Q1 2024 Airgain Inc Earnings Call

Participants

Jacob Suen; President, Chief Executive Officer, Director; Airgain Inc

Michael Elbaz; Chief Financial Officer, Company Secretary; Airgain Inc

Anthony Stoss; Analyst; Craig-Hallum Capital Group

Scott Searle; Analyst; ROTH Capital Partners

Tim Savageaux; Analyst; Northland Capital Markets

Presentation

Operator

Good afternoon, and welcome to Airgain's First Quarter 2024 earnings conference. My name is Molly, and I will be your operator for today's call. Joining us today are Airgain's President and CEO, Jacobson and CFO, Michael Hill.
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 investors dot AirGate. 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 management will be making forward-looking statements about future events as well as Airgain's business strategy and future financial and operating 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, May eighth, 2020. Again 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 will include a discussion of non-GAAP financial measures. Please see today's earnings release for further details, including a reconciliation of GAAP to non-GAAP.
Now I'd like to turn the call over to Airgain Inc, CEO. Jacobson. Jacob?

Jacob Suen

Thank you, operator, and welcome, everyone, and thank you for joining us this afternoon.
To begin today's discussion, I'll give some company background, followed by a review of our performance for the quarter. Before handing the call over to our CFO, Michael Alberts, who will review our financial results for the quarter in more detail, as well as provide our outlook for second quarter 2024. After that, I'll 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 today. Again, we simplified wireless connectivity across the value chain from embedded components to integrated systems. Our primary markets encompass the enterprise, consumer and automotive sectors within our enterprise market. Our products include embedded cellular modems, custom products, asset trackers, 5G and IoT antennas. Our new 5G outdoor fixed wireless access device and our 5G smart network controlled cellular repeaters. Our consumer market is comprised mostly of our embedded antenna business, a traditional area of expertise for AirGate, our consumer products include custom embedded antenna design for customer premises equipment, OCT. devices, such as those that enable WiFi 6E and will enable WiFi seven.
Lastly, our automotive market includes both our aftermarket antennas as well as our vehicle networking devices, highlighted by our recently announced AirgainConnect fleet eValues. 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. And again, we have a track record of developing an offering optimized wireless solutions to our channel partners and customers help them get connected quickly as new technologies emerge, we are confident that we will continue providing leading edge products, two months.
Turning now to a review of our recent operational results in three core markets. We generated $14.2 million in sales in the first quarter above the midpoint of our guidance range and a 41% increase over the prior quarter. Our indicators show that the macroeconomic headwinds and industry wide demand softness that we have faced in recent quarters are continuing to dissipate, which we believe is a positive sign for the rest of the year. Specifically, we completed significant shipments in Q1 in a few of our product areas such as our custom products and embedded modems.
Additionally, while still behind where we expect our typical run rate to be, our consumer market performed better than we anticipated above our usual seasonality for the beginning of the year. Also, as we have discussed in prior quarters, it is crucial for our long-term growth that we continue to invest in our R&D and sales efforts we believe that cutting edge products and experienced and trained sales teams has significant contributors to our growth, and we expect to continue investing in these areas as we grow our revenue while headwinds remain in each of our markets, we believe that our Q1 sales result is a positive sign for our expected growth opportunity in the second half of the year.
Taking a closer look at our three markets. Our enterprise market performance in Q1 was largely driven by our custom products and embedded modems products lines. Our IoT antenna ramp-up is off to a good start, showing both an increase from Q4 and a strong pipeline of opportunities through the year, although closing IoT antenna contracts sometimes take time due to the product's position within internal router solutions. We are confident in the demand that we're seeing and believe that this is a growth opportunity for us through the rest of 2024.
Looking ahead to second quarter, we expect to hold total enterprise revenue steady even U.S. We expect a sequential decline in our custom products due to the large project for which we completed shipments in the first quarter with our 5G product roadmap, our structural portfolio expansion with new railcar focused features and strong IoT antenna pipelines. We are confident that we can offset this custom product launch. In addition, we are pleased by our FWA. products set to ship in second quarter, a significant milestone, especially in light of the extensive efforts across our organization and the achievement of the key certifications that will require to get these products to ship in our consumer market.
Our first quarter show some encouraging signs even with our typical seasonality for our consumer products, which tends to show a slower start to the year. We outperformed Q4 2023 in this market in the first quarter. Also, we believe there are positive growth indicators in our consumer markets. First, as we have mentioned in recent quarters, we expect a significant transition from WiFi six and 6E to WiFi seven among MSOs. While this shift continues to cause cautious buying behavior among our OEM customers as they work to avoid excess inventory.
