Q3 2023 Airgain Inc Earnings Call
Good afternoon, welcome to Air gains third quarter 2023 earnings Conference call. My name is Sherry and I won't be coordinating for kidney is call joining.
Joining us for todays call are art gun arguments, president and CEO Jacob ceiling and she asked I don't think all of us.
This call will be recorded and made available for replay via the link found in the Investor Relations section of Air gains website Investor Relations Dr. Eric Green Dot Com following management's prepared remarks, the call will be open for questions from Eric and sell side analysts I question listeners that during this call.
Air Games management will be making forward looking statements about future events and are games business strategy and future financial and operating performances actual results could differ materially from those stated or implied by these forward looking statements due to risks and uncertainties associated with the companies.
Business. These forward looking statements are qualified by cautionary statements contained in today's earnings release and are gaining SEC filings. This conference call contains time sensitive information that is accurate only as of the date of the fly broadcast November nine 2023.
<unk> 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 retro.
Kelly Asian.
The GAAP to non-GAAP results I would now like to turn the call over to our CEO Jacob Suen Jacob.
Okay.
Thank you operator, welcome everyone and thank you for joining us for today's call I will first cover our operational highlights and achievements for Q3, and I will hand, it over to Michael to walk you through our financial performance for the third quarter.
And our guidance for the fourth quarter.
After the war.
I'll provide an update on our strategic product and marketing initiatives for Q4 and beyond before opening the call up for questions.
I would like to start by briefly introducing who we are and what we do for those who may be new to air game in our industry.
Again, we simplify wireless connectivity for the consumer in the Pi and although motive market.
Our technology expense across the value chain from embedded components to integrated systems.
Products for under three sub brands, including embedded arrogant antenna plus and are getting integrated.
At the beginning of the year, we announced our initiative to improve the five G customer experience by fixing coverage gaps boosting performance and simplifying the delivery of <unk> connectivity to the home office and vehicle.
Earlier this year, we introduced our linde terms by G fixed wireless access device and lighthouse by G. C band Smartly Peter.
And we will be announcing a third product initiatives in the coming months that fits into our effort to improve the <unk> customer experience.
Goal is to begin shipping some of these innovative products to partners and customers in the first half of 'twenty 'twenty four.
We work with a global network of bus system integrators distributors and large customers to help solve critical connectivity issues improved wireless performance and effectively shortening time to market for their products.
With arrogance growing product portfolio, we offer complete wireless solutions to our channel partners and customers that help them get connect it quickly.
No ball our performance third quarter sales came in at $13 7 million in Dallas, which was close to the midpoint of our guidance range.
The macroeconomic conditions, such as demand softness and inventory corrections have continue to create a wall pressure in all three of our main markets.
Consumer enterprise and automotive.
While we focus on growing our customer base, we expect the continued inventory overhang in our channel and that of our lead customers to persist in the fourth quarter.
Coupled with the shift of a large enterprise project from the fourth quarter to the first quarter of 'twenty 'twenty four we are projecting a lower guidance range in the fourth quarter. However, we're nearing our turning point and are beginning to see signs of a market recovery we expect.
Well in our enterprise market in the first half of 'twenty 'twenty four with broader growth in the second half of the year from our consumer and automotive markets.
Especially with the launch of our product initiatives.
Moving to a review of each of our markets.
Our consumer market is comprised of our custom embedded antenna design for CPE devices, So primarily doing major service providers.
In addition to a demand softness and inventory corrections.
The additional forces within the consumer market, creating I'll walk pusher.
First as we discussed last quarter.
Service providers or <unk>.
On the cusp of a transition from Wi Fi <unk> Wi five seven.
They are counting on Wi Fi seven to improve performance and user experience and they are looking for ways to accelerate the Wi Fi seven adoption and transition.
In anticipation of the shifting our key OEM customers operating cautiously in order to avoid excessive inventory.
While the market is hesitant in the short term this shift presents a compelling long term opportunity for air game to deliver its cutting edge Wi Fi seven technology.
We have invest heavily in our Wi Fi seven capabilities and.
And we recently secured a design win from a tier one cable operator for its next generation widebody seven CPE.
Second consumer domain containing the shift from wire to wireless providers for Internet service as they cut the cord and make the transition to S. W. E.
We recognize this trend and focus our strategy on penetrating this growing market, which offers significant average selling price or a S. P equal.
We're pleased to announce that we recently secure a large design win with a tier one mobile network, operator or M. N O for the antenna design.
In the indoor if W. A router for which we expect to begin shipments in Q1.
In addition.
We are working on several other opportunities with cable operators and M N O's and look to secure these opportunities in early 'twenty 'twenty four.
