Airgain, Inc.
Q4 2023 Earnings Call Transcript

Published: 6 Mar 2024

[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

[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.

[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.

[Anthony Stoss:]

Okay, it's nice to see the pick up for the March quarter guide. Either one of you guys, can you talk about to the enterprise businesses really snapping back in the March quarter? Jacob, do you think it's going to grow sequentially every quarter this year? Then I've a couple follow ups.

[Michael Elbaz:]

Right. So this is Michael, I actually think that you're right. It is snapping up very nicely. It's basically a gross across all the product lines that we have. The embedded modem is really a welcome sign, I have to say on the overall Q1 Quarter, mainly because this inventory correction that we've been anticipating is over on that specific product line. And this was one of the programs that was mostly impacted by the excess inventory in FY 2022. In addition, the Asset Tracker, even though it's a bit of a lumpy business, on the hardware, the recurring revenues are relatively flat, but on the hardware level, that tends to be lumpy itself, but it is nice -- nicely growing as well too, the custom product as well too, and then the antenna specifically on those IoT applications. We do suspect that the overall enterprise market will be relatively flat, at least in the near future. This is going to be basically the ups and downs of some of the product lines. But it is good to see its coming back at this point.

[Jacob Suen:]

Yes, and I will comment a little bit more, Tony. When Michael says we're expecting to be flat, it's flat over a nicely improved number already from Q1 -- from Q4 to Q1. So we expect to be able to maintain that nice level that we're going to get into Q1 for -- in Q2.

[Anthony Stoss:]

Got it. And then Jacob on the Airgain Connect the 2.0 the new product now it's a couple months ago. Do you have an existing kind of customer base that are waiting for this product since they were maybe testing the original product?

[Jacob Suen:]

Yes, we actually .have a number of customers that have been waiting. Now this product, I would say, is no longer one large customers like it was with the Version 1. It's -- we already have a lot of interest from a number of system integrators. Now I expecting these fields to be nothing huge, but it's really diversified across domestically internationally.

[Anthony Stoss:]

Got it. Then last question for Michael.

[Michael Elbaz:]

Yes, go ahead.

[Anthony Stoss:]

Go ahead Jacob.

[Jacob Suen:]

Yes, I was trying to say we are going to be working with a number of system integrators and channel partners on the AC fleet product line.

[Anthony Stoss:]

Got it. And then last question for you, Michael, on the inventory write down. Do you expect any other product lines to have the same write downs going forward? Do you think everything's pretty clean, though?

[Michael Elbaz:]

No, everything is pretty clean now. This was really the AC-HPUE has been a major product line for us of concern. And we did have a partial reserve last year exactly in Q4 of FY 2022. At this point, the product line is fully reserved. And we are fully focused on transitioning to the new Airgain Connect next generation AC fleet platform.

[Anthony Stoss:]

All right. Very good, guys. Best of luck.

[Jacob Suen:]

Thank you, Tony.

[Michael Elbaz:]

Thank you, Tony.

[Operator:]

[Operator Instructions] Our next question comes from Tim Savageaux with Northland Capital Markets. Please state your question.

[Tim Savageaux:]

Hi, good afternoon and my congrats on the guide as well. Jacob, I wanted to follow-up on your Mobile Congress commentary and specifically the opportunities for the kind of coverage extension. Infrastructure product you mentioned, a potential strategic partnership with the International MNO. I don't know if you've talked about the size of that operator, but my question is as you look at those sorts of opportunities, can you try to size them for us? And I imagine something like a strategic partnership would be larger than normal? And then how does that relate to kind of some of the served addressable market commentary that you made?

