Airgain Inc (AIRG) 2016 Q3 法說會逐字稿

Good afternoon. Welcome to Airgain's third-quarter 2016 earnings conference call. Joining us for today's call are Airgain's President and CEO, Charles Myers, and CFO, Leo Johnson. Following their remarks, we will open up the call for questions.

Please note that certain information discussed on the call today is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. I caution listeners that during this call Airgain management will be making forward-looking statements about the future events and Airgain's business strategy and future financial and operating performance.

Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the Company's business. These forward-looking statements should be considered in conjunction with and are qualified by the cautionary statements contained in Airgain's earnings press release and SEC filings, including its S1 and quarterly report on Form 10-Q, which the Company expects to file by November 14, 2016.

This conference call contains time sensitive information that is accurate only as of the date of this live broadcast, November 10, 2016. Airgain undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

This conference call will also include a discussion of non-GAAP financial measures including adjusted EBITDA. Please see today's earnings release, which is posted on Airgain's website, for further details, including a reconciliation of the GAAP to non-GAAP results. Any discussion of non-GAAP measures is not intended to detract from the importance of comparable GAAP measures.

Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the Company's website at www.Airgain.com. Now I would like to turn the call over to Airgain's President and CEO, Charles Myers. Sir, please proceed.

Thank you, Tony. Welcome, everybody, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the third quarter ended September 30, 2016. A copy of that is available on the Investor Relations section of our website.

I'd like to start the call today by welcoming the former COO of Time Warner Cable Media, Joan Gillman, to our Board of Directors. For those of you that did not have an opportunity to read the press release announcing her appointment this week, Joan has served in multiple leadership roles at Time Warner in its media and advertising sales division, Time Warner Cable Media.

She not only has a wealth of experience in the connected home market, but also brings a deep insight to the cable industry, one of our core markets, making her an ideal candidate to help shape our strategic roadmap, especially during this time of such rapid growth for our Company.

Throughout her career Joan has proven she is a visionary leader capable of inspiring others and drawing from her talent and experience to help transform major organizations. We are very fortunate to have her on our Board and look forward to her guidance and contributions as we continually expand our market share and global footprint.

Transitioning to our results for the third quarter, we are pleased on how our overall numbers came in, building on the progress we made in the second quarter. The third quarter represented another period of strong top-line growth matched by our ability to maintain healthy margins and ultimately generate profitability for our shareholders.

Sales, which were partially affected by some seasonal factors, grew by 87% to $12.4 million driven by a continued growth in our gateway and set-top box segments, but also the emerging prominence of our smart TV segment.

In fact, we recently shipped our 25 millionth antenna to be smart TV market last month. We believe this and other positive developments in both our business and the industry as a whole reflect only a small part of our attractive growth opportunities ahead of us.

But before I provide any further details about our operational results, growth strategies and outlook, I'd like to turn the call over to our CEO, Leo Johnson, and who will walk us through the financial results for the third quarter and the first nine months of 2016. Leo?

Thank you, Chuck, and good afternoon to everyone. Before I begin I would like to mention that simply looking at our quarterly numbers on a sequential basis may not provide a full picture of the progress and performance of our business. This is primarily due to the natural seasonality of our business, which is reflective of the industry we are in.

For those of you that are newer to our story, our results are usually affected by some of our customers making purchasing decisions around holidays. For example, in China all businesses observe the national holiday the first week of November. This, and along with customer demand and product cycles that can impact our top-line, sometimes contribute to stronger quarterly sequential growth since many of our customers purchase ahead of the holiday season to account for higher volume requirements in the fourth quarter.

For the same reason our historical sequential growth Q4 over Q3 is reflective of lower purchasing days in China, which again also depends on the customer demand and product cycles of that particular quarter, and we would expect to see a similar seasonal effect this year.

In addition the Chinese New Year is another holiday that contributes to the seasonality of our business. During these two weeks of the celebration of the first quarter ending March 30, the Chinese businesses are off from work. This creates a temporary drop in demand for our solutions causing the results for the first quarter to be down sequentially compared to the fourth quarter of the prior year.

