Airgain, Inc. (NASDAQ:AIRG) Q2 2023 Earnings Call Transcript
Airgain, Inc. (NASDAQ:AIRG) Q2 2023 Earnings Call Transcript August 10, 2023
Operator: Good afternoon. Welcome to Airgain's Second Quarter 2023 earnings conference call. My name is Latanya, and I'll be your coordinator for today's call. Joining us today's call are Airgain's President and CEO, Jacob Suen; and CFO, Michael Elbaz. As a reminder, this conference being recorded and made available for replay via a link found in the Investor Relations section of Airgain's website at www.airgain.com. [Operator Instructions]. 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, August 10, 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. Please see today's earnings release for future 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?
Jacob Suen: Thank you, operator. Welcome, everyone, and thank you for joining us. For today's call, I'll first cover our operational highlights and achievements for Q2. Then I'll hand it over to Michael to walk you through our financial performance for the second quarter. Afterwards, I will provide an update on our strategic product and marketing initiatives for 2023 and beyond, before opening the call up for questions. I would like to start by briefly introducing who we are and what we do for those of you who may be new to Airgain in our industry. At Airgain, we simplified wireless connectivity for the enterprise, automotive and consumer markets. Our technology spends across the value chain from embedded components to integrated systems of our products for under three sub-brands including Airgain embedded, which represents our embedded antennas, embedded modems and IoT development kits.
Airgain Antenna Plus, which represents our fleet, IoT and networks antennas, and Airgain Integrated, which represents our growing stable of finished products including cellular-based asset trackers, vehicle networking devices and 5G connectivity products. As we evolve from being exclusively a components company to a systems company. We are creating unique solutions, designed to improve and build up on the 5G customer experience. Earlier this year, reintroducing our 5G fixed wireless access or FWA in 5G C-bands Smart Repeater solutions and are making significant progress toward the commercialization of these innovative products. Our goal is to begin shipping some of these products to partners and end customers in the first half of 2024. From a go-to-market perspective, we work with a global network of VSaaS system integrators, distributors and large customers to help solve critical connectivity issues, improved wireless performance and effectively shorten time to market for their products.
With Airgain’s growing portfolio of products, we are able to offer complete solutions to our channel partners and customers that help them get connected quickly. Now, for our performance. The second quarter sales came in at $15.8 million, which was near the lower end of our guidance range. Macroeconomic conditions have continued to create demand softness industry-wide, which when combined with inventory correction in our channel, drove a sequential decline in our Enterprise and Automotive markets. While we underperformed in these two markets, we did see an increase in our consumer market with the deployment of WiFi 6E in major cable operators, leading to a sequential growth in this category. That said, we do not expect this trend to continue as we project a sequential decrease in our consumer sales in the third quarter.
Furthermore, we expect that the product shipments of a large enterprise project that was initially scheduled for a third quarter to be delayed to the fourth quarter, contributing to our lower third quarter guidance. Despite current headwinds, we remain optimistic that our sales expansion strategies, combined with new product introductions in fleet and 5G connectivity, pave a path to growth in 2024 and beyond. Some of these expansion strategies include adding channels of distribution, expanding geographies and diversifying our customer base. We are already able to see tangible results from these strategies in key growth verticals such as rail, fleet and shipping and logistics. Our Enterprise market represents a mix of components in systems that include our embedded modems, asset trackers enterprise antenna design and custom products.
While we experienced demand softness and excessive channel inventories in the first half of the year 2023 with our embedded modems, our asset trackers in custom products continue to grow. In particular our asset trackers are gaining momentum in several vertical markets, including rail, shipping and logistics and equipment rentals. With the design win we announced in the first quarter for the rail industry, our shipments to the customer started to ramp up in Q2 and we expect to secure further wins in this market. Airgain is well positioned in its capacity to offer a complete end-to-end solution that includes cellular-based asset trackers, embedded modems and data management software to solve key customer problems. For the rail industry, Airgain offers the ability to customize a solution to track conditions such as location low status, door open, hand bridge pools, weight bearing status, rail cut impacts and several more.
