Airgain, Inc. (NASDAQ:AIRG ) Q2 2022 Earnings Conference Call August 11, 2022 5:00 PM ET

Jacob Suen – Chief Executive Officer

Morad Sbahi – Senior Vice President of Product and Marketing

Victor Blair – Vice President of Operations

Michael Mani – B. Riley Securities

Good afternoon. Welcome to Airgain’s Second Quarter 2022 Earnings Conference Call. My name is Karen, and I will be the coordinator for today’s call. Joining us for today’s call are Airgain’s CEO, Jacob Suen; Senior Vice President of Product and Marketing, Morad Sbahi; and Vice President of Operations, Victor Blair.

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 up for questions from Airgain’s publishing 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, August 11, 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 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. Like last quarter, I will start with high level commentary about our Q2 operational highlights in financial performance. Then our Senior Vice President of Product and Marketing, Morad Sbahi will provide an update on our strategic product and marketing initiatives. Afterwards, our VP of Operations, Victor Blair will discuss our key operational initiatives that are enhancing efficiencies and driving scale.

As we indicated during our guidance, we had a record second quarter that built upon the strong momentum we established in Q1 and deliver record quarterly sales of $19.3 million, which was up 10% sequentially and 11% year-over-year. This strong growth pattern was driven by our focus efforts to expand our enterprise and automotive segments.

In addition to strong top line growth, we deliver our first quarter of adjusted EBITDA profitability in over a year. Taking a step back, especially for those of you who may be new to Airgain in our industry, I would like to provide a brief overview of who we are and what we do. Airgain is a leading provider of wireless connectivity solutions, creating and delivering products that include embedded components, external antennas, and integrated systems across the globe.

We operate in three growth markets, enterprise, automotive and consumer, which collectively offer Airgain a more than $15 billion total addressable market. Our enterprise market is characterized by solutions for the industrial Internet of Things or in order to, smart CD and smart utility connectivity and reliable wireless connectivity in dense environments, such as buildings, stadiums, and transportation terminals.

Our automotive market includes products that are deployed in a wide range of vehicles to solve critical connectivity needs in the fleet, public safety and automotive aftermarket segments. In our consumer market, which is the original pillar of our model encompasses a large growing set of consumers using wireless enabled devices, including wireless gateways, smart home devices, and more.

While utilizing technologies such as Wi-Fi, LTE, 5G, and LPWAN. Today, we see the largest investors growing opportunities in our automotive and enterprise markets, particularly on the IoT front with NimbeLink products now fully integrated into our portfolio. Over the last year, we have made significant progress integrating our products in organizing our portfolio. Through this process, we discover that a significant differentiator or Airgain is the diversity of products we offer across the value chain.

Whether you are building a connected product and need embedded components that can help you get to market quickly only to solve a critical connectivity issue in your operating environment. Because of this value proposition, we have organized our products into three distinct sub-brands, Airgain Embedded, Airgain Integrated and Airgain Antenna Plus.

Later in the call, Morad will dive deeper into this sub brands and provide color on their makeup. With an extensive rate of products, invest in markets, partnerships have never been more important to our go-to-market strategy. We continue to see demand for our external fleet antenna business, especially in public safety, where we have secure several wins for our products to be deployed with first responders.

Alongside those efforts, we have built partnerships with software and hardware providers to amplify our sales efforts on the B2B manufacturing front, specifically targeting fleet management, asset tracking, public safety and transportation markets. Our core business with service providers remains strong. As an example, where the incumbent in the next generation Wi-Fi 6E opportunity that we started working on in the second quarter with a North American Tier 1 service provider that is expected to launch in Q2 2023.

In addition, our new solution selling approach has helped us secure wins that include more than one of our product lines, significantly increasing the size of our customers engagements. During Q2, we secure a win with a medical device manufacturer that includes one of our NimbleLink embedded modems and three of our embedded antennas in each unit.

In addition, an energy company selected Airgain to connect their mobile fueling units, each one with a NimbleLink embedded modem and an external M2MAX Antenna. These design wins showcase our ability to leverage our comprehensive portfolio to meet the complete connectivity needs of these customers and help brand their products to market quickly with minimal design resources.

In addition to our embedded component wins, we also continue to grow our integrated product lines. During Q2, we expanded our free connectivity opportunity into the financial services market with a significant order to a key service provider in that industry. We’re also seeing significant wins through our asset tracking partners in the construction, rental, packaging and micro mobility markets.

