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

Airgain, Inc. (NASDAQ:AIRG) Q4 2023 Earnings Call Transcript March 6, 2024

Airgain, Inc. misses on earnings expectations. Reported EPS is $-0.33 EPS, expectations were $-0.21. AIRG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to Airgain’s Fourth Quarter and Full Year 2023 Earnings Conference Call. My name is Diego, and I will be your operator for today’s call. Joining us today 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 investorrelations.airgain.com. Following management’s prepared remarks, the call will be opened for questions from Airgain’s covering analysts. I caution listeners that during this call Airgain’s management will be making forward-looking statements about future events as well as 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 06, 2024. 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 GAAP to non-GAAP results.

Now, I would like to turn the call over to Airgain’s CEO, Jacob Suen. Jacob?

Jacob Suen: Thank you, operator. Welcome, everyone, and thank you for joining us this afternoon. To begin today’s discussion, I will give some company background, followed by the review of our performance for the quarter and year, before handing the call over to our CFO, Michael Elbaz. He will review our financial results for the quarter and year in more depth as well as provide our outlook for Q1 2024. After that, I will share some closing remarks before opening the call for questions. All right. Let’s begin. For those of you who may be new to our story at Airgain, we simplified wireless connectivity across the value chain from embedded components to integrated systems. We have three core markets: enterprise, consumer and automotive.

Our enterprise market is comprised of integrated system solutions with a mix of components, specifically these market includes components such as our embedded cellular modems, custom products and antennas for access points and internal bank applications. These market also includes system solutions such as our Asset Trackers and our upcoming Lantern Fixed Wireless Access in Lighthouse Smart C-Band Repeater products. Our consumer market is comprised mostly of our embedded antenna business, a traditional area of expertise for Airgain. Our consumer products include custom embedded antenna design for customer premises equipment, or CPE. Devices, such as those that enable Wi-Fi 6E and will enable Wi-Fi 7. Lastly, our automotive market includes both our aftermarket antennas, as well as our vehicle networking devices, highlighted by our recently announced Airgain Connect Fleet Device.

We work with a global network of VARs, system integrators, distributors and large customers to help solve critical connectivity issues, improve wireless performance, and effectively shorten time to market for their products. We believe the global connectivity opportunity is large and durable, secular tailwinds, including increased connectivity technology adoption, and growing serviceable addressable markets across our product suite will continue to propel the industry and our company forward. At Airgain, we have a consistent track record of developing and offering optimized wireless solutions to our channel partners and customers that help them get connected quickly. As new technologies emerge, we are confident that we will continue to provide leading edge products to match.

Turning now to a review of our recent operational results in three core markets. As we look back on 2023, our team manage our business through several macroeconomic headwinds, including industry wide demand softness and inventory overhang and corrections, that cost order pushups, especially in the second half of the year. We generated $10.1 million in sales in the fourth quarter in line with the midpoint of our guidance range, and closed 2023 with $56 million in full year sales. However, our demand indicators, including our backlog and channel point of sales data show us that our markets are starting to recover. Although we will still face some of the persistent headwinds in the first half of the year, we believe that we are primed for a strong 2024 with gradual growth.

Moving to a closer look at our three core markets. 2023 was an important year of development in our enterprise business. Notably, we announced several new products, including our Lantern Fixed Wireless Access Solution, which is set to begin shipping in the first half of this year. Our Lighthouse Smart Repeater platform for which we expect first revenue shipments by early next year and expansion to our RECON13 5G antenna product line, specifically designed for IoT applications to improve our rugged outdoor 5G antenna offering, a bright spot as we began shipment in Q4 of 2023. And a new custom product offering developed to a joint engineering collaboration with a strategic customer for its transition to a new and sophisticated platform for its end markets.

In addition, we secured a multimillion dollar asset tracking opportunity with a railcar leader in an Asset Tracking Alliance with Sensing & Control. Still, we faced several challenges in the second half of 2023. Our decline was largely driven by persistent inventory overhang in the channel on our embedded modems, combined with declines within our custom products in enterprise access points. Even as our challenges persisted through the end of the year, we believe we’ll reach a trough in Q4 and that our enterprise market it sit for a gradual recovery in the first half of 2024. We see end customer demand growth in our embedded modems, as evidenced by growing point of sales at our distribution partners, as many of the inventory challenges subside, along with new sales opportunities.