These critical features provide increased recurring revenue for Airgain, which represents a meaningful portion of our asset tracker sales. Recurring revenue growth and contribution to the top line has been an emphasis for our team to increase customer retention and loyalty as well as strengthen our ability to maintain competitive advantage. With stable revenue streams in place we believe we can continue our strategic investments in new product innovations to drive long-term growth. Our custom products offering features joint engineering collaboration, with our customers to develop products for specific applications, while helping them reduce their time to market. This offering has been a bright spot for us. However, while we have seen momentum from this sector, we acknowledge that shipments can fluctuate from quarter-to-quarter based on the level of integration and customization.
For example, as mentioned earlier some product shipments scheduled to occur in the third quarter have now been delayed to the fourth quarter, due to shifting time lines often inherent in complex projects. In addition to video surveillance as-a-service or VSaaS, and EV charging we are also seeing growth in industrial equipment shipping and logistics and equipment rentals for our enterprise products. These segments are generally looking for a shorter time to market and easy path to connectivity and better performance in challenging environments. With our focus on simplifying wireless connectivity, we appeal to these markets with products that help eliminate design bottlenecks, remove the need for RF expertise, and provide rugged and reliable connectivity, complete with a long shelf life.
Our automotive market includes both our aftermarket and vehicle networking devices. We saw a sequential decline in this market in Q2 due to customers' excessive inventory and forecasting changes. We mentioned last quarter a threefold channel strategy in automotive that includes, adding differentiation and flexibility to our product designs, implementing changes to the supply chain that make us more responsive to demand, and expanding our channels of distribution globally. We're executing on these strategies and believe this will lead to sequential growth in Q3 and beyond. In May, we announced the migration of our fleet and IoT antennas to the Easy Connect platform, which simplifies the ordering and installations of our antennas. At the same time, we also announced another addition to our line of 5G mobile antennas, the MULTIMAX 5G.
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Earlier this week, we announced two new products that we believe are highly differentiated. Our RECON13 is designed for 5G connectivity and includes as many as 13 antenna elements in one device, all in a stealth design that measures less than 2 inches in height. This solution is combined with a universal mounting form that allows it to adapt to any low service. We believe, this design will be a cutting-edge solution for both mobile and fixed applications. We also announced the ULTRAMAX class 5G, our first 5G-ready windshield or dashboard made antenna. Both products support our effort to build 5G-ready cell connectivity for the fleet in first responder markets. While EV Connect offers us flexibility in responding to general market demand, we have also implemented supply chain solutions to shorten lead times, a key differentiator in the aftermarket industry.
Lastly, we are also expanding into several international channels to broaden our geographical reach. We expect that new product introductions combined with new channels and new customers will lead us to greater growth prospects starting in Q3. Finally, our consumer market is represented by our custom embedded antenna design for CPE devices sold primarily to major service providers. We saw an increase in Q2 in this market, primarily as a result of the deployment of WiFi 6E devices by major US cable operators. However, we saw two trends that have negatively impacted this market. First, core cutting and the availability of FWA has caused subscriber loss at major broadband and cable operators. This has created demand softness for the cable industry, along with excessive inventory in the channel, in the first half of the year.
Second, cable operators are transitioning to offer WiFi seven technology as a key driver for growth in 2024, while this transition will create new opportunities for Airgain to deliver best-in-class antenna solutions. Operators are cautiously approaching the WiFi 6E deployment on a needed basis to ensure that they don't accumulate excessive inventory during this technology transition. While we continue to work with major broadband and cable operators to produce CPE devices with the highest level of performance, we are also securing design wins with mobile network operators or MNOs on their 5G wireless CPE devices for the broadband audience. We are currently working on an indoor WA router opportunity with a Tier 1 US MNO. While we navigate a challenging demand environment this year, we believe our strategic focus on customer base expansion combined with WiFi 7 investment will drive growth next year.
