Airgain, Inc. (NASDAQ:AIRG) Q4 2022 Earnings Call Transcript

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Airgain, Inc. (NASDAQ:AIRG) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good afternoon. Welcome to Airgain's Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Shamaley, and I will be your coordinator for today's call. Joining us for today's call 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 Following management's prepared remarks, the call will be open 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, March 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. 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?

Jacob Suen: Thank you, operator. Welcome, everyone, and thank you for joining us today. For today's call, I will first cover our operational highlights and achievements for Q4 and 2022. Then I will hand it over to Michael to walk you through our financial performance for the fourth quarter and full year. Afterwards, I will provide an update on our strategic product and marketing initiatives and then share our 2023 outlook before opening the call for questions. As you saw from our earnings release, the fourth quarter was another record sales quarter at $19.9 million, up 4% sequentially and 41% year-over-year, bringing our fiscal year sales to $75.9 million. This annual sales milestone reflects an 18% year-over-year increase driven by solid contribution from our enterprise market, which accounted for $10 million in the quarter.

Our strong results in the enterprise vertical was driven by higher WiFi access point and industrial IoT sales, both vectors that we expect to continue through 2023. Overall, our financial performance in 2022 and solid balance sheet coupled with our expanding product offerings will enable us to successfully mitigate the near-term headwinds we are experiencing in our current quarter, while positioning our company for even greater success in 2023. A key financial highlight for the fourth quarter was the record sales contribution from the enterprise market. This has come as we capitalize on our expanding backlog, video surveillance as a service offering and saw growth from the connected EV charging market. With market forces driving adoption in these key industries, Airgain has adeptly capitalized by offering solutions and expertise to meet the strong demand to bring products to market quickly.

In the quarter, we secured several opportunities in both new and existing markets, further supporting our strategic move into IoT. Now that we have reorganized our sales team around verticals instead of product lines, our teams are gaining traction in cross-selling and up selling new and existing customers. In addition, we recently partnered with one of the leading European IoT network providers to connect our asset tracking devices for a best-in-class solution. This allows Airgain to bundle connectivity with our asset tracking customers across Europe, the Middle East and Africa as well as within the U.S. This strategic partnership gives Airgain added global reach and capabilities for future IoT projects globally. On the automotive front, our focus continues to be on the aftermarket and first responder segments.

Though we saw significant interest in improved coverage within the first responder market, the adoption rate of our HPUE product was slower than anticipated due to the limitations of the total offering. With that, we're transitioning the AirgainConnect platform to the next generation product, taking key learnings from the previous product. We are working with the customers on our latest vehicle networking trials and look forward to providing superior connectivity through a broadening set of customers. We find the demand for improved fleet connectivity to be stronger than ever, influencing the speed of our transition. Our consumer vertical experienced a slight step back quarter-over-quarter in Q4, a trend that we expect to continue in Q1 due to a combination of seasonality and demand softness from supply shortage and technology transitions.

Seasonality is a historical trend we have seen and communicated in the past and is typically made up for in the latter quarters of the year. However, supply chain issues have caused many of our customers to delay development in order to transition directly from WiFi 6 to WiFi 7. Though softness in market wide chipsets and excessive inventory played a role in Q4, on a year-over-year basis, we reported a 160% increase from the $2.5 million in 2021 to the $6.5 million in 2022. Recently, we announced that Airgain's embedded antennas was selected to power the WiFi 6 based VR Air Bridge by D-Link Corporation, which allows PC gamers to use their VR headset without the hassle of a cable or WiFi router. Airgain's custom design, testing and optimization services, simplify the delivery of enhanced signal in challenging environments, as we showcase our WiFi 6 capabilities in a data rich setting like gaming.

Continuing with consumer, our increased focus on the development of new products and solutions over the last few years is beginning to bear fruit. We have built relationships over the years with service providers that now have even greater reason to turn to Airgain for solutions to their needs, exciting developments in 5G connectivity of open the door for more solutions based offerings and we have commenced trials of major U.S. operator networks. In a sense, our step into new markets is usher in by established long term relationships. Our commitment to being a systems company in our emerging leadership in 5G has opened market avenues in high growth verticals. With the recent introduction of our Lighthouse smart repeaters. We are streamlining our end-to-end 5G development that includes fixed wireless access, repeaters and enterprise software management solutions.