The growing partnerships and customer wins not only do we reflect the increasing demand for Airgain’s innovative technology, but also our world class global team who is committed to realizing our company’s vision and scaling our business. In terms of our CFO search, we have narrowed the search down to a short list of financial leaders that have the credentials to build on our solid foundation and take Airgain to the next level of growth and profitability. We expect to have our new CFO in place by the fourth quarter. I would like to thank our finance and accounting team who has step up and done a tremendous job in the interim.

With that in mind, I’ll discuss our financial results for the second quarter ended June 30, 2022. Sales increased 10% sequentially to a record $19.3 million, up from $17.5 million in Q1 of 2022. Beginning with our consumer sales, Q2 finished at $6 million, $100,000 below Q1 2022, primarily due to supply chain constraints for our customers.

Enterprise sales increased from $8.6 million in Q1 to $9.1 million in Q2. The growth in enterprise sales was mainly due to growth in industrial IoT and enterprise Wi-Fi products. Automotive sales increased from $2.8 million in Q1 to $4.2 million in Q2, primarily due to higher revenue from our AirgainConnect and Antenna Plus products.

Our non-GAAP gross margin set solidly at 39.4%. Margins were 110 bps below mid-point guidance, mainly due to unfavorable product mix in higher than expected material costs. Non-GAAP operating expense of $7.2 million in improvement over our guidance range. Non-GAAP net income in Q2 was $358,000 and our non-GAAP earnings per diluted share was $0.03. Both represent substantial improvements from the prior quarter.

Adjusted EBITDA was $0.5 million in Q2 and improvement from our guidance range and a great improvement from negative $0.3 million in Q1 2022. Finally, our balance sheet remain strong with cash and cash equivalents at quarter end of $9.4 million after paying the NimbleLink earn out in April.

Now, I would like to provide a preliminary outlook for the third quarter ending September 30, 2022. Due to the ongoing supply chain issues, affecting companies globally, both Airgain and our customers are experiencing longer lead times for contract fulfillments of certain products.

We are taking proactive steps to mitigate some of these issues, such as procuring long lead time items in advance of normal orders to reduce the overall deployment time for our systems and components. In Q3, we expect sales to be in the range of $18 million and $19.5 million or $18.75 million at the midpoint of the range. We’re seeing orders ship quarter-to-date in addition to our current backlog that already exceed the midpoint of our guidance. We expect non-GAAP gross margin for the third quarter to be in the range of 36.5% to 39.5%.

We expect Q3 non-GAAP operating expense will be about $7.1 million plus or minus $200,000. Non-GAAP net income per share for Q3 is expected to break even at the midpoint. Adjusted EBITDA is expected to be $226,000 at the midpoint.

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

Thanks, Jacob. In our previous call, we introduced a marketing framework that helps communicate the progress we are making in penetrating our core growth markets. We internally call this marketing framework, the 3Es, which are evolution, ecosystem and expansion. Addressing our continued evolution, I am encouraged to report that our efforts with the major utility company I mentioned during the last call, deploying AirgainConnect and adjacent products at a large scale continues the progress.

Airgain is also evolving its depth of capabilities to better enable enterprises to deploy powerful, reliable and secure private wireless networks that require higher throughput and wider coverage along that line. This quarter, we introduced the next generation of CBRS and CBand antennas for private wireless network applications, featuring technology that provides high performance connectivity for point to point, as well as point to multipoint applications.

We also continue to build our ecosystem or our partnerships. We separate our partnerships into two categories, namely partners that we sell to and partners that we sell with. The sell to partners are those, we sell our products and solutions directly to. Our sell with partnerships represent joint selling opportunities where Airgain goes to market alongside the partner.

We frequently receive requests for these arrangements for our asset trackers, after market antennas and with our AirgainConnect products. In addition, there is a growing opportunity for these types of partnerships with our embedded products. Expansion represents our development of future technology. In our last call, we talked about the work we are doing with Mobix Labs that will help grow our leadership in 5G.

We will also shortly be announcing another partnership that was entered into in Q2 that will continue to help us futureproof 5G networks. Our advance development team is hard at work producing new products to target entirely and tap segments for us, all with the express goal of establishing Airgain as a leader in 5G. Our company was founded 20 years ago upon the introduction of the first commercially available smart antennas for wireless LAN. We hope to introduce more first in the future, stay tuned.