While 2023 has presented some challenges thus far. We believe we have the right product road maps and expansion strategies to drive future growth in Q4 and into 2024. While we are expanding our customer base, channels of distribution and geographies, we’re actively investing in three major product initiatives. We believe that this will lay the foundation of our revenue growth as market conditions improve. With that, I will turn the call over to Michael. Michael?
Michael Elbaz: 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 are found in our earnings release. Now, let's turn to this quarter's results. As Jacob mentioned, Q2 sales were $15.8 million at the low end of our guidance range of $15.7 million to $17.3 million. Our sales declined 4% sequentially and 18% year-over-year, primarily due to inventory corrections with our channel and direct customers. Consumer sales were $6.2 million, reflecting a sequential increase of $1.1 million on a strong uptick of Wi-Fi 6E embedded antenna shipments. Enterprise sales were $7.3 million, which decreased sequentially by $1.1 million.
The decline was driven by lower embedded modem sales due to channel inventory corrections, partially offset by higher asset tracker sales on new customer wins. Automotive sales were $2.3 million, reflecting a sequential decrease of $0.6 million, primarily due to direct customer inventory corrections. Q2 gross margin was 40.4% at the high end of our guidance range of 37.5% to 40.5%. Q2 gross margin was 130 basis points higher sequentially, driven by favorable consumer revenue mix along with lower indirect cost of sales, resulting from operational efficiencies. We are in the process of increasing the number of contract manufacturers from six to 10 in order to ensure adequate second-source supply of our products and to reduce product cost. As mentioned in prior earnings calls, leveraging our CM model is a primary driver of our gross margin improvement initiative.
We completed the first phase of this leverage with our automotive antennas, which we expect will positively impact our gross margin by 100 basis points in Q4. Q2 operating expenses totaled $6.5 million, in line with our guidance of approximately $6.4 million. Operating expenses decreased sequentially by $750,000, driven by lower employee expenses and lower marketing and professional fees. We are continuously driving operational efficiencies to reduce our expenses and make room for the investments needed for our three major initiatives. As a result, our Q2 adjusted EBITDA was positive $37,000 and non-GAAP EPS was negative $0.01. Our cash balance as of June 30th was $9.3 million, $0.5 million more sequentially. Our accounts receivables balance was $8.6 million, $0.5 million higher sequentially due to revenue linearity in the quarter.
Net inventory was $4.8 million or $3 million higher sequentially. Now, moving to, our outlook for the third quarter ending September 30th, 2023. We project sales to be in the range of $13.25 million and $14.75 million or $40 million at the midpoint of the range. We expect non-GAAP gross margin to be in the third quarter to be in the range of 38.5% to 41.5% or 40% at the midpoint of the range. We project our operating expenses to be approximately $5.8 million. Non-GAAP EPS is expected to be negative $0.02, at the midpoint of our guidance. Adjusted EBITDA is expected to be breakeven at the midpoint of our guidance. Despite the revenue challenges we faced in the third quarter we remain committed to achieving a breakeven adjusted EBITDA model, while we continue to execute on our strategic road map.
Now, I would like to turn the call back to over to Jacob, who will walk us through our strategic product initiatives. Jacob?
Jacob Suen: Thanks Michael. While Q1 saw several exciting product announcements. Q2 was the quarter of executing on those growth initiatives. We have made significant progress, since discussing the impact of these new technology initiatives on the market and our business trajectory at our Analyst and Investor Day in March. We believe that these initiatives will carry our growth into 2024 and beyond. While 5G delivers on its promises of lower latency, increased capacity and higher throughput it comes at the expense of a shorter signaled range from the base station. Consequently, this creates coverage gaps for 5G customers. We believe Airgain is well positioned to solve these major coverage efficiencies, economically benefiting both the MNOs and the end customers.
