Airgain Inc Q3 FY2022 Earnings Call

Good afternoon. Welcome to Airgain’s Third Quarter 2022 Earnings Conference Call. My name is Diego and I will be your coordinator for today’s call. Joining us for today’s call are Airgain’s President and CEO, Jacob Suen; CFO, Michael Elbaz; and Chief Revenue Officer, Morad Sbahi. 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 www.airgain.com. Following management’s prepared remarks, the call will be opened for questions from Airgain’s sell-side analysts. I caution listeners that during this call, Airgain management will be making forward-looking statements about future events and 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, November 10, 2022. 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. Please see today’s earnings release results for further details, including a reconciliation of the GAAP to non-GAAP results. Now I’d like to turn the call over to our CEO, Jacob Suen. Jacob?

Thank you, operator. Welcome everyone and thank you for joining us on the call today. Before we get into results, I wanted to take the opportunity to welcome to Airgain’s family, our new Chief Financial Officer, Michael Elbaz. Michael brings finance experience as well as the disciplined process knowledge needed to support our growth plans. I also wanted to announce the promotions of Morad Sbahi from his position of Senior Vice President of Global Products and Marketing to the newly formed position Chief Revenue Officer, which will combine the global sales and marketing functions into one position in charge of delivering the company’s revenue plans. These changes to Airgain’s executive team represent the maturity in the organization needed to support our growth plans for the coming years. Now for results. Similar to last quarter, I’ll start with high-level commentary about our Q3 results and operational highlights. Then, I’ll hand it over to Michael to walk you through our financial performance for the quarter. Then Morad will provide an update on our strategic product and marketing initiatives. Afterwards, I will share our outlook before opening the call for questions. As you saw from our earnings release, the third quarter of 2022 marked another solid period for Airgain, highlighted by 24% year-over-year sales growth in our second consecutive quarter of positive adjusted EBITDA. These results demonstrate the leadership team’s focus on driving profitable growth and our ability to consistently deliver on our plan. The momentum we have established over the last two quarters, particularly in our consumer and automotive markets, has continued into the fourth quarter and is setting us up for a strong 2023. We have seen some key customer wins in the previous and current quarters, and we are focused on developing new products and solutions that will enable us to gain a foothold in new markets and expand our wallet share with these new customers. We have also seen a significant spike in new business leads and interest across our end markets. Factors we attribute to both our R&D and focused sales and marketing efforts, and our emphasis on fast-growing markets, such as industrial IoT, are paying dividends, something Morad will touch on later in today’s call. Our enterprise business remains solid as we see normalized growth from key customers. We saw uneven shipment challenges from Q2 to Q3 due to concern over supply chain issues. However, customer demand for our overall enterprise business remains strong as our backlog in Q4 continues to grow. The video surveillance as a service market, as well as in the connected EV charging market, continues to show great promise. For the latter, this is especially the case with increasing government investments in these technologies. On the automotive front, our product and sales strategies continue to generate sequential growth. Additionally, we have developed new product strategies with our fleet antennas that will add ordering and manufacturing flexibility as well as speed up our lead times. We continue to work on the next generation of vehicle networking platform with our current and future offerings by providing superior connectivity to a broadening set of customers. We were pleased to see the continued recovery in our consumer market due to the successful initiatives we implemented to mitigate supply chain constraints and headwinds. Consumer contributed greatly to the year-over-year improvement we saw in overall sales and gross margin expansion in Q3. Much of the positive momentum has been in the WiFi 6 and 6E space as we continue to gain market share and reinforce Airgain’s leadership in fast-growing and higher-margin technologies. Just in this past quarter, we have successfully won two new WiFi 6 and 6E design contracts with global service providers, both of which will ship in 2023. We also engaged with key ecosystem partners on the next-generation WiFi 7 system designs. At Airgain, we specialize in simplifying the growing complexity of wireless, and WiFi 7 introduces increased complexity in the IS design. This fits directly into our core strength and will help drive sales in the future. In terms of the supply chain, as I mentioned, we continue to navigate the changing times of the macroeconomic environment by mitigating risk in our supply chain. This includes simplifying our supplier network and adding supply redundancy to ensure stability. As you know, at Airgain, innovation is synonymous with our brand. Our vision for connecting the world is intertwined with a solution selling approach. We have identified three key differentiators in relation to the market as a whole in our competition. First, we simplify wireless for end customers across all our product lines. Second, our large breadth of products spans across the entire value chain, whether you are trying to solve a connectivity issue in your product design or your upgrading environment. The third is our technological capabilities, particularly in reference to our expertise. Together, these differentiators and capabilities all boil down to one key message: we simplify wireless. In engineering circles, our design is no less than black magic. It is often complex and difficult to optimize, yet Airgain’s foundation was built on solving complex antenna design issues, not only within the device but also within the environment as well. As we integrate our acquisitions and add new product lines, this specialty in simplifying wireless has become a connecting theme. Moving forward, our focus is to leverage this core competency to move into a leadership position in a new wave of technologies and platforms as they become increasingly integrated and complex. Airgain is poised to make a significant impact in the wireless connectivity space. With that, I will turn the call over to Michael. Michael?