[Jacob Suen:]

Yes. Hey, Tim. Good to talk to you. Good to hear from you. Yes, I was actually extremely excited about the feedback we got through a number of customers meetings. And certainly -- normally they were really interested in the Smart Lantern that we announced during the show, and then the next gen, again, connect AC fleet. But there were a lot of interests on the Smart Network Repeater. And what I'm hearing consistently, especially with the international community, is that 5G coverage is an issue for them. I think that one customers told me that in Brazil, the government is mandating that they'd be able to cover 5G everywhere. And to do that now, especially some of the remote area, or even within the metropolitan area, there's coverage gaps with 5G today. And even you could be really close to a base station, but between buildings, there's what they call the shadowing effect. And you'll notice that even in New York Metropolitan. So how do you address that to install a lot of base station, it's really cost prohibitive, right. And also sometimes it's also challenging because you have to lay the fiber. And our Smart Lighthouse Network Repeater, really addressing that particular problem [ph] because with our Smart Network Repeater, all you have to do is connecting to a light pole that's already existed. And with our smart feature with our carrier aggregation feature, this is the perfect product, ideal product for those particular carriers all the -- all the power company as well. And as we are talking to these customers its becoming obvious that we are having a product that is really addressing that need. And that's where we actually going to have trials in Europe, in Middle East, in Latin America, and here in the U.S. So we're seeing a lot of interest. And with this particular MNO, I mentioned, internationally, it's in the EMEA area, and we already discussed about a very strategic partnership. We've already done a preliminary trial with them. It was extremely well received, and they really want to do a much bigger trial. They are willing to enter a strategic partnership with us, and I hope to update you in the real near future. As far as the size, we talk about, really sizable market, really large opportunities. So I hope to update you more, but exciting time here with our new products.

[Tim Savageaux:]

Great. And just to follow-up on that. You mentioned, I don't know if you're coming out of Mobile World Congress with a lot trial commitments? Sounds like that's the case. But you've mentioned a couple of trials in the past. But as you look at it now anywhere to kind of size the number of trials you have going on for the Lighthouse product.

[Jacob Suen:]

Yes, I mean, look, this is in dealing with the mobile network operators usually it takes time, right, because they -- this is an infrastructure play. So they are always really cautious about the deployment. So they have to go through several different trials. And that's why, even though we announced the product last year, we know this was going to be a year and year and half, duration for the -- for certification for trials. And I'm pleased that so far on the number of trials we have found, we receive some extremely positive feedback from the customers. So we are proceeding to the next stage and we hope to get POs [ph] by the end of this year, and we are still on track for that and those should be sizable opportunities.

[Tim Savageaux:]

Got it. And last question for me, I think in your initial comments, you talked about gradual growth for the year. I'm guessing that refers to expectations for sequential growth throughout the year. But it sounds like you've had this big pick up in Enterprise that you hope to kind of sustain at that level and maybe have consumer, and some of the asset tracking businesses kind of drive sequential growth in the second half. Is that the right way to look at it?

[Michael Elbaz:]

Hi, Tim. This is Michael. Yes, you're correct. So the consumer, we do expect two good things happening. One is the Wi-Fi 7. What is not in our control is, of course, the service providers monitor, their own Wi-Fi 7 solutions, but we expect that to happen in the back end of the year. The good news is that we have two of the key design wins here. The MNO is another one that's going to be ramping up through the year as well to. On the automotive market, the aftermarket itself, this is still being adopted by the excessive inventory overhang that we still continue having with lead customers, but for their feedback, there should be through that in the back end of the year in Q3, Q4 itself. And then we'll also have the Airgain Connect AC fleet coming up, starting to ship in the second half of the year. And then on the enterprise business, yes, we do expect to have an overall maintenance of that product of that market. With some pockets of opportunities as we mentioned before, we definitely are very focused on the Asset Tracker because of SAM and sense overall growth and also with a Lantern FWA product is watching.

[Tim Savageaux:]

Okay, thanks very much.

[Michael Elbaz:]

Thank you.

[Jacob Suen:]

Thank you, Tim.

[Operator:]

Thank you. And at this time this concludes our question-and-answer session. If your question was not taken, you may contact Airgain's Investor Relations team at [e-mail]. I'd now like to turn the call back over to Mr. Suen, for his closing remarks.

[Jacob Suen:]

Thank you for joining us on today's call. I especially want to thank our dedicated employees for their ongoing contributions and our investors for their continued support. We look forward to providing additional updates at our next opportunity. Operator.

[Operator:]

Thank you for joining us today for Airgain's fourth quarter and full year 2023 earnings call. You may now disconnect.