The industry has indicated that this shift will likely start in the second half of the year as MSOs are keen to improve performance and user experience. We believe this ship presents a compelling long-term opportunity for again to deliver its cutting edge Y by seven antenna technology, as evidenced by the Tier one Amisol design win we were awarded in March. Additionally, we expect to receive our first production purchase order from another Tier one MSO in the coming weeks.
Second, consumer demand continues to shift from wired 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. As we announced last November, we have secured a design win with a Tier one mobile network operator for the antenna design in the indoor FWA router and we began product shipments in Q1. We expect the shipment ramp of our M&O product, along with some market recovery with our MSOs to generate sequential growth in the second quarter Lastly, our automotive market, as we expected, our automotive market continues to face industry-wide headwinds across our products in this market, which include aftermarket products that are deployed in a wide range of vehicles, mostly focused on public safety and transportation inventory.
Reductions from lead customers have dampened growth. We continue to expect to face some challenges in this market in the second quarter as well. However, well, we are still at least a quarter away from clearing our inventory challenges. We are pleased with the interest that we are seeing in our automotive market, especially for our AirgainConnect fleet or AC fleet product. We are reaching the last few important development milestones and are still on track to ship AC fleet early in the second half. Overall we were encouraged by the early indications of recovery that we witnessed in our enterprise and consumer markets. We understand that we are not yet fully clear of this persistent industry challenges and will remain responsive to the macroeconomic environment, but we believe that we have line of sight into progress across our other products in these markets to anticipate a continued rebound as we've 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 element. First continued execution of our established business across our embedded modems, custom products, embedded antennas and aftermarket automotive products. Again, traditional expertise is in component-based products that are deployed in various consumer and enterprise applications. We have developed strong relationships with our partners through the value chain and believe that there are lucrative opportunities available ahead for these product categories. As I mentioned, we have already secured a design win this quarter with a Tier one Amisol, and that is on top of the other Tier one design win that we announced last year. We still expect to start shipments to both MSOs in the second half of 2024. Also, the new line of products will launch in 2023 for our IoT customer products, automotive markets in industrial IoT antennas are expected to ramp up throughout the year as well. With our customer agreements and funnel, we are encouraged that we will return to growth in our established business this year.
Second, integrated wireless solutions expansion. Why do we continue to drive our existing components business forward? Many of our forward-looking indicators for 2024 point to our wireless connectivity product lines of our solutions with the greatest upside. Specifically, our AIoT trucking and 5G connectivity products offer the largest strategic growth opportunities for our business on the asset tracking side, our offer truckers are deployed across transportation, supply chain and other specialized applications as the truckers plane, a recurring revenue opportunity as well with multiple subscription based components such as our nimble and cloud base device enablement platform in our trucking information, yes, both our 5G connectivity products include our Lantern FWA field to improve connectivity at the home or in the office our Lighthouse smart repeater designed to expand high-quality coverage for mobile network operators.
And our recently announced next generation AC fleet by G. vehicle gateway created to offer wide area cellular in local area, WiFi connectivity across public safety, transportation and public and private vehicle fleet. We have received significant interest for each of these solutions for Lighthouse while making steady progress on the international strategic partnership that we mentioned last quarter, including a live network trial altogether, we currently have two active customer trials with formal plan for the second half of the year. Also for AC fleet. We have over 20 customer trials across our domestic and international customers scheduled for second quarter.
Again, 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 products are the culmination of several years of investments in shifting a game from exclusively components to full systems. And we believe that we have significant upside in these areas.
Lastly, in February, during Mobile World Congress, we announced our smart FWA technology, which is designed to transform the 5G customer experience by optimizing connectivity and reducing the number of truck rolls and customer returns by operators currently experience, especially as we work to ship Lantern SWA. We believe that this is a strong market entry point to establish our demand base for the eventual delivery of smart FWA in 2025 and beyond.
With that, I will turn the call over to Michael to discuss our first quarter 2024 financial results and second quarter 2024 outlook in greater detail.
Michael?