Thank you, Jacob. I am excited to be part of the Airgain family. To quickly introduce myself to the audience, I bring over 25 years of experience in public corporate finance, primarily with semiconductor companies. The market served by these companies ranged from wired to wireless broadband solutions. Airgain has the building blocks for making a significant impact in the wireless space, and I look forward to making a meaningful contribution to achieving its strategic and financial goals. My objective over the next six months is to improve our operational efficiencies and our communication with the investment community. 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, is found in our earnings release. Now, let’s turn to this quarter’s results. Airgain delivered another quarter of strong sales and profitability. Q3 sales were $19.2 million, $0.4 million higher than the midpoint of our guidance range of $18 million to $19.5 million. Our sales were relatively flat sequentially, as higher consumer and automotive sales were offset by lower enterprise sales. Consumer sales totaled $7.3 million, reflecting a sequential increase of $1.4 million on easing supply chain shortages impacting our customers’ product shipments. The $7.3 million in consumer sales was the highest point since the second quarter of 2021. Automotive sales were $5.1 million, reflecting a sequential increase of $0.9 million on the continued strength of our aftermarket product line. Enterprise sales were $6.8 million, which declined sequentially by $2.4 million on lower shipments of our industrial IoT product line. Q3 gross margin was 39.4% and at the high point of our guidance range of 36.5% to 39.5%. Gross margin was flat sequentially, but it was up 290 basis points on a year-over-year basis because of the improving consumer sales mix and automotive margins. Q3 operating expenses totaled $7 million, an improvement of $0.3 million sequentially. As a result, our Q3 adjusted EBITDA was $0.8 million, $0.6 million higher than the midpoint of our guidance and $0.3 million higher sequentially. Adjusted EBITDA margin for the quarter was 4.1%. Non-GAAP net income was $0.6 million, resulting in non-GAAP diluted EPS of $0.06, $0.03 higher sequentially. Our cash balance as of September 30 was $9.2 million, relatively flat sequentially. Now moving to our outlook for the fourth quarter ending December 31, 2022, we expect sales to be in the range of $19.7 million and $21.1 million, or $20.4 million at the midpoint of the range. We expect gross margin for the fourth quarter to be in the range of 37.5% to 40.5%. We project our operating expenses to be approximately $7.4 million, and adjusted EBITDA is expected to be $0.7 million at the midpoint of our guidance. Non-GAAP EPS is expected to be $0.05 at the midpoint of our guidance. Now I would like to turn the call over to Morad, who will walk us through our strategic products and marketing initiatives. Morad?

