Airgain Inc (AIRG) 2017 Q2 法說會逐字稿

Good afternoon. Welcome to Airgain's second-quarter 2017 earnings conference call. My name is David and I will be your coordinator for today's call. Joining us for today's call are Airgain's president and CEO, Charles Myers; CFO, Leo Johnson; and Director of Investor Relations, Alexis Waadt. I would now like to turn the call over to Ms. Waadt who will provide the necessary cautions regarding the forward-looking statements made by management during today's call.

Thank you, David, and good afternoon, everyone. 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 future events and Airgain's business strategy and future financial and operating performance, including performance for the remainder of 2017.

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 release and SEC filings including its Form 10-Q which we expect to file by August 15, 2017.

This conference call contains time sensitive information that is accurate only as of the date of this live broadcast, August 7, 2017. 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 non-GAAP EPS and 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. Following management's prepared remarks we will open up the call for questions from Airgain's publishing sell side analysts and major institutional shareholders. Now with that I would like to turn the call over to our President and CEO, Chuck Myers. Chuck?

Thanks, Alexis. Welcome, everyone, and thank you for joining us today. After the market close we issued a press release announcing our results for the second quarter ending June 30, 2017, a copy of which is available in the Investor Relations section of the website.

Overall, Q2 represented a continuation of the momentum Airgain has achieved over the last several quarters and years. We are still excelling in our core connected home and IOT markets while working to develop and further expand our opportunities with automotive, enterprise and industrial IOT markets.

Our total revenue for the quarter increased 32% year-over-year and 16% from Q1 to $13 million. The Q2 2017 gross margin came in at 47%. Our diluted non-GAAP EPS was $0.10 a share, adjusted EBITDA of $1.2 million -- with GAAP net income of negative $70,000 and GAAP EPS of negative $0.01. Included in the GAAP net income were acquisition-related expenses of $795,000.

I'd like to highlight several significant announcements which reflect the continued operational progress of our strategy and roadmap. We were very active in the low-power wide-area network space during the quarter. We are currently participating in three network trials and continue to develop additional reference design.

As we announced in May, we joined the LoRa Alliance. At that time we had already commenced shipments into the LoRa network trial for a large North American carrier. Our antenna systems have been implemented in two additional network trials, one in North America and the other in China.

We have developed programs for several new outdoor antennas to address the growing demand in this emerging space. And through our early involvement in such trials and reference designs we've positioned ourselves to take advantage of the anticipated growth in this market.

In Q2, one of our major new retail router programs hit volume production. The program is with a leader in the consumer wireless routers where we are supplying custom external bi-pole antennas. This business is important to us because we displaced an incumbent supplier in the program. This represents a significant revenue opportunity outside of our core antenna business with corresponding higher antenna ASPs.

We are also making strong inroads with a Tier 1 enterprise networking customer. We have a second design win for a ceiling mounted access point which has begun volume production.

During the second quarter we saw a ramp of another major US carrier's 802.11ac strategy. Their portfolio is comprised of a full array of 4x4 Wi-Fi product forming 802.11ac video streaming ecosystem. Airgain optimized both the flagship video gateway and set-top box antenna solutions to enable maximum system (technical difficulty).

Switching gears to our Antenna Plus acquisition which we closed during Q2, Antenna Plus was an early innovator in the mobile fleet external antennas. With this acquisition we gained access to their unique portfolio of cellular, GPS, Wi-Fi and private radio frequency antenna products.

We also acquired an established network of sales distribution and value-added reseller. We believe this arrangement will provide leverage for Airgain's existing products to gain entry into several new markets including the fast-growing automotive fleet and industrial IOT space.

Just three months into the acquisition we are now seeing how Airgain's engineering expertise can strengthen and accelerate Antenna Plus's existing product lines. Overall we're very pleased with the acquisition and the opportunities presented to us.

Now, before I provide any further details about our operational results as well as future growth strategies and outlook, I'd like to turn our call over to Leo Johnson, our CFO, who will walk us through the financial results. Leo?

Thank you, Chuck, and good afternoon, everyone. Let's turn to our financial results for the second quarter ended June 30, 2017. Our sales for the second quarter increased 32% to $13 million from $9.9 million in the same period a year ago. The increase was driven by our continued growth in product sales.

Our gross profit for the second quarter of 2017 grew 35% to $6.1 million from $4.5 million in Q2 of last year. Gross profit as a percentage of sales in the second quarter was 47.0% compared to 46.1% in the second quarter of 2016. The increase in gross profit as a percentage of sales was primarily due to sales mix.

Our total operating expenses for the second quarter were $6.2 million, up from $3.6 million in Q2 of last year. The increase was primarily due to higher personnel expenses to support our sales, marketing and R&D initiatives, the ongoing operating expenses related to Antenna Plus, and acquisition costs of $795,000. In July we consolidated the Antenna Plus operations into the Arizona headquarters to streamline product development and production.

Our adjusted EBITDA decreased 8% or $108,000 to $1.2 million as compared to the same year ago period. Non-GAAP EPS was $0.10 on a per diluted share basis based on 10.2 million shares compared to non-GAAP EPS of $0.19 per share based on 6 [million] shares a year ago.

Net income for the second quarter of 2017 was negative $70,000. GAAP EPS was negative $0.01 per diluted share compared to -- based on 9.5 million shares compared to GAAP EPS of $0.15 per share based on 4.5 million shares a year ago.

Now turning to the balance sheet, cash and cash equivalents at the end of the second quarter totaled $36.5 million compared to $41.9 million at the end of the prior quarter. The decrease was primarily driven by the $6.3 million we paid for the Antenna Plus assets. This completes my financial summary. I'll now turn the call back over to Chuck. Chuck?