Also, in addition to the renewed shipments of our custom products, and continue shipment ramp with our IoT antennas. Our Asset Tracker business continues to show growth potential with growing applications for pallet, packaging and logistics tracking, rolling in on a consistent basis. Revenue still tends to be uneven for our Asset Trackers. But our pipeline includes several opportunities in railways, warehousing, equipment management and rental, lot management, and co-chain, give us confidence that this is one of our existing product lines that presents a significant growth opportunity in the second half of 2024. Finally, we expect our Lantern Fixed Wireless Solution to start shipping in the first half of the year. In our consumer market, which again represents a vast audience utilizing wireless enabled devices.

A couple of key factors impacted our Q4 performance. First, as we have mentioned previously, service providers are on the cusp of a transition from Wi-Fi 6 and 6E to Wi-Fi 7. They are counting on Wi-Fi 7 to improve performance and user experience. And they are looking for ways to accelerate the Wi-Fi 7 adoption in transition. Anticipation of this shift has caused widespread caution among our OEM customers as they work to avoid excessive inventory. Still, while this has created near-term pressure on our consumer market growth, we are confident that this shift presents a compelling long-term opportunity for Airgain to deliver its cutting edge Wi-Fi 7 antenna technology, as evidenced by the fact that we secure Wi-Fi 7 design wins with two Tier 1 North American MSOs. Second, consumer demand continues to shift from wire to wireless providers for Internet service as consumers transition to FWA.

We recognized this trend last year and have focused our strategy on penetrating this growing market, which offers significant average selling price or ASP growth, since we now provide both the Wi-Fi as well as the cellular antenna design. Even as this shift applies some downward pressure on our existing MSO revenue, it creates a greater opportunity for us in the long run as it opens up a new and exciting market. As we announced last November, we have secured a design win with a Tier 1 mobile network operator or MNO for the antenna design in their indoor FWA router. We currently expect to begin shipments for this product in Q1. While we anticipate that these headwinds will continue in the first half, we remain committed to turning around our consumer market performance and are confident that the second half of 2024 is where we will see this improvement.

Lastly, our automotive market. As a reminder, our automotive market includes aftermarket products that are deployed in a wide range of vehicles mostly focused on public safety, transportation and municipalities. Inventory corrections from the customers have dampened the growth in this market. And we expect this trend to continue in the first half of 2024. Still, we saw several major accomplishments in 2023. We launched our Easy Connect antenna platform to simplify external antenna ordering and installation, further develop our 5G product line of antennas and launched Ultramax 5G high performance windshields. As we shift into 2024, we expect that several of these products will ramp up as inventory correction delays dissipate, especially in our 5G antenna product lines.

We’re seeing signs that our combined focus on new and differentiated products, supply chain flexibility, and global channel expansions continues to yield results. And we are optimistic that our efforts will turn this market in the second half as well. In January, we announced our next generations of vehicle gateway, Airgain Connect fleet or AC fleet, which is set to begin shipping in the second half of this year. Overall, we faced significant downward pressure in 2023 across our end markets, especially in the second half of the year. Several of the factors that caused these headwinds are yet to fully clear and will likely persist through the first and second quarters of this year. Still, while we remain responsive to the macroeconomic environment, our demand indicators have provided positive signs that our business is starting to turn.

We are cautiously optimistic that we have reached a trough and are confident that our investments in our business have positioned Airgain for growth, especially in the back half of the year. As we have communicated in past quarters, we are transitioning from being exclusively a component manufacturer to a wireless system solutions provider. As such, our growth strategy is focused on two key elements. First, continue execution of our established business. Our embedded antennas are deployed in various consumer applications, including access points, wireless gateways, fixed wireless access devices, Wi-Fi routers and extenders in smart home devices, just to name a few. We have developed strong relationships with our partners throughout the value chain, including chipset providers, carriers, original designing manufacturers or ODMs. In OEMs on the development side, and MNOs in service providers on the customer side.

Over the last few years, we have invested in next generation Wi-Fi 7 design in testing capabilities. And we have now reached the cost of the expected widespread transition from Wi-Fi 6E to Wi-Fi 7. As we strategize for 2024, we intend to maximize our opportunities with our consumer market already, in addition to the design win we secure with a Tier 1 MSO for our next generation Wi-Fi 7 products in November. Yesterday, we announced another design win with another Tier 1 MSO, both are expected to start shipping in the second half of 2024. Furthermore, the new line of products we launched in 2023 for our IoT custom products, automotive markets and industry IoT antennas are expected to ramp up throughout 2024. With our customer agreements in funnel, we are confident that we will return to growth in our established business this year.