Michael Elbaz

Thank you, Jakub. 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 first quarter results. As Jacob mentioned, Q1 sales were $14.2 million, above the $14 million midpoint of our guidance range. While our first quarter sales increased by 41% sequentially, there was still lower by 13.5% on a year-over-year basis, primarily because of continued headwinds in our consumer and automotive markets.
Enterprise sales were $8.9 million, reflecting a sequential increase of $4.3 million or 92%, driven by growth in our custom products, embedded modems and IoT antennas product lines. In our testing products, we completed a large projects along with shipments of production units for a strategic customer. In addition, our embedded modem sales increased to pre 2023 level as distributors continue to recover from excess channel inventory.
On a year-over-year basis, enterprise sales increased by over 5%. Consumer sales were $3.5 million, reflecting a sequential increase of $0.3 million, driven primarily by shipments of the Tier one MNO antenna design win we announced last November. Automotive sales were $1.8 million, reflecting a sequential decrease of $0.4 million due to ongoing excess inventory correction.
Q1 gross margin was 40.2%, 990 basis points higher sequentially due to a large inventory charge we recorded in the fourth quarter of 2023. On a year-over-year basis, Q1 gross margin was 120 basis point higher, primarily because of a higher automotive margin. Q1 operating expenses totaled $6.6 million, relatively flat sequentially. Q1 2024 operating expenses decreased by $0.7 million from Q1 2023.
On a year-over-year basis, engineering expenses increased by over 20% to support new product initiatives. This expense increase was more than offset by our focus on efficiencies, which resulted in a reduction of our G&A and marketing communication expenses of over 25% on a year-over-year basis. As a result, our Q1 adjusted EBITDA was negative $0.7 million and non-GAAP EPS was negative $0.08.
Our cash balance as of March 31st, 2024 was $7.2 million, $0.7 million lower sequentially, resulting from negative cash flow from operations of $1.3 million, partially offset by net proceeds from the ATM offering we launched two months ago. Our accounts receivable balance was $9.6 million, $2.3 million higher sequentially, primarily due to higher sales. Net inventory was $2.6 million, $2.2 million higher sequentially.
Now moving to our outlook for the second quarter ending June 30th, 2024 as a reminder, we provide quarterly guidance for sales, non-GAAP gross margin and expenses, non-GAAP EPS and adjusted EBITDA. As we believe this metric to be key indicators for the overall performance of our business. We project sales for the 2024 second quarter to be in the range of $14.25 million to $15.75 million or $15 million at the midpoint of the range.
We expect sequential growth of approximately 5% at the midpoint of our guidance, driven by growth in our consumer markets from both our MNO and MSO customers. We expect our enterprise sales to be relatively flat sequentially with an anticipated decline in our custom products due to the large project shipments in Q1, offset by growth in our asset trackers, embedded modems and IoT antennas as well as first shipments of our FWA solution. We expect non-GAAP gross margin for the second quarter to be in the range of 39.5% to 42.5% or 41% at the midpoint of the guidance.
We anticipate the sequential increase in gross margin to be driven by higher enterprise margin due to differentiated new products and applications. We expect our operating expenses to be approximately $6.8 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 $0.5 million at the midpoint of our guidance.
Now I would like to turn the call back over to Jacob for his closing thoughts. Checkup.

Jacob Suen

Thanks, Michael. A few closing thoughts before we head to Q&A. First, I am proud of our team's effort and dedication to our strategic roadmap initiatives we have several highly innovative products that are on tight time lines. And as of today, I can confidently say that we are executing on what we have promise and are still on schedule. This is only possible with our team's strong commitment and a highly effective and experienced management team.
Second, we remain optimistic about our market potential in industry recovery, even as we continue to face significant headwinds. We have made real progress along many aspects of our business, including new products, new partners and new geographies. We continue to invest in our growth as well, including the expansions of our sales was as a part of a more aggressive growth strategy in response to progress across several of our other initiatives, including market demand, especially after rebound in several product lines in Q1. We believe that our industry has started to turn a corner, and I am confident that our resiliency, while effectively navigate these headwinds will pay off in the coming quarters.
Further, 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 WiFi seven, increased demand for asset tracking capabilities in long-standing 10 points in the 5G coverage space. We are confident that the worldwide connectivity opportunity is vast and growing. There are many geographies around the globe, the projects on the tap markets for our industry and our business, for example, our next generation smart SWA AC fleet in Light House smartly feeder products and to solve key challenges in the connectivity space and each US generated strong interest from several major players. We believe that innovations like this set us apart as a key player in our industry so far in second quarter, we have maintained our existing business execution and continue making progress on our strategic initiatives. We believe in our team. I'm confident in our overarching strategy and look forward to the path ahead for AirGate.
And with that, operator, please open the call for Q&A.

Question and Answer Session

Operator

(Operator Instructions) Anthony Stoss, Craig-Hallum Capital Group.