Given the seasonality of our business we will be providing year-to-date results in addition to quarterly results whenever appropriate. We believe this practice puts us more in line with the companies in our industry and it aligns us to focus on the long-term growth of the Company rather than quarter-to-quarter fluctuations that often distort the real measures of our success.

Now turning to the financial results for the third quarter and the nine months ended September 30, 2016. Our sales for the third quarter increased 87% to $12.4 million from $6.7 million in the same period a year ago.

For the first nine months our sales increased 67% to $30.8 million from $18.5 million in the same period a year ago. The quarterly and the nine-month increases were primarily driven by increases in our product sales.

Our gross margin for the third quarter of 2016 increased 101% to $5.6 million or 44.8% of sales from $2.8 million or 41.6% of sales in Q3 of last year. For the first nine months of this year gross profit increased 77% to $13.8 million or 44.8% of sales from $7.8 million or 42.3% of sales compared to the same period a year ago.

The increase in gross profit for sales for both Q3 and the nine months ended this year was primarily due to the increase in sales of our board mounted antennas, which typically have higher gross margins -- or gross margin percentage. As we stated in our last call, our target gross margin is at least 40% and we expect to continue to achieve this target moving forward.

Now turning to expenses. Our total operating expenses for the third quarter increased 53% to $4.3 million from $2.8 million a year ago. For the nine months, total operating expenses increased 38% to $11.5 million from $8.3 million the same period a year ago. The expenses in both periods were primarily due to higher personnel expenses to support the Company's sales and marketing and R&D initiatives and also includes incremental costs related to the public offering.

For the nine months ended 2016 net income attributable to common shareholders totaled $1.1 million or $0.25 per diluted share. This was an improvement from the net loss attributable to common shareholders of $2.1 million or a loss of $3.70 per diluted share in Q3 of last year.

Our adjusted EBITDA, which we define as earnings before taxes, depreciation, amortization and fair market value and adjustments for warrants -- I'm sorry, I'll go back in a second; I skipped a paragraph -- and [StopEx] compensation increased $1.6 million from $73 million a year ago. For the first nine months, our adjusted EBITDA totaled $3.2 million, a significant improvement from the $123,000 from the same period a year ago.

Then -- this is probably the best thing -- I skipped, unfortunately. Our net income attributable to common shareholders for Q3 of 2016 totaled $861,000 or $0.16 per share on a diluted basis. This was an improvement from net loss attributable to common shareholders of $617,000 or $1.05 per share on a per diluted share basis Q3 a year ago.

This completes my -- one other thing to add, now turning back to the balance sheet, cash and cash equivalents at the end of the third quarter totaled $16.8 million, which was up $5.3 million from a quarter ago. The increase is primarily due to the net proceeds of $10.8 million received from our IPO in August.

This completes my financial summary and I will now turn the call back over to Chuck.

Thanks, Leo. I started off at the beginning talking to some of the key areas of our business where we saw encouraging growth for both the quarter and the year to date thus far. Our carrier gateway and set-top box segments continue to represent the core of our business as many of these carriers' OEM and chipset suppliers continue to rely on our high-performance embedded antenna solutions.

In both the connected and the IOT space we are seeing the rapid proliferation of wireless networking, which of course is only made possible by more robust and advanced antenna solutions. We believe very few providers can provide these solutions given the increasing complexity of both designing and testing these antenna systems to ensure maximum throughput.

These are just some of the reasons why we have continued to grow globally and become a trusted partner in enabling the next-generation wireless networking.

A newer area that has some encouraging growth over the past few quarters and particularly during Q3 when compared to year-over-year basis has been our smart TV segment. Over the past two years we've grown the production of our antennas being installed in smart TVs from zero to a current run rate of more than 1 million a month. We've seen this as a fast growing emerging market and is far from showing signs of slowing down.