Second, integrated wireless solutions expansion. While we continue to drive our existing components business forward, many of our forward looking indicators for 20 24 point to our wireless connectivity product lines as our solutions with the greatest upside. Specifically, our Asset Tracking and 5G Connectivity products offer the largest strategic wealth opportunities for our business. On the Asset Tracking side, our asset trackers are deployed across transportation, supply chain, co-chain and other specialized applications. Asset Trackers win a recurring revenue opportunity as well with multiple subscription-based components such as our NimbeLink cloud-based device enablement platform and our tracking information dashboards. We estimate an $800 million serviceable addressable market in 2024 alone, and believe that we are poised for success in the back half of the year.

Our 5G connectivity products include our Lantern FWA, built to improve connectivity at the home or in the office. Our Lighthouse Smart Repeater, designed to extend high-quality coverage for mobile network operators. In our recently announced next generation AC fleet 5G vehicle gateway, created to offer wide area cellular in local area Wi-Fi connectivity across public safety, transportation and public and private vehicle fleets. Two of these products are expected to ship this year. We recently completed our product certification for Lantern FWA and expect to ship to a funnel of customers in the next quarter. For AC fleet, we have several customers both in the U.S and abroad to have samples today and are confident that we can begin shipments in the second half.

These three product lines represent over $700 million of potential projected serviceable addressable market in 2024 and $1.7 billion of potential additional SAM in 2025, effectively doubling our foundational SAM of $1.8 billion for our existing product lines. Our connectivity product lines are the culmination of several years of investments in shifting Airgain from exclusively components to full systems. And we believe that we have significant upside in these areas. With that, I will turn the call over to Michael to discuss our fourth quarter and full year 2023 financial results and 2024 Q1 outlooks in greater detail. 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 can be found in our earnings release. Now, let’s turn to our fourth quarter results. As Jacob mentioned, Q4 sales were $10.1 million in line with a $10 million midpoint of our guidance range. Our fourth quarter sales declined 26% sequentially, and 49% year-over-year, primarily due to excess inventory across both our channel and direct customers, coupled with demand softness in our consumer market. Consumer sales were $3.2 million, reflecting a sequential decrease of $1.2 million due to continuing demand softness with cable operators.

Enterprise sales were $4.6 million, reflecting a sequential decrease of $2.2 million driven by lower sales of custom products and access points. Sales of embedded modems were flat sequentially as some distributors continue to recover from inventory overhang. Automotive sales were $2.3 million, reflecting a sequential decrease of $.2 million. Q4 gross margin was 30.3% largely due to an inventory charge of $1 million we recorded in the quarter. This charge-related primarily to the end of life of our Airgain Connect HPUE product lines. The year ago we recorded the partial excess inventory reserve as a result of a lower demand forecast. In Q4 2023, the HPUE product line is fully reserved as we transition to the next generation of Airgain Connect, vehicle networking product that we announced 2 months ago.

Excluding the noncash inventory charge, our gross margin would have been approximately 40% in line with the midpoint of our guidance range. Q4 operating expenses totaled $6.5 million, $.5 million higher sequentially, and from $5 million higher than our guidance. The increase was driven by higher project development expenses. Sequentially, our G&A, sales and marketing expenses decreased while our engineering expenses increased, as we focused on the development of our Lantern FWA, and Airgain Connect Fleet solution. As a result, our Q4 adjusted EBITDA was negative $3.3 million and non-GAAP EPS was negative $0.33. Our sales for 2023 totaled $56 million, $19.9 million, or 26%. lower year-over-year. Enterprise sales declined by $7.3 million driven by excess channel inventory corrections, specifically in our embedded modem product line as well as by our maturing and declining access points product line.

Consumer sales declined by $6.9 million due to soft demand from cable operators, as well as excess inventory. Automotive sales decreased $5.7 million, driven by the lack of Airgain Connect HPUE sales in 2023, and excess inventories that impacted our lead aftermarket customers. Full year 2023 gross margin was 37.9%, 30 basis point higher than our full year 2022. gross margin of 37.6%. Full year 2023 operating expenses totaled $26.4 million, 9% lower year-over-year driven by reduced marketing and G&A expenses considering the sequential revenue declines even as we prioritize our investments in our strategic initiatives. Full year 2023 adjusted EBITDA was negative $4.5 million, compared to positive $.1 million in 2022. Driven by the impact of the material sales decline, which was partially offset by decreased operating expenses.