As we navigate a challenging demand environment, we expect declining consumer sales in the next two quarters follow like Guangzhou pools from our old design win and from our cable operator, why five seven technology transition.
Our enterprise market represents a mix of components and systems that include our embedded modems assay truckers enterprise antenna design and custom products.
Inventory overhang containers to dampen our embedded modem revenue and wireless.
Our distributors are back to normal buying patterns, others are still carrying inventory that will last a few more quarters.
Despite the inventory overhang, we see end customer demand growth in our modems as evidenced by growing point of sales and our distribution partners and we expect a gradual recovery in the first half of 'twenty 'twenty four.
It'd be charging in visa has continued to be strong markets for all our modems and we do we do see industrial.
Aqua business energy and minutes Iot applications as growth opportunities.
Our custom products offerings features joint engineering collaboration with our customers to develop products for specific applications, while helping them reduce their time to market.
These projects can often hub shifting time life, depending on product requirements engineering resources certifications and manufacturing schedules.
Shipments can fluctuate from quarter to quarter based on the complexity of the product offering.
Which has had a material impact on our expected timing for such remedies specifically.
One of our lead customers is going to a technically complex platform refresh in the combinations of high inventory and its current platform and the completion delay and this new platform created a material shift of revenue from the second half.
Of this year through the first half of 'twenty 'twenty four.
Our Austin chalk her business continues to show significant growth potential.
We continue to see growing applications, but pallet packaging and logistics and trucking, which represented a bright spot in our Q3 revenue.
In addition, our pipeline includes several opportunities in railways warehousing equipment management and rental.
Management and cold chain.
This is one of our existing product lines that presents a significant growth opportunity in 2024 due to the market size flexibility of applications.
Attunity for recurring revenue in all our strategic product Differentiators.
Because of the size of the customers with which we are interacting Andy in the established pilot process. The sales cycle for this product can be from nine to 18 months.
While our potential deal pipeline is strong we are working to address our resource constraints streamline our processes and shorten the sales cycle to help create a more consistent revenue stream in 2020 four.
Lastly, our automotive market includes both our aftermarket and Pan us as well as our vehicle networking devices.
Our focus in the automotive market.
Luxury being in the public safety transportation and many municipalities.
Inventory corrections from the customers have mentioned the growth in this market and we expect this trend to continue in the first half of 'twenty 'twenty. Four however, we're seeing size, our combined strategic focus on new and differentiated product supply.
Chain flexibility and global channel expansion is yielding results in Q4.
We expect our previously announced <unk> 13, and ultra Max class five G products will begin to ship this quarter.
Both of which fit into our new low profile design focus.
This is in addition to our EZ connect platform, which at supply chain flexibility by separating the antenna from the cable harness.
Minimizing the variations in Skus. In addition, we signed a new system integrator in the public safety and municipality market that we believe will contribute significantly to our automotive sales next year.
Despite the downward pressure from macroeconomic forces that have persisted throughout 2023, we remain optimistic that our sales expansion strategies pay a path to growth in 2024 and beyond by.
By the end of 2023 we expect to have added five new distribution partners and a major system integration partner greatly expanding our reach we have also announced new products that should start to impact revenue in Q4 alongside tool.
Our three major product initiatives to include the <unk> customer experience.
All of which helped provide an addressable market that should contribute significantly to the 20th Twentyfold revenue and be.
We have expanded into two new key geographies and look to take advantage of the market needs. In these regions. While 2023 has presented some significant challenges. We believe we have the right product roadmaps and expansion strategies to recover and grow.
In 2024.
With that I'll turn the call over to Michael Michael.
Thank you Jacob before diving into the numbers. Please note that my review of our financial results and guidance refers to non-GAAP figures.
Information about the non-GAAP financial measures, including GAAP to non-GAAP reconciliations are found in our earnings release.
Now, let's turn to this quarter's results.
As Jacob mentioned Q3 sales were $13 $7 million below the $14 million midpoint of our guidance range there.
The variance was primarily due to lower than forecasted consumer sales.
Our sales declined 13% sequentially and 29% year over year, primarily due to the high inventories across both our channel and direct customers.
Coupled with demand softness in our consumer market.
Consumer sales were $4 $4 million.
Reflecting a sequential decrease of $1.8 million.
As our future quarter had a strong uptick of Wi Fi six E embedded antenna shipments.
Enterprise sales were $6 $8 million, which decreased sequentially by $5 million.
The decline was driven by lower sales of costume products.
Partially offset by higher sales of embedded modems as some distributors are recovering from inventory overhang.
Automotive sales were $2.5 million, reflecting a sequential increase of $42 million.