Jacob also mentioned earlier our three new sub-brands, Airgain Embedded, Airgain Integrated, and Airgain Antenna Plus. These brands help to organize our product portfolio by audience focusing our marketing and sales efforts on a core value proposition for each.

The Airgain Embedded brand includes our internal antenna systems, NimbeLink embedded modems and development kits. It is focused on design teams, consistent of engineers, product managers, and system architects that are trying to bring connected products to market. This brand is meant to provide this segment with a comprehensive portfolio for wireless development that speeds time to market requires minimal in-house RF engineering and provides a future proof pathway to potential product versions.

Airgain Integrated combines our expertise in cellular and signal enhancement to bring fully integrated products to market that improve connectivity in the operating environment for our end user markets. These markets include public safety, fleets, logistics and transportation, agriculture, network operators and more. Airgain Integrated is comprised of our AirgainConnect platform as a trackers, device management software and more.

Finally Airgain Antenna Plus represents our external signal enhancement product. It is divided into our fleet antennas, which appeal to our end user markets and IoT antennas, which appeal to design teams. In the case of our IoT antennas, a design engineer often must decide whether to design in internal or external antenna and Airgain is able to offer multiple options. By segmenting our product offering by audience, we have also been able to successfully launch targeted demand generation activities that have begun to generate significant results, filling the pipeline for current and future sales.

Looking ahead, we have aligned our product suite with the expanding demand from our markets and customers. We continue to evolve our products to meet changing market needs and are improving our market delivery mechanisms. We also see continued interest in our products from software, hardware and carrier partners because of their ease of integration and look to continue to build our leadership taken advantage of the new wave of 5G product deployments.

Now I’d like to turn the call over to Victor to give operational update. Vic?

Thanks, Morad. Last quarter, we announced a successful migration to a 100% fabulous model, which involved closing our Arizona manufacturing facility. That decision saw success in short order as we were able to maintain a flexible production process and continue the migration of finished goods assembly to North America, thereby mitigating the risk that other companies are experiencing in China on supply chain related matters.

Despite these moves, there are significant headwinds looming that will likely prolong through the end of the year. The continued impact of the pandemic is felt in the periodic shutdown of factories, especially in the Asia Pacific region. This has created additional supply chain shortages and purchase price variance that are affecting some of our customers programs.

In addition, rising interest rates, inflation and associated effects have combined to challenge Airgain’s opportunities to grow margins and remove risk for customer supply chains. Despite these external headwinds, Airgain delivered record sales in solid gross margins. We also feel that we can mitigate some of these effects in the future through operational efficiencies, including redundancy in our contract manufacturers, dual designs, and our ability to carry strategic inventory. The CM transition and other steps we took in the previous quarters have successfully given Airgain greater scalability and have already shown their value in mitigating risks surrounding global manufacturing and shipping halts. We will remain resilient and flexible in order to provide end customers with innovative and reliable products.

Now I’ll hand it back over to Jacob to close out our remarks. Jacob?

Thanks, Vic. As you can see from our growth and profitability metrics, we’re executing on our strategy to penetrate our growth markets and capture a meaningful share in the wireless connectivity market. Our record quarterly top line revenue and positive adjusted EBITDA reflect our execution of strategy and commitment to delivering profitable growth.

Looking ahead, we’re focus on going within our core markets, as well as expanding our leadership within IoT and 5G. We plan to expand our existing product lines to better serve the needs of our markets and hopefully introducing a few firsts here in the near future. Our success on these key initiatives will position us for accelerated profitable growth in consistent cash generation.

In parallel, Airgain will continue to look at strategic inorganic growth opportunities that align with our overall market capture plan to enhance our product portfolio or customer base within our targeted market. While being mindful of risks associated with various macroeconomic factors, we expect growth where we accelerate in Q4 of 2022. Our outlook for growth is supported by the strong tailwinds in our end markets, our growing backlog and our confidence in our team’s ability to capitalize on the demand for Airgain’s advanced wireless technologies.

And with that, we’re ready to open the call for your questions. Operator, please provide the appropriate instructions.

Thank you. The floor is now open for questions. [Operator Instructions] We’ll take our first question for Michael Mani with B. Riley Securities. Please go ahead, sir.