Thanks, Michael, and welcome to the team. With our transition into selling IoT products and bundled solutions, we’ve seen many opportunities arise from existing and new customers, including more comprehensive and stickier contracts. From a sales perspective, this boosts retention and renewal rates, further demonstrating the long-term value of our products. In addition, the broadening of our markets from consumer only to automotive and enterprise greatly expands our serviceable market from $330 million to well over $7 billion. As Jacob touched on, we saw significant wins this quarter that reflect the strength of our horizontal reach in multiple IoT end markets. The notable demand increase for connected EV charging, both in terms of consumer trends as well as governmental infrastructure investment, resulted in a contract win that we’re expecting to contribute to our results in 2023. Additionally, we secured purchase orders for our nimble linked integrated modems coupled with antennas offerings from large customers in the medical device and oil and gas industries, further validating the effectiveness of the synergy of our products and our go-to-market plan. We also secured wins for our next-generation IoT products with new and existing customers in the video surveillance and public safety end markets. Cross-selling and upselling existing customers is an important initiative for Airgain and a key driver of sustainable sales growth going forward. This is an exciting time for Airgain, particularly in R&D. We began the transition to the next generation of vehicle networking platforms, an initiative in line with our goal to capture a much broader market share by producing international service provider-agnostic products and solutions. We’re building off the experience over the past three years of our AirgainConnect platform, and the focus in the future will be not only on HPUE but on other product subcategories in order to broaden the offering and capture new branches of the market simultaneously. To date, we’ve seen success not only in first responder markets but also in fleet and utilities. We look forward to continuing that momentum and updating the market on these initiatives in the coming quarters. 5G represents a central focus for the company as we work with ecosystem partners to develop both the hardware and software that will improve user experience. We are leveraging our expertise with in-home wireless and cellular technologies to develop the critical building blocks of next-generation CPE wireless systems in order to increase customer satisfaction and help operators reduce churn. We look to continue to build on our leadership in RF, taking advantage of the new wave of 5G product deployments, including C-band and beyond. We announced in September our work in fixed wireless access, which is a central application for many 5G deployments. This is a significant market expected to grow fivefold by 2026 according to industry estimates. Today, most fixed wireless access antennas, particularly those used in home gateways, are designed to prioritize simplicity over performance. With fixed wireless access and the addition of 5G, the complexity of embedded antenna systems increases, which is where Airgain offers a differentiated advantage given our knowledge base and ability to solve complex radio frequency problems. Our offerings will continue to cater to more intensive demands in order to simplify the process of bringing higher-quality solutions to the market. We’re able to save customer costs and accelerate time to market by leveraging our methods of embedded antenna systems designed specifically for fixed wireless access. Over the next few months, we will be announcing several new products that we believe will highlight our market leadership in these key technologies I just described. This is a concerted effort by our company in line with our shift to becoming a wireless system solution provider with differentiated value for many focused markets that include fixed wireless access, vehicle networking, industrial IoT, and carrier network segments. Stay tuned as we look forward to unveiling our work in due time. Now I’d like to turn the call back over to Jacob. Jacob?

Thanks, Morad. As exhibited in this quarter’s numbers, we are seeing the results of our efforts to mitigate the headwinds from the supply chain. We will continue to leverage our expertise in providing our customers with high-performance wireless solutions across our targeted markets. Areas of key focus remain 5G, IoT, fixed wireless access, and WiFi development. In the near term, we expect to deliver sequential organic growth and another quarter of adjusted EBITDA profitability in the fourth quarter. We expect strong growth in our enterprise market as we continue to expand our product portfolio and international footprint with our IoT solutions. We also anticipate meaningful growth with our aftermarket automotive business. As for our consumer business, we expect continued recovery. Long-term, consumer growth will be driven by our integrated product launches with the major global service provider customers that we have built great partnerships with throughout the years. Looking ahead to 2023, I am optimistic about the growth across our targeted markets. The innovative products we are launching point the company towards robust sales growth, coupled with consistent gross margin expansion. With these developments on the horizon, we are focusing on execution and operational efficiency. We continue to remain resilient and flexible in order to provide end customers with market-leading and reliable solutions, driving lasting value for our shareholders in the process. And with that, we are ready to open the call for your questions. Operator, please provide the appropriate instructions.

Our first question comes from Scott Searle with ROTH Capital. Please state your question.

