inventories with the pending Wi Fi 7 call. Technology transition along with some soft demand taking place at the MSO level. And so what we have secured so far is really the call.

Speaker 3

M and O Tier 1 design win, which we expect to start shipping in Q1. So this will give us a bit of a bump in Q1, but really call. The overall growth on that market will really come from the Wi Fi 7 technology transition, call. Which we expect to see at the end of Q2 and certainly in the second half of the year. On the enterprise business, call.

Speaker 3

What we are facing right now is more of a inventory overhang with one of our lead customer, and this is also the same lead customer where we have also call. A costume design of a platform, a new platform, this is a complex project, which is now delayed to the early part of call. Next year, Q1, specifically speaking. And so while we see a overall depressed or lower revenues in Q4. We expect to see the uptick in Q1 and then some resumption after that of growth in the fiscal year 'twenty call.

Speaker 3

Mainly because of the inventory corrections being sorted out through the first half of the year. And then finally, on the automotive, it's more of a mixed story call. Between some of the inventory correction going on with some of our lead customers, but also that being offset with the growing call. New products, we have recently announced a number of new products, but also new channel and new geographies as well too. Call.

Speaker 3

And those, again, for the second half of the year, will start to really pan out for us as well, too, along with the new product initiatives. In terms of mix, call. It's a bit uncertain right now given the low level of visibility on how everything plays out. All of our OEMs call. Certainly, trying to be very conservative in the inventory level.

Speaker 3

We could see some surprise in December with some surprise orders, call. But we're not counting on that. And so in terms of the mix, it could be fluctuating quite a bit. Call. The good news here is that on the margin front with the automotive product cost reduction that we have initiated about 2, 3 quarters ago call.

Speaker 3

And those are becoming effective in Q4. We do see our overall gross margin starting to improve call with the Centimeters leverage that we have been counting on, and this trend will continue on. And so I think we will be call. Somewhat protected with some of the consumer market mix, which has been unfavorable over the past few quarters.

Speaker 2

Call. I hope that answers your question.

Speaker 4

Thank you. That's very helpful. Thank you so much. And I was wondering if I can squeeze in another one. So call.

Speaker 4

What are the some your view about cash or any change in the inventory days? How do you feel about your cash level, whether it's sufficient for your working capital? And thank you.

Speaker 3

Sure. So our cash actually increased call. In Q3, at the end of September increased compared to quarter over quarter, but also year over year basis. We are at $10,000,000 right now. Call.

Speaker 3

And this has been mostly driven out of working capital management, lower inventories, and as I mentioned, but also call. Lower account receivable, not only because of lower sales, but also primarily because we achieved a record low DSO with some very strong collections. Call. So the team is definitely very focused on whatever we can do from a working capital management standpoint. With the call.

Speaker 3

EBITDA loss that we are projecting for Q4 of $1,800,000 at the midpoint of the guidance, call. We expect our cash balance to be at around $8,000,000,000 which is definitely sufficient for enough of resources To be able to pursue our growth initiatives and especially in light of a growth resuming in the first half of the year.

Speaker 2

Call. Got

Speaker 4

it. Thank you so much.

Speaker 3

Thank you.

Operator

That will conclude our question and answer session. Call. If your question was not taken, you may contact Airgain's Investor Relations team at airggateway grp.com. I would now like to turn the call back over to Mr. Suen for closing remarks.

Speaker 1

Call. Thank you for joining us on today's call. We look forward to updating you on our next call. Operator?

Operator

Call. Thank you. This concludes today's call. Thank you for joining us for Airgain's Q3 2023 earnings call. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Airgain Q3 2023
00:00 / 00:00