Anthony Stoss

Hey, guys, nice progress on Jacobs I wanted to focus in on the fleet products, just to confirm what I heard. I believe I heard you say that you've got it seems like over a dozen trials that are going on at one point on the call, you talked about you'll be shipping to revenue in the second half of the year. And then I had a follow-up for Michael.

Jacob Suen

Yes. So we are going to the last stage of the product development cycle in a product. It's due to shipping in the early second half of the year. But meanwhile, we actually have 20 plus customer trials, both domestically and internationally schedule in this quarter, second quarter, to go through the process.

Anthony Stoss

Okay. Is that. Is that a short trial or do you think this is many, many months? Or how do you handicap when you think it converts into revenue?

Jacob Suen

I think it varies. It could be from couple of weeks to potentially one or two months.

Anthony Stoss

Got it. And then, Michael, on I'm curious, your thought if you want to peek into the future, do you think you'll be potentially positive EBITDA in Q3? Or it seems like maybe have a better shot in Q4. Maybe thoughts on that TietoEnator.

Michael Elbaz

Yes, we don't give that much of the guidance together. But I think from a directional standpoint, we certainly would like to be breakeven in Q3. They might be in Q4 in terms of a positive EBITDA at this point.

Anthony Stoss

Got it. And if I could sneak one more in on WiFi seven for the MSO's jack-up arm, it seems like everything has been teed up for the second half of this year, do you think you'll have meaningful revenue and WiFi seven or is that more a 2025 event.

Jacob Suen

Based on the current feedback, I think that we have one major MSOs, Tier one MSO in the US, but already in all of that's already indicating that we're going to be receiving POs from them and then they're going to be shipping in, I would say, Q3. So that one, we're expecting material revenue contribution for the second half of the year. The second major U.S. Tier one MSO seems to be a little bit behind and the anticipation is that we'll be able to ship maybe some and the latter part of the year.

Operator

Scott Searle, ROTH MKM.

Scott Searle

Good afternoon. Thanks for taking the questions. Maybe I'll take it. Maybe to dive in on AirgainConnect, the next-gen product. Could you give us an idea of how that's shaping up for the second half of this year? Kind of what you're looking like from a channel and dealer perspective and kind of your early expectations on that front?
And then, Michael, just to dive in a little bit more consumer in the second half of this year. Are you seeing enough in the pipeline that the consumer business with WiFi gets back to doing $5 million a quarter? And then I had a follow-up or two.

Jacob Suen

I can connect first before I turn over to Michael. So I'll because of our previous experience we feel when it comes to Volvo about the how do we going to go to market with the AC fleet. So right now, we are targeting really three major aspects. One is on the vast, the distributors, the channels and those are the ones we have dealt with previously and also the DCs one in oh one partner relationship, I guess the market and then the second one is what we call our direct accounts. We actually currently targeting about roughly about 80 customers right now that we're focusing on. These are mostly private and private fleet companies such as the utility companies as an example.
And we also these are the ones who are actually engaging them directly, enter a business. There's another there's another the category, what we call strategic partners. And these would be the likes of some somebody like a in our XMOAAAICRI. wireless or a Motorola Solutions, that type of names, you know, and those are the ones that don't buy directly from us, but they can work with us the likes of AT&T as well. So those are the three partners of our customers that we are actively engaging and we do expect that to do. There is enough generate material revenue for the second half of the year.

Michael Elbaz

And to answer your question, Scott, on the consumer market, the lead time cycle is very short on this market. So our data, our backlog data is not very meaningful to predict what will happen for the second half of the year. However, what I can say for sure is that the current backlog that we're sitting on right now is definitely promising for the second quarter, it will be the main driver of the increase on a sequential basis. We do have a first PO for WiFi, seven, small, but first nonetheless. And that's promising as well, too. And the one thing that is also encouraging for us is the M&O Tier one design win that we had announced that is in the process of ramping up at this point and so we do see the growth taking place. So somewhat of a recovery are as to what shape it will be the second half of the year it might be a bit early to tell right now.

Scott Searle

Great. Thank you. Helpful. And if I could follow up on the Lantern front, you had some news this week. I believe with AT&T and T-Mobile activity on that front. And it seems like there's a lot of other trial activity going on. I'm wondering if you could walk us through the paces on certification and timeline to deployment with some of the more advanced carriers. And if you could give us an idea from a pilot perspective, the geographies that you're seeing a lot of that activity and kind of what you're baking in is the lower end of the range for contribution in the second half of this year? Thanks.