Hey, good afternoon. Thanks for taking the questions. Nice job on the quarter. Jacob, maybe just to dive in on the consumer side with WiFi. I’m not sure if I missed this on the call, but did you talk about component availability from a WiFi standpoint, if that was impacting your ability to ship more to the service providers? And if there was anything left on the table during the quarter. And then while we’re starting to increase, getting to levels we haven’t seen in a year or so, it’s still below the peak levels of $10 million a quarter. I’m wondering what timeline you see getting back to those types of levels, and I think you indicated that there was a large service provider win that should start to contribute in 2023.

Okay. Hey, Scott, yes, Jacob here. As far as the component shortage issue, we are seeing improvement on the consumer side. One of the main chips that we learned previously that is still an issue as far as we know. Although many other components have improved markedly in the last quarter or so. So, we anticipate the consumer recovery to continue and as far as when it is going to get back to normality, I would say we hope that sometimes next year that would happen.

Got it. And maybe, Jacob, just to follow up quickly. I think you referenced another big service provider win. I’m not sure what the timeline is on that or the color that you could provide around that, but I’d love to get a little bit more detail if they are available.

Yes. So, a couple of these design wins surrounding WiFi 6E, and we anticipate both design – I mean we have the incumbent, whether it’s sole source for those designs. So, it’s not a matter of how we’re going to win the design, but rather when the service providers are actually going to be launching it. Right now, they are projecting sometime in the late first half or early second half of next year.

Okay. Great. And if I could, I think on the enterprise side, it was a little bit softer. I’m not sure if you differentiated what kind of end markets or otherwise what was going on there? I know NimbeLink is in that group; there have been some component availability issues on that front. I was wondering if you could provide a little bit more color on that side of the business? And also, what the demand profile looking like for NimbleLink?

Yes, I’ll start and then maybe Morad can chime in. So overall, the demand is very strong. There was some movement, as we indicated even in the last earnings call about just some of the shipment because some of the customers are concerned about supply shortages. So, some of the shipment was moved into Q2 versus Q3, but we have very strong demand. In fact, I indicated that we have a very strong backlog already for Q4 and next year. So, we feel really good about the overall IoT business.

Yes. So, hey, Scott, how are you? So, just to kind of supplement what Jacob talked about, the health of the business looks really strong for industrial IoT, and that’s not only for cellular connectivity but also in terms of what we’re trying to do in asset tracking. As I mentioned on the script, we’ve seen wins in multiple verticals, and EV charging and what’s happening there with the demand from the consumer, as well as the initiatives that the government is putting in place. We’re seeing that really starting to accelerate for us. Video surveillance as a service also is showing a lot of traction for us. We’ve also secured a nice win that combines not only the cellular modems but also with our antennas. So, that takes in that synergy of the combined two companies, which is something that we’re really excited about. And then also, in parallel, we’re starting to see a lot of traction in the logistics space, particularly in rail. I would say with the NimbeLink brand and those products going forward, it’s looking pretty strong.

Very good. Very helpful. And lastly, if I could, on the fixed wireless access front and moving towards solutions in general, I’m not sure if there are any timelines. I think you’re talking about a lot of development there, but are we going to see some of the impact of that in 2023? Or is that a little bit premature? And while on the subject of ‘23, I was wondering if you have any early thoughts in terms of how the year is shaping up and what we should be thinking about from a growth perspective? Thanks.

So I’ll talk about that then I’ll let Jacob chime in on what the growth outlook is, and maybe Michael, if he wants to comment on what that’s going to look like through the year. So, fixed wireless access for us is a really important initiative that really supplements or reignites our consumer business. What’s happening is that if you look at the traditional gateways that we’ve had deployed or designed to help OEMs design for deployments for wireline operators, I would contend, as many industry analysts are saying, fixed wireless access is really the killer app for C-band. What’s happening is with the addition of cellular, the complexity increases in the box. This provides the opportunity for Airgain, which also allows us to double and sometimes triple the content per box and the ASP. In terms of wins, there are a couple of wins that we’ve managed to secure for fixed wireless access, and I think one of those could contribute in the latter part of next year to our results. But I think that’s looking really, really good for us in terms of reigniting the consumer space. We are also supplementing that. You can see what’s happening with some of the operators that started to deploy the fixed wireless access and some of the churn. There is a lot of traction that we are seeing in their request to help them increase the signal from the tower down so that you can increase the broadband stream, and that’s exactly what Airgain excels in. This plays nicely for us in terms of our capabilities and what we will be able to do with that. Jacob, I don’t know if you can elaborate on the second part of…