In fact, according to the ABI research, the market for the Wi-Fi enabled TVs is projected to grow to 176 million units in 2021. Our goal is to not only to grow within our existing base as the number and complexity of antennas continue to increase, but also to expand our base where -- both here in the US and across the globe. Just looking at some of our key performance indicators for Q3 across all of our business segments will reveal the strong progress we are making on that front.

To begin with, the total customer devices nearly doubled in the third quarter to 16.6 million devices from 8.6 million devices in Q3 of last year. As a reminder, our total customer devices metric, the number of devices which are antennas -- those are the antennas that are installed. The average number of antennas per device on the other hand increased 15% to 2.84.

We feel this is another important metric to track because it measures how we can expand our presence in a single device. And finally the average selling price per device has decreased 5% to $0.72 for the quarter.

While these metrics are useful in evaluating the performance of our business from a year-over-year perspective, our long-term progress will be measured by our ability to execute on some of the key initiatives we talked about in our S1, such as expanding our customer base within our current markets and increasing sales to our existing customers.

As an organization we are committed to continuing growing and pursuing opportunities that can strengthen our market position and expand our vertical focus. Let's spend some time talking about some of the markets which we are already entrenched and looking to penetrate further.

But apart from these markets there are a multitude of others that are in need of technically robust and superior wireless connectivity solutions, which again are made possible by the high-performing solutions that can enable it all. Examples of these markets include home security and automation, wearable and healthcare devices, and even automotive with its growing propensity to provide mobile connectivity for the consumer.

We will continue to execute on these initiatives and growing as we have done today by connecting the right solutions with the right sales and engineering teams to meet our customers' exact specifications. Along the way there may also be opportunities to acquire complementary technologies, assets or companies that we feel are confident in helping us pursue these growth opportunities.

So, looking onward it's important to stress again that, although we do experience fluctuations in our results from quarter to quarter due to seasonality effects, as Leo had mentioned earlier, the Chinese national holiday for example that took place in the first week of our Q4 was a positive driver for our strong Q3 results. We also believe our year-to-date results will help show that we've developed a strong foundation for the long-term continued growth of our business.

And at that, we are ready and open the call for your questions. Operator, if you could please provide the appropriate instructions.

(Operator Instructions). Matt Robison, Wunderlich.

Congratulations. Chuck, can you talk a little bit about how customer concentration was relative to the second quarter? And maybe what some of the dynamics were related to the -- ASP declined slightly as did the number of antennas per device? You also had some seasonality commentary.

It seems like in some situations you had I guess a little bit of a pull in the business into the September quarter because of the November holiday. Would you expect a pull in into the December quarter associated with Chinese New Year? So that would be another question. Then I've got some -- a couple housekeeping questions for Leo.

Okay, I'll touch on -- I'll let Leo touch on the seasonality and the other one. On the ASP, typically when you see our ASP go up, especially on devices that have multiple antennas, where you have 2.84 increase I believe the number was 15% if I'm not quoting that incorrectly. If you look at that, what tends to happen is some of those designs tend to be duplicates.

So as that -- the ASP dropping might be because we have more of the equivalent antenna in the same device. And along that there's a scale, pricing scale that goes with that. The more on one device the less expensive without affecting our margins we can deliver that antenna and that's where you primarily see that driver.

As far as the seasonality, I think you can look at our historic numbers and you're going to be able to see that we typically get some fluctuation in the third quarter from the Chinese national holiday. And we always get fluctuation in the first quarter -- and our first-quarter always tends to be historically reflective as to what you would see in the filings because of the Chinese New Year which affects 10 days of purchasing.

Yes, 10 to 12 days of purchasing. And that one, to answer the other piece of the question -- yes, we probably saw some pull ins in Q3 but we will not see pull ins from Q4 for the Chinese New Year because just the timing of it. The New Year doesn't start on January 1 like the national holiday did this time on October 1.

Last year though, if we impute the December quarter revenue, you had a pretty big sequential uptick in the December quarter last year. And more -- somewhat more flat comparison in the third quarter last year. So I understand that we don't expect to see the same exact same percentages every year.