Our cash balance as of December 31, 2023 was $7.9 million, $2.1 million lower sequentially driven by lower cash flows from operations on lower sales. Our accounts receivable balance was $7.4 million. $1.1 million higher sequentially, due to a sales linearity issue in the fourth quarter. Net inventory was $2.4 million, $1.5 million more sequentially, resulting from the excess and absolute inventory reserve along with inventory consumption. Now, moving to our outlook for the first quarter ending March 31, 2024. As a reminder, Airgain provides quarterly guidance for sales, non-GAAP gross margin and expenses, adjusted EBITDA and non-GAAP EPS as we believe this metrics to be key indicators for the overall performance of our business. We project sales for the 2024 first quarter to be in the range of $13.25 to $14.75 million or $14 million at the midpoint of the range.

We expect a sequential sales growth of approximately 40% at the midpoint of the guidance range driven by the enterprise market. We expect growth in our embedded modems product line after a year of inventory overhang, along with growth in our custom products, asset trackers and IoT antennas product lines. We anticipate the enterprise market growth to be partially offset by a sequential decline in our automotive market due to continued inventory correction. While our consumer market sales will remain relatively flat sequentially. We expect non-GAAP gross margin for the 2024 first quarter to be in the range of 39.5% to 42.5% or 41% at the midpoint of the range. Despite the projected decrease in the consumer sales mix from 32% in Q4 2023 to approximately 20% in Q1 2024.

We expect our gross margin to increase driven by differentiated new products and applications in our enterprise market. We anticipate the enterprise consumer and automotive gross margin to converge around the corporate gross margin, reducing the impact of market sales mix changes, and opening a task to gross margin increases in future quarters. We project our operating expenses to be approximately $6.4 million. We continue to invest in our engineering and sales teams as we focus on our strategic initiatives in fixed wireless access, vehicle networking and Smart C-band Repeaters markets. non-GAAP EPS is expected to be negative $0.06 at the midpoint of our guidance. Adjusted EBITDA is expected to be negative $.5 billion at the midpoint of our guidance.

Now, I would like to turn the call over to Jacob for his closing thoughts. Jacob?

Jacob Suen: Thanks, Michael. A few closing thoughts before we had Q&A. First, I am proud of our team’s ability to navigate in uncertain market environment in 2023. Even as we faced significant headwinds, we’ve made real progress along many aspects of our business, including in new products, new partners, and new geographies in markets for our sales teams. I am optimistic that our industry has started to turn a corner, and I am confident that our efforts will pay off in the coming quarters. Second, we’ve already made significant progress in 2024 with three new developments across our markets in the last couple of months. These include the unveiling of Airgain Connect Fleet, the evolutions of our flagship vehicle connectivity lie in our automotive business.

The announcement of the first of its kind, Smart Lantern FWA solution in our antenna business. The partnership with Lenovo think edge in our asset tracking business, and a Tier 1 MSO Wi-Fi seven design win. Still, we believe that the upside is greatest in the second half of the year. And we look forward to building on our early successes through the rest of 2024. Third, we believe that our products are at the heart of our value proposition for our customers, especially with the many emerging trends within our industry, including transitions to Wi-Fi 7, increased demand for asset tracking capabilities and long standing pinpoints in the 5G coverage space. We are confident that the worldwide connectivity opportunity is vast in going and that many geographies around the globe represent on the tap markets for our industry in our business.

Actually just returned from the Mobile World Congress in Barcelona last month. In the interest and positive feedback we received, gives me even greater confidence in our efforts. For example, our next generation Smart Lantern FWA product expected to launch next year. It’s a product that has generated strong interest from several major players in the operator space. We expect that this product, slated to ship next year, could significantly reduce the number of track rolls and customers returns the operators currently experiencing. Our AC fleet products has also garnered substantial interest with both domestic and international prospects. Due to its all-in-one capability, and its local file size that makes it easy to install and maintain, with better performance at a competitive price.

Finally, reliable 5G coverage remains a key challenge for operators around the world. And our Lighthouse Smart Repeater aims to solve 5G coverage gaps in an effective and timely manner. For example, we are in advanced discussions towards a strategic partnership with an international MNO for Airgain to become their primary partner for our Lighthouse Smart Repeater with shipment expected in early 2025. Overall, we remain committed to helping our partners and customers get connected quickly. At Airgain, we can enable connectivity across both components in complete systems. And we are confident in the prospects for our overarching strategy in the years to come. And with that, operator, please open the call for Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Scott Searle with ROTH MKM. Please state your question.