This transition from exclusively component design to full systems targeted service providers, it increases our serviceable, available market or SAM by $7.2 billion. As we mentioned last quarter, we have identified three key differentiators Airgain has in relation to the market and our competition. First, our core competency has always been simplifying wireless connectivity. Second, we provide a breadth of product line that spans across the entire value chain, whether a customer is trying to solve a connectivity issue in a product design or in an upgrading environment. The third is Airgain's focus on high growth technologies, particularly in reference to our RF expertise. These three differentiators continue to the shape, our approach to addressing the market and developing solutions that meet our customers' needs.

Moving forward, we are laser focused on executing the roadmap we have put into motion and I look forward to providing updates on our programs in future quarters. With that, I'll turn the call over to Michael. Michael?

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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. Airgain delivered a quarter of strong sales and cash flows. As Jacob mentioned, Q4 sales were $19.9 million within our guidance range of $19.7 million to $21.1 million. Our sales grew 4% sequentially, driven by a strong performance in our enterprise market. Enterprise sales were $10 million, which increased sequentially by $3.2 million on higher shipments of our industrial IoT and WiFi access products.

Automotive sales were $3.4 million reflecting a sequential decrease of $1.7 million. Consumer sales totaled $6.5 million reflecting a sequential decrease of $0.8 million. Q4 gross margin was 30.5% as we recorded a one-time $1.1 million inventory charge related to our AC HPUE product. This non-cash charge was primarily due to excess inventory as we transition our focus to our next generation of AirgainConnect product. In addition, we recognized higher than expected purchase price variances during the quarter. These purchase price variances or PPVs generated some prior core purchases of enterprise components at higher market costs due to supply chain shortages. As we had higher than expected enterprise product shipments, these TPVs negatively impacted our gross margin.

Net of the AC HPUE inventory charge and the PPV releases, our gross margin would have been 39% in line with the midpoint of our guidance range. Q4 operating expenses totaled $7.2 million lower than our guidance of $7.4 million, primarily due to tight expense management while we prioritize our focus on our engineering programs. As a result, our Q4 adjusted EBITDA was negative $0.9 million and non-GAAP EPS was negative $0.11. Excluding the AC HPUE inventory charge of $1.1 million adjusted EBITDA and non-GAAP EPS would have been positive. Our cash balance as of December 31 was $11.9 million, 30% higher sequentially driven by working capital improvements. Day sales outstanding or DSOs for the quarter was 40, the lowest DSO result we experienced in the past two years.

Net inventory was $4.2 million, $5.1 million lower sequentially. Net of the AC HPUE access to inventory charge our inventory balance declined across all of our product lines. On a fiscal year basis, our sales totaled $75.9 million, $11.6 million or 18% higher year-over-year. Enterprise sales increased $7.1 million, driven by higher sales of industrial IoT and WiFi access products. Automotive sales grew $5 million on higher aftermarket sales. Consumer sales declined by $0.5 million resulting from the global supply shortage we experienced last year. Fiscal year '22 gross margin was 37.6%, 180 basis points lower than the prior year driven by the AC HPUE inventory charge in Q2 of 2022 and an unfavorable sales mix on lower year-over-year consumer sales.

Fiscal year '22 operating expenses totaled $29.1 million, 5% higher year-over-year on conservative expense management. Adjusted EBITDA at $0.1 million was slightly positive for fiscal year '22 compared to a negative $2 million in the prior year. Now moving to our outlook for the first quarter ending March 31, 2023. We expect sales to be in the range of $15.7 million and $17.3 million or $16.5 million at the midpoint of the range. We expect gross margin for the first quarter to be in the range of 37.5% to 40.5%. We project our expenses to be approximately $7 million. Adjusted EBITDA is expected to be negative $0.4 million at the midpoint of our guidance range. Non-GAAP EPS is expected to be negative $0.06 at the midpoint of our guidance range.

Now, I would like to turn the call back over to Jacob, who will walk us through our product and marketing initiatives. Jacob?