Q3, gross margin was 39, 1% compared to our guidance range midpoint of 40%.
The variance was primarily due to the end favorable consumer sales mix.
Q3, gross margin was 130 basis points lower sequentially.
Due to the unfavorable consumer sales mix.
And then more enterprise margins driven by and then favorable product mix change.
Q3 operating expenses totaled $6 million.
Slightly higher than our guidance of approximately $5 $8 million.
Operating expenses decreased sequentially by $5 million, driven by more contracture and other verbal expenses, resulting from G&A efficiencies.
Our Q3 operating expenses at $6 million represents the lowest spend level since the acquisition of nimble linked in Q1 of 2020 one.
As we mentioned in prior earnings calls, we are focused on driving operational efficiencies to reduce our expenses and make room for the investment needed for the launch of our three initiatives that will help drive revenue in 2024.
As a result, our Q3 adjusted EBITDA was negative $5 million and non-GAAP EPS was negative six cents.
Our cash balance as of September 30 Years' worth $10 million.
$7 million higher sequentially, driven by working capital management.
The $10 million cash balance was $8 million higher than the same quarter in the prior year, despite lower year over yourself.
Our accounts receivable balance was $6 $3 million to $4 million lower sequentially due to strong cash collections and lower sales.
Net inventory was $4 million point $8 million lower sequentially.
Given our cash balance and our tight expense management, we believe we have sufficient resources to execute on our growth strategies.
Now moving to our outlook for the fourth quarter ending December 31st 2023.
We project sales to be in the range of nine to five to $10 $75 million or $10 million at the midpoint of the range.
The lower revenue guidance compared to prior expectation is due to lower than anticipated.
Consumer sales and continued inventory corrections.
Coupled with a large enterprise project Pushout Jacob mentioned.
We expect non-GAAP gross margin for the fourth quarter to be in the range of 38, 5% to 41, 5% or 40% at the midpoint of the range.
Levered leveraging our C. M model is a primary driver of our gross margin improvement initiatives.
And we completed the first phase of this leverage with our automotive antennas.
Despite the lower projected consumer sales mix, we expect our gross margin to improve sequentially as a result of our automotive product cost reductions.
We project, our operating expenses to be approximately $6 million.
non-GAAP EPS is expected to be negative 19 cents at the midpoint of our guidance.
Adjusted EBITDA is expected to be negative $1.8 million at the midpoint of our guidance.
Despite the revenue challenge, we face in the fourth quarter, we remain focused on generating positive cash flows in the first quarter of 2024, while we'll continue to execute on our strategic product initiatives.
Now I would like to turn the call back over to Jacob.
Who will walk us through those strategic initiatives.
Jacob Thanks.
Thanks, Michael.
During Q3 and Q4, our team has spent a significant amount of time and effort on our strategic planning process. As a result of this analysis of our products and markets. We developed a product roadmap that stretches into 2025 and kept yours.
Our strategic product launches that we believe will shape our revenue in the future.
Of our current product lines, we believe our asset truckers offer the greatest strategic growth opportunity.
When we narrow the market to cellular connect asset truckers, we estimate the 'twenty 'twenty four serviceable available market or Sim to be $900 million. In addition, we have been in the market for over three years and have built a strong.
Pipeline of deals.
Mentioned that previously.
Because of the pilot process and size of the end customer the sales cycles can be longer than some of our other products.
However, the deals are larger more sustained and involved a significant component of recurring revenue.
We continue to make very good progress and are optimistic that our asset trucking offering will become an even greater revenue contributor to the overall business.
In addition, we have previously discussed our initiative to improve the customer experience.
While five G delivers on its promises of lower latency increased capacity and higher throughput. It comes at the expense of a solar signaled range from the base station.
Frequently this creates gaps for <unk> customers.
The air gain is well positioned to solve these major coverage deficiencies.
We have identified three key areas, where we believe we can make an impact.
These areas include the network itself customer premises in the vehicle.
Improving <unk> connectivity and customer experience begins at the edge in the home office with fixed wireless access.
These devices allow wireless operators to compete with cable and wire solutions for the broadband connection this.
This year, we announced our entry into this market with the introductions of an enterprise grade CPE called Lane turn it up anyway.
Lantern, it's an outdoor ruggedized sub six gigahertz <unk> break the trade off between performance and ease of install.
It is equipped with directional high gain antenna that is optimized for mid band and high band frequency range offering superior performance for all M N old customers.
It also includes a patent pending easy installation kit that comes with a mobile app that's sick.
And it's currently reduces installation time and eliminates the need for professional installation.