Yes. As far as 2023, as I indicated, I am really optimistic. I expect growth across all three of our targeted markets. But in particular, I am really excited about what we are able to do on the IoT front, which is part of our enterprise market and what we are going to be able to do with the consumer side. We are really alluding to, I expect the recovery to complete hopefully by sometime next year. On the consumer side, we have several new design wins. Many of the service providers are completing their ramp-up on WiFi 6 and many are already launching on WiFi 6E and already working on some designs for WiFi 7. I feel good about what we can do in these two particular markets, and also automotive is showing steady growth as well. All in all, I feel really good about how 2023 is shaping up. Lastly, we do expect the supply shortage issues and pandemic impacts to be in the rearview mirror sometime next year.

Great. Thanks so much.

Great questions. Thank you.

Next, we have Alex Vecchi with William Blair. Please state your question.

Hi. This is Sabrina on for Alex. Thanks for taking my questions. Earlier this year, there were targets of bringing gross margin back to the 40% range and then it has been guided up sequentially. Could you provide some color on the contribution from the end market for the next quarter and then possibly in 2023?

Sure. Hi Sabrina, this is Michael Elbaz. So, from a gross margin standpoint and you are right, our gross margin in Q3 averaged 39.4%. Based upon the guidance that we just provided for Q4, our overall FY 2022 gross margin will average about 39.8%, which is really a slight improvement year-over-year of only about 40 basis points. This is not really the target and focus that we have internally as we are looking to really bump up that gross margin to the low-40s next year with a long-term gross margin target of about 45% beyond 2023. There are a number of reasons why the gross margin has been stable around the 40% to 39% level. The key driver has been the pandemic, primarily because of supply shortages, which leads to a high-cost level from operational support, but also because of the higher cost of components. In addition, we also had the transition to a fabless model that we started a couple of quarters ago. From my past experience, such transitions take at least about a year to complete and fully realize the benefits. Once those supply chain issues are resolved and once the transition to a fabless model is completed, the team will be completely focused on leveraging the fabless model to improve our efficiencies and really to reduce our operational costs. What I do see right now is more of a gradual increase starting in the first half of next year as we aim for our internal goal of about 45% in the long term.

Thank you. That was really helpful. And then kind of a follow-up to that, since you have been bringing the OpEx down a bit throughout the quarter, I was wondering how to think about that going forward and if you could reach 2020 levels.

So, on that piece of it, I think the goal here is really to continue funding our R&D development. This is key to our innovation and a key to our long-term success. Our SG&A expenses, on the other hand, as the revenue continues to grow, we expect to see the percentage of SG&A expenses reduced. All in all, the key focus is really on the adjusted EBITDA margin itself and building that up, which will also result in free cash flow generation.

Okay. That is helpful. Thank you. I will get back in queue.

Thank you.

Our next question comes from Tim Savageaux with Northland Capital Markets. Please state your question.

Hi there. Sorry. Good afternoon. Couple of questions, I want to go back to consumer, and you kind of touched on this, but it sounds like with the design wins and maybe some of the fixed wireless access activity that you feel like you might be able to get beyond previous peaks in consumer maybe in the second half of the year. I just want to kind of bounce that off of you. And a separate question. You haven’t talked too much about AirgainConnect here on the call, either for the quarter or the outlook in ‘23. I wonder if we can get an update there or kind of what you are seeing, and it seems like your focus is shifting more to the aftermarket. Thanks.