Improving 5G connectivity and customer experience, begins in the home or office with Fixed Wireless Access. These devices allow wireless technology to compete with cable and wire solutions, for the broadband connection. In January of 2023, we announced our reference design for an outdoor directional FWA device with an easy installation hardware kit and its unique software tool that helps to solve the trade-off between performance and ease of installation. We are excited to announce that we have moved this product from workers design stage into production under the long-term FWA brand and have shipped samples to major customers for trial, testing and evaluation. This product not only appeals to the MNOs, but is also receiving strong interest from our system integrated partners, for enterprise applications such as Broadband failover and remote access.
Early market feedback has been positive. And we expect to begin generating revenue from this product in the first half of 2024. With the reduced transmission range of 5G signals, the cost of ownership for network operators increases significantly due to the infrastructure and equipment required to expand high quality coverage. An active smart repeater can overcome this challenge by facilitating efficient use of existing infrastructure to ensure a stable and high-quality signal. Airgain is at the forefront of developing advanced smart relators, which aim to reduce the cost of wireless infrastructure for operators. The lighthouse smart repeaters are a major initiative announced in Q1 and feature single pole installation, carrier aggregation, active eco cancellation, support for multi upgrader frequency bands and active theme steering capability.
We have completed lab tests and are conducting multiple trials on Tier 1 upgrader networks to further optimize the performance of our products. We expect these products to begin generating revenue by the end of 2024. The third major initiative we are working on at Airgain involves delivering a better 5G signal for vehicles. We have been in the fleet and vehicle networking industry for many years. With the deployment of 5G, the use cases for higher data rate applications have multiplied substantially. This is especially important for several segments including public safety, transportation, agriculture, utilities and many more. We will provide additional information for this opportunity in the near future. While we continue to grow our core product lines and generate organic growth, we believe our focus on improving the 5G customer experience through these major initiatives can fundamentally offer cutting-edge solutions for the markets in which we compete, as well as create a strong growth trajectory for Airgain.
In closing, while we are seeing short-term headwinds due to macroeconomic conditions, the major initiatives we have set into motion a nearing duration. We are investing in three major product initiatives, which represent multibillion-dollar serviceable available market, while diversifying our customer base, expanding our channels of distribution and entering new geographies, we are also making these investments while keeping our focus on positive EBITDA generation. We are pleased that we have made significant advancements in our multi-step go-to-market development process for our three major initiatives. Our fixed wireless access offering for both consumer and enterprise environment has thus far completed lab and field testing and is now in customer trials with several domestic and international prospects.
The projected timetable for this device to launch remains consistent in the first half of 2024. Our next-generation vehicle networking platform is following a similar trajectory in terms of both partner and in customer demand. During this process, we have considered lessons from our previous offerings in this space, in collected amounts of feedback from customers throughout the value chain. We look forward to updating you further, as we get closer to market. Finally, our lighthouse smart network repeater platform is also progressing steadily through trials and is now receiving direct interest, from MNOs and installers both domestically and internationally. This is representative of our late demand goals and a testament to the quality of our offering.
As our initiatives have express intent to solve many of the common problems, MNOs base in the deployment of 5G networks. I am proud of our team members, for their passion and commitment throughout the company's transformation. And I feel that, the solid work our team has put forth is nearing materialization, and we should start to see its results soon. Transformation in technology road maps, operations and sales is an ongoing process for every successful company, and we feel that we have been effective in executing on that strategy, that we have laid out over a couple of years ago. We are very confident in the substantial strides our team has made, thus far on the development of our cutting-edge solutions, with a dedicated commitment to simplifying wireless connectivity, across a broad spectrum for our customers.
We have set a course to deliver unparalleled products that cater to the evolving needs of our customers and partners. By driving innovation in the connectivity industry, we look to continue establishing ourselves, not only as a leader in the market, but as a company that shapes the industry in the process. We believe the future is bright for Airgain. And with that, we are ready to open the call for your questions. Operator, please provide the appropriate instructions.
Operator:
Jacob Suen: Thank you for joining us on today's call. We look forward to updating you on our next call. Operator?
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Operator: Thank you. If your questions were not taken you may contact Airgain's Investor Relations team at airg@gateway-grp.com. Thank you for joining us on today's call. We look forward to updating you on our next call. Thank you.