Right, well, Matt, last year in Q4 the TV market was just starting to take off for us and it kind of hit what I'll call 90% ramp started in Q4 and it's been growing since. But prior to that it wasn't nearly as large a piece of our business nor was it as big on an aggregate. So basically that's the difference between Q3 of a year ago and Q4 of a year ago is that actually the Smart TV market kind of took off for us.

As far as the concentration goes, was Smart TV as big a percentage in the third quarter as it was in the second quarter?

Yes, somewhere right around north of 10%, South of 15%. It's going to fluctuate just by the very nature of the shipments. But both times it stayed right in that range. And to your question about -- go ahead.

No, you continue. Sorry, I didn't mean to interrupt.

And then you had the one question on the customers. The same three customers that we talked about last quarter came in once again all over 10% -- over 10% of our business. And we're not expecting a lot of changes there. At least not --.

The housekeeping (multiple speakers).

Not in the immediate future. Pardon?

The housekeeping questions were cash flow from operations, capital expenditures and depreciations separate from D&A, just the depreciation alone. Do you have those numbers?

Yes, the depreciation alone was -- right off the top of my head it's going to be right around $300,000 in depreciation. Amortization was about 83 times -- amortization $250,000. I mean I have to give it to you right off the top of my head, Matt. I don't have it right here in front of me.

That's fine. Round numbers are okay, they are not that big. CapEx and cash flow?

CapEx -- CapEx was typically light. I think we did about $275,000. I told you last that we were going to buy a chamber for our APAC group and that's about $200,000. Those types of expenses don't happen that often for us. Exact numbers, I was pretty close on that amortization and depreciation. Depreciation, $350,000, amortization $275,000.

Okay, what was the cash flow from operations?

Cash flow from operations, almost $2 million, $1.9 million -- $1.967 million.

Very good. Thank you very much.

(Operator Instructions). Tom Sepenzis, Northland.

Congratulations on the good quarter. Great start. I'm just curious, what should we be expecting for OpEx in Q4? Will that come back down without the IPO cost?

It will come down but it will come down slightly. We are continuing to invest in our business, Tom. And we are not the biggest company in the world, so expenses for us is still a stepping stone, it's not a straight line. And in this quarter we want to invest a little bit more going into it into R&D. So, my expectation is it will go down but not -- it won't go down significantly, but it will go down some.

Got you. And then gross margins, you mentioned your target is 40%. So you've been well about that in the mid-40% range. Are you expecting not to go back down because of pricing pressure or is it more likely that you'd stay in this mid-40% range?

I think we'll stay in the mid-40% range for the next short-term future. But we have -- there is some switch outs that we're seeing that are going to happen basically in our project base that could impact the gross margin, but it's not going to be like we're going o tank it or anything.

Yeah, we never know, but we feel very comfortable at 40%. And we are happy being conservative on that number and we'll continue to be conservative on that number.

Great, thank you. And then the 5% ASP drop, was that sequential or year-over-year?

That was -- I think it's basically the same. I think it was a sequential drop, right?

We're just verifying it.

We are just verifying it, but I think it was --.

Yes, that was -- I believe that was from last year.

Yes, that's last year.

And then your share count, what are you using in the calculation to get to the GAAP you said was [being since]?

That one's always a killer -- that one's always a killer, Tom. But in the fully diluted number right now we're using approximately $6.7 million for this quarter. And then on a go-forward basis the number is -- if you want to count -- probably the easiest thing to do is figure out what it will be on a go-forward basis because you have the -- shares are only outstanding from the IPO for half the month.

We had all the preferred shares that were still in there for half the month and all this kind of stuff going back and forth. But at the end of the day, if you take the number of shares that we have outstanding at the end of the quarter which was roughly 7.5 million, 7.6 million, and ad in the roughly 1 million options that we have and figure the treasury method on that, you're going to come into -- our fully diluted EPS for the quarter would have been about $0.14.

Okay. And then going forward it's up to 8.3 million shares?