Jacob Suen: Thanks, Michael. With our transition to solution based selling, we have got deeper into markets where we found a well suited niche such as electric vehicle or EV charging and video surveillance as a service or VSaaS. The common thread between these industries is that they build products that need to be brought to market quickly. On the EV front, there is a convergence of government investment, automakers increased emphasis on building EVs and consumers' increasing demand for buying these vehicles. The bottleneck in this case is the charging networks, which in turn creates a need for our products and services. Our NimbeLink embedded modems are used by several top manufacturers who require reliable connectivity for building, maintenance, data's, tracking, usage, monitoring and more.

Airgain provides an elegant solution that shortens time to market and eliminates the need for in-house RF expertise. On the VSaaS front, wherein customers similarly need to roll out new technology quickly to absorb return on investment, our design capabilities, support and future proof products have helped a multitude of customers in this market get connected quickly. Our partners in this space operate on subscription-based models, minimizing the focus on proprietary hardware design and manufacturing and opening the door for third-party collaboration during the design process. Most of the leaders in this space focus on differentiating through software and partner with Airgain on the hardware to deliver complete solutions to their customers.

This has resulted in a growing revenue stream for Airgain from this market. We also continue to find success in bundling our aftermarket antennas with fleet and first responder solutions. We work with key players in each industry to provide a reliable signal with which to operate their technology. With the longest limited warranty in the industry is five years, Airgain antennas are designed to enhance performance in challenging conditions. In addition, we feel strongly about the initiatives we have put in place thus far on the IoT front. We have finalized a master supply agreement with one of the largest railroad companies in the U.S. to provide a unique solution to their railcar tracking needs. We look forward to share more about this development at our Analyst Day next week.

In addition to growing our existing product lines, we have announced several new offerings that will help Airgain for its leadership in 5G connectivity. We recently announced the release of our fully integrated outdoor 5G fixed wireless access reference design. One that comes with an optimized antenna system, a 5G NR modem, an enterprise software management system and an easy installation kit. This latest reference design expands our position as a leader in fixed wireless access antenna design by simplifying the process of bringing a full FWA device to market. Overall, this helps Airgain tackle a greater share of the rapidly expanding 5G market on both the enterprise and private networks side of equation. In order for our customers, we effectively manage our growing portfolio of connected devices, we also announced a partnership with Errigal to develop a simplified end-to-end platform that provides wireless networking monitoring management tools for both network infrastructure and client devices, simplifying the deployment and management of our solutions.

The collaboration aims to combine Airgain's innovations in wireless systems and Errigal's expertise in software development and cloud management services to allow users to manage network worldwide via an easy-to-use digital interface. Finally, we recently announced a partnership to develop a reference design for a 64T64R antenna array to pair with the partner's massive MIMO radio units, typically used in 5G infrastructure such as base stations. Massive MIMO can offer a significant improvement over traditional MIMO systems, combined with Airgain's Lighthouse smartly heaters, outdoor FWA and enterprise network management, massive MIMO adds another product line to Airgain's growing portfolio of 5G connectivity systems for network operators intended to simplify 5G deployment, save operational costs and improve the customer experience.

In closing, while we are facing near-term headwinds, we are optimistic about our long-term prospects and remain focused on growth in our three markets. We expect strong growth from our enterprise market as we continue to expand our product portfolio and international footprint with our IoT solutions. We anticipate meaningful growth with our aftermarket automotive vertical upon the introductions of our latest offerings from the AirgainConnect product family, as well as expanded distribution for our aftermarket antennas. For our consumer vertical, we expect continued long-term consumer growth will be driven by our integrated product launches with the major global service providers' customers that we have built great partnerships with throughout the years.

Our road map is paved with ambitious product initiatives. Given the products we have and the breadth of systems-based solutions we have introduced, our SAM has more than doubled from $7.6 billion to $16.5 billion. These new products are designed to address coverage issues on the service provider side, reduce deployment costs and improve the customer experience. The changes to Airgain's executive team over the past year have set the company in a position to better support sustainable growth in the coming years. The leadership team and I feel strongly about the position the company is in with its steady sales base and financial discipline. I am confident, these initiatives will generate positive top and bottom line results, as well as better position Airgain for key customer wins in new markets.

I want to thank all of our team members for their dedication to our mission and ongoing commitment to our customers. Our Analyst Day next week will provide us with the opportunity to share the progress we have made in a greater fashion, showcase our latest innovative technology, and better introduce our management team to the market. And with that, we are ready to open the call for your questions. Operator, please provide the appropriate instructions.

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