So – hey Tim, how are you? This is Morad. So, in consumer, we really hope that you are right, and we expect it to be because what’s happening is that not only do we continue to see the refreshes in our traditional wireline business, but here comes this wave of fixed wireless access with the MNOs trying to compete for that piece of business. That provides us with a way that we can ride and then help to re-grow that business. The design wins are there. It’s just a matter of how the rollout is going to look like. On the operator side, we are seeing the supply getting better. There are 10 fabs coming online right now. TSMC is stating that they don’t have any problems with the roadmap. However, you read some literature and it may suggest there could still be some issues. Other than the macros and what the operators wind up doing and the timing of how they deploy that product, we feel pretty good about what’s going to happen in that business. And just to address your point about AirgainConnect, when we built that product, the initiative was to simplify how those products are built and deployed, simplify the installation by taking everything to the top of the car and also to increase performance. That product, the first AGC-HP, was designed specifically for AT&T’s FirstNet, and the market potential was limited by what we could do with AT&T. What we plan to do going forward is to build products that are a derivative of that SKU allowing us to win in markets that address the needs of other operators not only here in North America but also on the world stage. The positive we’ve seen from the deployments on AirgainConnect is that not only have we seen success with first responders, police, fire, and ambulance, but also with utilities, and that’s really exciting. As we look at what we do with the roadmap going forward, we are going to pay attention to what we do with the feature set, with the price to ensure that what we release ends up being something that provides a higher value proposition and expands the market for us.

Thank you.

Our next question comes from Michael Mani with B. Riley. Please state your question.

This is Michael Mani on for Craig Ellis. Thanks for allowing us to ask a few questions. So, to start on the Consumer segment, and nice to see the progress on the supply chain side, but my question is more on how you would characterize demand in the first half of next year. I was just wondering, as you talk to your service provider customers, are there any changes in tone and how they talk about demand or how they place – or in their order patterns as well? And I guess, how would you gauge the risk of a product launch being delayed further in mix? Thank you.

Hey Michael. Jacob here. I will take it, and either Michael or Morad can chime in. We do see the demand being there. As I alluded to earlier, they still haven’t fully deployed WiFi 6, which has really stood up and fully deployed back in 2021, but because of the pandemic and the supply shortage issue, I really believe that they really start to ramp up in 2022. We expect 2023 to be the year they fully ramp up. Already, they are deploying some of the WiFi 6E. The supply shortage issue is still going to be in play for the first half of the year and expect that to gradually subside. It’s still there for certain. We now know that the main chipset for WiFi chips is still in shortage, so we expect the second half to show substantial improvement.

Got it. Okay. Thank you. And turning to gross margin, I think you mentioned part of the improvement this past quarter was that you were able to raise auto margins above what you expected. Could you talk about, I guess, your initiatives to raise margins in that segment and perhaps also in the Enterprise segment as well? How much could that unlock? And yes, how much of that is a kind of tailwind to get us back into the low-40% range next year?

Hi Michael, this is Michael. So, from a gross margin standpoint, the upside to the guidance that we provided at 39.4% was primarily driven by the consumer revenue mix that we had. Consumer being a bit of a positive surprise to our revenue and gross margin, but at the same time, it’s also the impact of lower operational costs. Compared to sequential or year-over-year, when I mentioned about the aftermarket margin improvement, this is a direct result of one of the benefits of the closure of our Arizona site and moving into a fabless model. We are starting to see some of our aftermarket products margins really improve as a result. One of the items on the Enterprise segment or market itself, it’s more driven out of a diverse mix of different products and product lines. This is definitely a key focus area for us, especially with the growth in demand we are seeing to really improve our overall gross margin.

Okay. Thank you very much.

Thank you.

Thank you. And at this time, this concludes our question-and-answer session. If your question was not taken, you may contact Airgain’s Investor Relations at team at airg@gatewayir.com. I would now like to turn the call back over to Mr. Suen for his closing remarks.

Thank you for joining us on today’s call. We look forward to updating you on our next call later.

Thank you. Thank you for joining us today for Airgain’s third quarter 2022 earnings call. You may now disconnect.