Slightly more than that. I'd say probably more in line with about 8.4 million, 8.45 million.

Great, thanks very much.

Scott Billeadeau, Walrus Partners.

I just got a -- just trying to go through the sequentials. So it sounds like because of things Q3 got some order sucked from Q4. So Q4 will be down sequentially and then Q1 is usually sequentially down from Q4. Did I hear that right?

I don't think you heard that right. I think that was maybe a comment that one of the analysts made.

Okay, okay.

We have no real assessment of whether things got sucked in from Q4 to Q3.

Okay, okay, fair enough.

And I think just to qualify, historically our quarters -- Q3 and Q4 tend to be maybe less stand Q2 to Q3 because of the seasonality depending on where the Chinese holidays hit.

Okay.

It doesn't mean they don't grow, it just means that they -- tends to be less growth.

Yep, yep. And then I think you mentioned 2.8 antennas per device. And could you -- do smart TVs have fewer or more than that as opposed to (multiple speakers)?

In general the growth has been consistently up because of MIMO requiring more antennas. So a couple years ago where we might have one or two antennas in a box, that definitely grows over time. So as we implement more and more AC chips, for instance, we end up with more and more antennas. So the number of antennas per device does tend to grow over time.

All right, that's it for me, thanks. Good quarter.

(Operator Instructions). Orin Hirschman, AIGH Investment Partners.

Congratulations on the progress.

Hey, nice to talk to you again, Orin.

Thank you. Just a couple quick questions. Can you just go over the seasonality one more time? What's typical and what may have changed over the last year or two in terms of seasonality? I know it's been asked a few times, but I'm still kind of unclear as to what's historic versus what should be the new norm. That's question number one.

And question number two is, is the sequential decline, the 5%, is that a normal sequential decline? Is there any point of reference for that on the prior quarter?

Sure, we're not quite sure about sequential decline. I don't know that we've ever seen a sequential decline. So, maybe we'll need some clarity on that. I will turn over the seasonality question to Leo.

The seasonality -- let me just get it out here because I'm not very smart so I have to explain it to myself. Basically in Q4 there's one week shut down in China which affects our business. Logic tells you that some business that we got in Q3 would have been in that first week of Q4. It's not the end of the world, it's not the biggest change ever, but it does happen and it does affect the sequential growth quarter over quarter of Q3 versus Q4.

Now the Chinese New Year on the other hand is a two week period that's just taken out of Q1. And that's the reason that between Q4 to Q1 you'll see our business drop because basically two weeks of -- no one is working in that time, so we're not selling basically any product over that two-week period. That's the reason that Q1 has always historically been less than Q4.

Which mimics other companies that are building their products in China. That's not an unusual phenomenon.

No.

And just in terms of the normal seasonality or seasonality from Q3 to Q4, just go through that with me one more time.

Q3 to Q4 there's one week but it's not nearly the impact of the Chinese New Year. It's not nearly the impact of the Chinese New Year. But it does have an impact. So naturally, if you think about it this way, Q3 has 13 weeks for us, Q4 has 12. And then you've got the normal course for -- whatever the business grows underneath that to offset.

It doesn't affect our growth. It only affects, as Leo -- I think he succinctly put it -- you just count less weeks in those quarters, that's all.

Got it. Okay, great. Okay, thanks so much.

(Operator Instructions). Matt Robison.

I actually answered my own question. I'll defer to the next caller.

We always knew you were smart, Matt.

(Operator Instructions). At this time this concludes our question-and-answer session. If your question was not taken, you may contact Airgain's Investor Relations team at AIRG@lilios.com. I would now like to turn the conference back over to Mr. Myers for his closing remarks.

This -- really thank you for joining us today. I especially want to thank our employees who have worked incredibly hard, especially through the IPO process and for getting us up to speed on being a public company. Our partners and investors for their continued support and we look forward to updating you on our next call. That's all I have. Thank you, Tony.

This does conclude today's conference. We do thank you for joining us for today's Airgain third-quarter 2016 earnings conference. You may now disconnect.