Scott Searle: Hey, good afternoon. Thanks for taking my questions. Appreciate the color and it’s nice to see the market bottoming and improving outlook as we look into the March quarter. Maybe, Michael, to just dive in quickly, I wanted to revisit the gross margins as we go into the first quarter, given that consumer tends to be a nice gross margin driver and that’s not part of the sequential [ph] uptick. I was wondering if you could just clarify again. So we’re expecting to see an improvement in NimbeLink margins and enterprise margins, in general. That’s where we’re going to see the biggest improvement in the March quarter.

Michael Elbaz: So yes, Hi, Scott. Thank you for the question. Yes, the enterprise margin is building up. It’s a result of a number of improvements that we have done in 2023. What I wish was this large project that we had mentioned a quarter ago, this is a new refresh platform for a strategic customer. That’s part of our custom product. That is definitely a higher value of premium product in its kind. Along with also on the antenna level, the fact that we have some IoT applications and markets. This is a part of the RECON13 product that we announced a couple of quarters ago. And those are also addressing some really differentiated type of applications. This is just to name a few. But this has been a definitely a process of continuous gross margin improvement.

We mentioned last quarter, Scott, that the automotive was — going to give us some increase, and it did actually. If you exclude the overall inventory charge that we had in Q4, the margin increased sequentially from 39% in Q3 to about roughly 40% in Q4 and that was mostly because of the automotive. And that is really kind of reconciling my comments on the overall convergence around the overall gross margin. So that the dependency and we see it in Q1, hopefully that we have had on the consumer mix is not as prescient as it has been in the past.

Scott Searle: Right. Very helpful. And congratulations on the Wi-Fi 7 wins. I just want to dive into that quickly. It’s that will start to ramp up with the first two MSO customers. It sounds like in the second half of this year. I was wondering if you could put a magnitude size around that dollar amount, so how big that will be? And how we should think about the recovery in general the consumer business. Peak did north of 10 million. We’re bottoming out now at around 3 million. How should we think about exiting 2024?

Jacob Suen: Yes, so very good question. So the Wi-Fi 7 we believe is going to be the major improvement for the MSOs to get back into the competitive advantages. And we do believe it will be the second half of the year as well too. Right now, in Q4, I believe we closed the quarter at $3.2 million and I mentioned that we will roughly be approximately flat in Q1. That is actually primarily because of the MNO design win that we had on the FWA is starting to ship in Q1. And this is going to give us some — a nice room as well to through the year. This actually the MNO ramp is actually offsetting the seasonality that we usually see in Q1. That’s the reason for the flatness on the overall consumer revenue. As we build up into the third quarter and the fourth quarter of the second half of the year, we believe we can go back to the $6 million that we have seen in the first half of last year. But again, this is a bit preliminary at this point.

Scott Searle: That’s very helpful. And lastly, if I could just, two other quick follow ups. On the tracker side of the equation, it sounds like the addressable market is pretty sizable. I was wondering if you could characterize some of the potential design opportunities that are out there. I believe last year, the railcar opportunity was in the ballpark of 10 million or so. I’m wondering if these other opportunities are of similar magnitude. And as it relates to Airgain Connect to Jacob, I’m wondering if you could provide a little bit more color now. We’ve had CES, you’re just at Mobile World Congress. It’s a 5G solution that supports global bands. How should we think about that ramping up? I know commercially, it starts shipping in the second quarter. But how quickly does that ramp both in North America and European markets as we look forward into the second half of this year in 2025? Thanks.

Jacob Suen: Hey, Scott, good to hear from you. It’s Jacob here. So regarding AC fleet, we’re already seeing in our best interest both domestically and internationally. And we expect that to be shipping in the second — early second half of the year, not second quarter. Although second quarter, we’re expecting a lot of customers trial happening, we’re really been shipping samples to the customers, both domestically and internationally. And it is not limiting to only USA and Europe, we actually have customers that will be doing the trials in Latin America, as well as Australia. So this is truly a globalised product. And what people are so interested is the all-in-one features capabilities. It’s one of its kind and it’s so such easier to maintain such easier to install and it’s like I mentioned earlier in the script, it’s better performance, it actually at a lower cost, overall cost of ownership is actually lower.

So that’s why we have generating a lot of interest with this particular product. So as indicated, we expect to start to have a nice funnel building up in the coming months, and then to be shipped in early second half.

Scott Searle: Great. Thank you. I’ll get back on the queue.

Jacob Suen: Thank you, Scott.

Operator: [Operator Instructions] Our next question comes from Anthony Stoss with Craig-Hallum. Please state your question.