Hi, this is Michael Mani on for Craig Ellis. Thanks for letting me ask a couple of questions. My first question is on gross margins, so I know we’re looking back to get into the low 40% range again in – you guys in this call and in the past have talked about some of the initiatives you have to get back to that range. Could you just talk about how you see your timing to get back to the low 40% levels? And also if you could just maybe quantify what the headwinds are in terms of size and just how do we improve on those initiatives? Just everything from COGS headwinds to structurally improving margins and maybe the auto and enterprise segments of your business as well. Thank you.

This is Victor Blair. Thank you for your question. First of all let me address the effort that we have and directing our gross margins towards in improvement. We experience some unfavorable product mix in Q2 and we incurred some onetime charges and we’re repositioning our inventory in Q3, which will help eliminate and give us a much more positive trajectory in Q4 for a gross margin improvement. The headwinds that we see are certainly everything that everyone is experiencing in macro economic climate right now, we’ve had increases in cost of service, certainly longer than normal durations for deliveries. We’ve seen the impacts very present in the supply chain channels specifically in the Asia region. And we are taking proactive measures to position inventory on our longer lead time items to mitigate against those global supply chain issues right now.

Got it. That makes sense. Thank you. That’s helpful. I guess, my next question is on consumer. So I know we’re also in that regard also targeting to get back to maybe $9 million sales per quarter levels. I guess, how – could you characterize the size of the supply headwind to the consumer segment in terms of lost demand, if you can, and also how much you think we – of that demand, do we recover going into 3Q and 4Q of this year. Thank you.

Good talking to you, Michael. It’s Jacob here. So I’ll go ahead and pick that questions and having that or more to chime in as needed. So on the consumer side, as I indicated, previously that really we seeing a recovering happening, although it’s been steady instead of improve dramatically like we were hoping for. And the main reason, it’s really due to the supply show this constraint that they alluded to. The business is started demand it’s definitely there. In fact, with this many service providers are already upgrading their network to support the Wi-Fi 6E, and not really position Airgain really well for the near future.

I indicated that we – in Q2, this is another major service provider in North America Tier 1 that’s already starting the design and expect that will be shipping in Q2 of next year. So all in all, the demand, it’s really promising. So the issue really we are dealing with here is regarding the supply shortage. And as Vic mentioned, we still seeing the impact of the pandemic. I think that shutdown is still happening, but we do expect that to really improve in the latter part of this year and definitely getting a lot better next year.

Great. Thank you, Jacob. If I could just squeeze a follow-up about the about the auto segment. So it’s nice to see the upside this quarter. And I know a significant contribution to that was AirgainConnect. If you can, would you be able to breakout how much the contribution from AirgainConnect was this quarter? And in addition to maybe characterizing where that upside come from, I’m guessing some of it was from that utility – big utility win back in April, but any other notable wins or trends there?

Yes. Great questions, Michael. So we don’t really get breakdown the details regarding a particular market segment, but we did mention in the earnings call that earlier regarding that the contribution to the uptake in automotive, but mainly contributing to AirgainConnect, as well as some of our Antenna Plus improved selves. We do see that trend to continue, hopefully, next quarter and beyond.

Great. Thank you very much.

[Operator Instructions] We’ll take our next question from Alex Vecchi with William Blair. Please go ahead.

Hi, thank you for taking my question. This is Sabrina on for Alex. You guys have done a really good job managing your OpEx close to the levels of first quarter last year. My question is kind of how to think about OpEx going forward and the growth of that throughout 2023.

Yes. I can speak to it a little bit Sabrina and then I’ll have Vic chime in as necessary. So from an OpEx perspective, we really make it certain effort across the whole entire organization. And I think that [indiscernible] we actually done a really good job in Q2, and we’re also expecting that train to continue in Q3 and beyond.

So the goal is to keep our OpEx flat or slightly higher while we try to go our top line. And certainly, we are becoming much more efficient as an example, when we transition our own factory into a same model that really help reducing our overall operating expense. But we are still making advance development efforts as needed. We’re still investing for the future, but we’re being really disciplined about what we’re going to spend and how we’re going to spend. Hope that I answer your questions, Sabrina.

[Operator Instructions] At this time, this concludes our question-and-answer session. If your question was not taken, you may contact Airgain’s Investor Relations airg@gatewayir.com. I’d 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. Operator?

Thank you for joining us for today’s Airgain’s second quarter 2022 earnings call. You may now disconnect and have a great day.