When we narrow our focus to <unk>, although non millimeter wave devices in the regions, where we plan to compete we estimate the same it's over $500 million in 2024 alone offering a lucrative market in which to come.
Pete.
While most tablet devices indoor solutions currently being sold to consumers through M N O's and subsidized.
All of a monthly fee.
Our enterprise grade device is now its.
Its own niche in the market.
Our global M N O partners see this product as a pathway to help them walk into the <unk> market in a meaningful way, even calling it a needle mover for them.
In addition, the product is receiving significant interest from our channel partners, who have hard to piece together enterprise establish solutions from multiple expensive components.
Against Lantern <unk> offers a simpler and less expensive option.
Allowing them to better compete in the market.
There's a myriad of use cases, where the device can be used.
However, broadband fail over and mobile operations seem to be the two games gaining the most early interest.
Product has been in trial with several channel partners and M N O's and we're targeting a Q1 ship date for the first versions of this product.
The feedback from trial customers.
It's been positive and we are pleased to announce that we have secure early purchase shoulders for the lantern at tableau eight products showing the market potential for the device.
With the reduced transmission range of <unk> signals the cost of ownership for network operators increases significantly due to the infrastructure and equipment require to explain high quality coverage.
And active smartly Peter can overcome this challenge by facilitating efficient use of existing infrastructure to ensure a stable and high quality signal.
Earlier this year.
Again for the lighthouse smart leaf heater, which offers a single pole installation carrier aggregation.
Echo cancellation.
Paul for multi up later frequency bands.
If beam steering capability, England.
And requires no fiber backhaul.
It is a cost effective way to deliver a targeted by <unk> signal in areas that luck quality coverage.
Based on the global number of base stations to the regions, we planed to serve and factoring rollout. We estimate the same for 2025 to be around $600 million for this product.
Making this a lucrative market in which we can compete.
We have completed multiple field trials on tier one operator networks.
Our own truck for product launch by the end of 'twenty 'twenty four.
Additionally, another key area, where we feel that we can influence the <unk> customers experience in the vehicle.
We have been in the fleet in vehicle networking industry for many years with the deployment of <unk> that use cases for higher data rate applications have multiplied substantially.
This is especially important for several segments, including public safety transportation.
So culture utility.
And many more.
Based on vehicle routers and focusing on <unk>, we estimate a same in 2024 of $200 million.
We will be announcing the next generations of our vehicle networking device in early Q1, So taco this market and provide opportunities for growth. We have seen early assignment from several major customers on this next generation product.
Our current target ship date will be Q2 of next year.
Between these three major product initiatives, we estimate over several hundred million dollars in potential additional same in 2024 and $1 $7 billion in 2025.
Effectively doubling our foundational Sam of $1 $8 billion for our existing products.
This gives us not only the ability to grow organically from our existing product lines, but also to expand our growth opportunities by adding value to our existing markets and exploring new markets.
It is also the combinations of the strategy, we announced two years ago to shift from exclusively components to full systems.
In closing <unk>.
23 hospital in a challenging year for air game, along with the rest of the industry in which we compete.
It forces have created a downward pressure on our traditional lines of business that will persist through the end of this year.
While we anticipated a challenging environment in 2023, we under estimated the severity of his impact on our business.
We are disappointed with our revenue and EBITDA guidance for Q4, as we expect stronger headwinds, resulting from the combination of lower than previously anticipated consumer sales continue inventory correction and customer project push outs.
However, despite these significant challenges we believe we have made the right strategic moves and now have a line of sight to revenue recovery starting in Q1 of 2024.
Our Q1 backlog is currently higher than that of our Q4 backlog, we are maintaining our existing customer base.
Adding new customers as evidenced by our recent design wins in our consumer automotive and enterprise markets.
And we have a strong pipeline of opportunities that should accelerate our future growth.
We are focused on being EBITDA positive in 2024 and generating positive cash flows based on the resolution of inventory issues in the market.
<unk> of channels and geographies that demand, but Wi Fi seven and SWA devices by major operators in the launch of our new products.
While our strategies is ambitious we believe we have the right team in place to execute.
We're very pleased to have the new additions of Evan Jones as our VP of engineering.
Evan spent over 23 years at Sierra wireless as their VP of Iot system engineering and customer experience.
Evan This is an industry veteran who has joined air gain at this pivotal time, because he believes in our vision and product roadmap.
He is also very excited to work with a seasoned executive team already in place and are game to help grow our existing product lines and ensure the successful launch of three new product initiatives into the marketplace.
Aegean has undergone a fundamental transformation in our technology product Roadmaps operations sales approach and plan to ship from components to systems.
As is often the case transformation can be difficult and painful for organizations and we are no exception.