Jacob Suen

Yes, great questions, Scott. So all in all. This is, as I indicated, and I'm just so proud of the team's effort. It's not easy. It's a lot of uncertainties for the team to be tenacious and navigate through the various in our certification that the trials in the hospital in a disciplined and have been phenomenal done a phenomenal job. Now the certification it takes anywhere from several weeks to several months, depends on the different types, right? You were talking about PTCRB. was of the get the specifications from the actual mobile network operators such as the names you just mentioned. As far as the trials we have, I would say majority of the trials is happening right now in North America, including U.S. and Canada. We also have some internationally in Latin America and also in Asia, EMEA as well. It does have a balance of what we sell.

Operator

Tim Savageaux, Northland Capital Markets.

Tim Savageaux

Good afternoon and congrats again on the results and outlook. And I wanted to follow up on the 5G repeater the Lighthouse trials, I think you mentioned two active network trials and four more planned in the second half. You've talked about the strategic partnership in terms of the trials that you have upcoming. I'm wondering if you could characterize sort of what sort of carriers you're planning on working with with those trials either U.S. international Tier one session?

Jacob Suen

Yes, hey, Jim, good to talk to you again and do a quick questions on the 5G initiative that we're doing. So there through active trials right now, one is the one that we mentioned last quarter and one is international, and here we talk about with this thing. We're making nice progress. We're going from a what I call motivates just a field trial now to what I call a live network trial. What I mean by that is that actually having a customers that we actually go into and they were actually going to install our system in to their network and going to stay there supposedly in a permanently if everything goes well.
So this is a -- this is, I would say, the final trial before they go ahead and close the with a with a with a purchase order. So from that perspective, we're very encouraged by the progress and that the international customers, we also have another active trial domestically here in the US with a with a Tier one MSOs as well. And that one is still early-stage. We have formal plans for the second half of the year limits in, although we have them issue, we have one in US, one in EMEA and then two in Latin America. And all of the four are either mobile network operators or power companies.

Tim Savageaux

Great. Thanks very much. And then kind of just trying to summarize what we're hearing here with regard to the second half, but it looks like you've got some growth drivers in consumer from you talk about the ramp of the fixed wireless antenna on I guess you saw some of that in Q1, but I guess how long does that take to get to what you might consider a full run rate deployment throughout the year?

Jacob Suen

So we are establishing or we call this IoT antenna in our certainly in our four leading for the enterprise market, whereas we are in four different applications, some of them for up for what you call the fixed wireless access applications. Some of them for actually for some other unique applications such as <unk>, smart city, traffic, lights applications. So all in all, we are already seeing a nice demand in couple of this market and we expect that to continue. And then Michael can add more color about some of the specific numbers.

Michael Elbaz

Thank you to and this is actually a very good question. So just to summarize overall from a consumer standpoint, as we mentioned that we do see growth in Q2 and we expect continued growth in the second half of the year, driven by the M&O design win along with the MSOs Y. five, seven and early adoption rate. The strength of that rebound in the second quarter is just too early to tell right now on the aftermarket, a part of automotive. There is still some ongoing excess inventory at this point, and we expect that to be sorted out at the end of the year during probably the last quarter of the Europe.
Now on the enterprise business, we came out with $8.9 million of revenue in Q1. A large part of the growth was due to that large project that we had mentioned in the past of our custom products that one are not having that anymore in Q2. We are very pleased with the offsetting our growth that we are seeing on the embedded modems on the asset tracker, the first shipment of the FWA solutions. And on this, what you just mentioned, the IoT antennas, which is really those products that we had mentioned about six to eight months ago as introduction.
And they are finding their way of very nicely in those communities in terms of a it's a bit of a long sales cycle altogether, but it definitely helped us with the ramp of the increase in Q1 we're seeing in Q2, and we expect some more in Q3 and Q4. So enterprise, we expect it to be relatively flat for the time being. But the unknown right now are going to be the contribution of the AC fleet. But also Lantern, as we mentioned, and hopefully some some Lighthouse at the end of the year.

Tim Savageaux

And then just one final thing on that front. To the extent you're looking for the growth in into to be consumer driven? Is it fair to say that's primarily the of the M&O design win?

Michael Elbaz

It's both actually attempting to sell both the Edmodo NDMSOMS. So we start to see some recovery. I mean the levels that we were at in Q4 and even Q1 were just released some of the lowest level that we've seen. So we do expect some recovery there.

Operator

At this time, this concludes our question and answer session. If your answer was not taken, you may contact Airgain's Investor Relations at team at AIRE and AIRG. and Gateway dash GRP. dot com. 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 First Quarter 2024 earnings call. You may now disconnect.