I would like to thank our team for continuing to persevere and execute despite the challenges.
While we look to recover and generate organic growth from our core products and customers. We believe our strategic focus on growing our asset truckload business and improving the <unk> customer experience through these major initiatives all of US a pathway to larger growth in 2020.
For <unk> and beyond as these initiatives begin to come to market. In early 2024, we believe they will began to help shape our future as a systems focused company.
And with that we're ready to open the call for your questions. Operator, please provide the appropriate instructions.
Thank you we will now take a question from Eric <unk> sell side analysts if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like.
Remove your question from the queue.
And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star. He is once again it is star one on your telephone keypad and we will pause for a brief moment to poll for questions.
Our first question is from Craig Ellis with B Riley Securities. Please proceed.
Hi, This is Lucy calling on behalf of Craig and I was just wondering if you could provide some color as we.
Moved our product mix.
Toward a higher volume of new clients and services and you know tough macro what are the some products in the consumer and enterprise that can drive meaningful revenue to <unk> or potentially into 2024 and is there any changes in the segment gross margin.
Like consumer gross margin or enterprise gross margin. Thank you.
Hi, Stacy this is Michael I Hope I can answer your question, if I understand it correctly from.
From a consumer standpoint, as we mentioned.
The revenue level is a bit depressed we saw it in Q3 are we expecting a further decline in Q4.
Primarily because of the Oems are trying to manage their inventories or excess inventories with the pending Wi Fi seven technology transition along with some soft demand taking place at the <unk> level and so while we have secured so far is really the <unk> and <unk>.
Tier one design win which we expect to start shipping in Q1. So this will give us a bit of a bump in Q1, but really are the overall growth on that market will really come from the Wi Fi seven technology transition, which we expect to see at the end of Q2 is certainly in the second half of the year.
On the enterprise business, while we are facing right now is more of a inventory overhang.
With one of our lead customer and this is also the same lead customer where we have also.
A custom design of a platform a new platform. This is a complex project, which is now delayed to the early part of <unk>.
Next year Q1 is specifically speaking and so while we see a overall depressed so lower revenues in Q Q4, we expect to see the uptick in Q1, and then some resumption after that of growth in the fiscal year 'twenty four mainly because of the inventory.
Corrections being sorted out through the first half of the year.
And then finally on the automotive it's more of a mixed story here between some of the inventory correction going on with some of our lead customers, but also that being offset with a growing new products. We have recently announced a number of new products, but also new channel and new geographies.
What you and those again for the second half of the year, we'll start to really pan out for us as well too along with the new product initiatives in terms of mix, it's a bit unsure.
Right now given the low level of visibility on how everything plays out all of our Oems are certainly trying to be very conservative in the inventory level, we could see some surprise in December with some surprise orders.
But we're not counting on that.
So in terms of the mix it could be a fluctuating quite a bit the good news here is that on the margin front with the automotive product cost reduction that we have initiatives about two three quarters ago and those are becoming effective in Q4, we do see overall gross margin starting.
To improve with a C M. A leverage that we have been counting on and this trend will continue on and so I think we would be somewhat protected with some of the consumer.
Market mix, which has been unfavorable over the past few quarters I hope that answers your question.
Thank you that's very helpful. Thank you so much and I was wondering if I can squeeze in another one so.
What are the some your view about cash or any change in the inventory days and how do you feel about your cash level, whether its sufficient for your working capital and thank you.
Sure So our cash actually increased all.
In Q3 at the end of September increased compared to quarter over quarter, but also year over year basis, we are at $10 million right now and this has been mostly driven out of our working capital management.
Lower inventories and as I mentioned, but also.
Lower accounts receivable not only because of lower sales, but also primarily because we achieved a record low DSO with some very strong collections. So they are the team is definitely very focus on whatever we can do from a working capital management standpoint with.
With the EBITDA loss that we are projecting for Q4 of a $1 $8 million at the midpoint of the guidance, we expect our cash balance to be at around $8 billion, which is definitely sufficient for enough of resources to be able to pursue our growth initiatives and especially in life.
A growth resuming in the in the first half of the year.
Got it thank you so much.
Thank you.
That will conclude our question and answer session. If your question was not taken you may contact the air gains Investor Relations team.
<unk> and <unk>.
I I R. G eight gateway Dash G. R. P dot com I would now like to turn the call back over to Mr. Xu and for closing remarks.
Thank you for joining us on today's call. We look forward to updating you next.
Operator.
Thank you. This concludes today's call. Thank you for joining us for <unk> third quarter 2023 earnings call you may now disconnect.
Okay.
Yeah.
Yeah.
Yeah.