Great, thanks, Leo. Before I provide additional remarks I'd like to share the results around some of our key performance indicators, excluding Antenna Plus, where we assess our current KPIs as they are only relevant to Airgain's OEM business.

In the second quarter on a year-over-year basis our KPIs -- the average number of the antennas per device increased 16% to 3.51 while our average selling price increased 22% to $0.99. Our total number of customer devices we shipped was 11.7 [million] as compared to 12 million.

As I mentioned previously, we joined the LoRa Alliance, one of the largest and fastest-growing alliances in the technology sector. Becoming a LoRa Alliance member provides us an opportunity to work globally with some of the most innovative partners and major mobile network carriers. We also joined both the ZigBee and the Z-Wave alliances. These three strategic correlations should drive more opportunities in the connected car, connected home and Internet of things business.

Looking ahead to the second half of 2017, we continue to execute on the strategies which have driven our success. We are a Company with advanced solutions growing new end markets in a strong financial position. We will continue to invest in our sales, marketing and R&D initiatives to further drive our already strong organic growth. We will also evaluate and look to acquire businesses and technologies like Antenna Plus that can be additive to our business and accelerate our future growth.

The proliferation of the IOT devices helps drive a profit and growth potential for Airgain. To benefit from some of these trends, we have further diversified our market offerings and extended our products and services. We believe we have set ourselves further apart from our competition by helping to solve problems of network deployments in homes, enterprises and cities on a global scale.

Performance improvement is more important than ever and the necessity for Airgain's real-world performance testing validation services and advice characterization has become a requirement, not a benefit.

Airgain strives to be the essential value-added partner that our customers rely on and our strong reputation is highly valued within our customer ecosystem. We take pride in consistently providing high-performance solutions among the competitive landscape and we will continue to raise the bar in an industry that sees swift technological changes.

And with that we are ready to open the call for your questions. Operator, please provide the appropriate instructions.

(Operator Instructions). Anil Doradla, William Blair.

Good results and good job on the execution. Just a couple of questions, Chuck. So Antenna Plus, relative to our model, there was a little bit more cost associated with it. So can you just give us an update on the costs that you've taken on with Antenna Plus and going forward how do the revenues look like? It sounds like there was a little bit of a reset on the revenue front, but in terms of opportunity what are the opportunities on the revenue front and cost?

Hang on just one second.

This is Leo. The cost from our model really wasn't any more; it was really just a shift from cost of sales and OpEx. These guys -- we had to re-audit their financials, so some of the costs that they had in the OpEx piece we had to push up into cost of sales.

Okay, all right. Also gross margins are running well above your target. So any latest thoughts on that front?

As we always say, we always model above 40%. It's been creeping up. We like where our margins are. We think that the Antenna Plus acquisition adds a little bit to that. And we'll always continue -- you constantly have margin pressure. We'll always continue to work that out. But the reality of it for our business where it is today, we are kind of in the range.

Now, Chuck, when you look at the remainder of 2017 into 2018, obviously on the cable side there's a lot of talk about 8x8 DOCSIS 3.1 802.11ac. Now can you share some qualitative comments in terms of what you are seeing? Obviously still the mix is on the lower considerations, but in terms of higher configuration antennas where are you? And when do you think you'll hit the sweet spot?

I think that you're going to see some of that this year. I think that most of the people -- we don't disclose customers and our customers are starting to roll out their 8x8 solution. I think you are right, Anil. I think the majority of the rollouts are not 8x8 and I don't think we would ever expect the majority to be 8x8.

But when you have a high-end gateway for instance and you're looking for a lot of streams in a home, there's a lot of justification for an 8x8. But I don't think any of us ever in the near-term expect that to be the majority of the shipments. I think you are going to consistently see a lot more of the 4x4, 2x2, 3x3 on the AC side.

And final question if you don't mind, Antenna Plus, you've been very excited about the opportunities, the technology and the differentiation. Can you share some insights as to any new traction or design wins or what you are see and potentially what we could see with Antenna Plus call it over the next couple years?

I think we continue to like the fact that it brings us into new markets and we think there was some pent up demand for our expertise in that business. So in the very, very short term that we've been in control, we've started to see some growth in that area. We would hope to see that continue.

I think as we mentioned in the notes, the business was originally primarily located in Wisconsin and in Arizona. And we consolidated that into the Arizona market that was kind of anticipated early on. We confirmed that in our model that was going to be the best approach.

We still do continue to have some assembly and things there as well, which has been nice. And our team out there, the acquired team has been integrated well and is doing a great job running that business.

We do see geographically some expansion in that as we really look to Antenna Plus to be a flag bearer for us as we move into the connected car market. And it's given us some ground to put that flag into as we drive forward with our discussions with the Tier 1 and Tier 2 automotive suppliers in the world wide. Probably our best traction so far without naming anything too specifically has really been in the EMEA for a variety of customer opportunities there.

All right, thanks a lot, Chuck and Leo.

Karl Ackerman, Cowen and Company.

When you look into the second half of the year how do you view the demand environment and the pace of the DOCSIS 3.1 upgrade cycle from US cable operators? And then secondarily, how do you view the opportunity from the largest smartphone provider who appears to have a new streaming device that may finally support 4K streaming? Curious if you could talk about the opportunity there please.

From the standpoint of -- the first question is around 3.1. We are definitely seeing a lot of uptake in that area. We see a lot of it right now in Europe would be kind of our -- really the initial deployments. So there's obviously -- because of the high def side of it, there's been a lot of push in that area and that's really where we see the carriers putting their deployment. We do think that shift overall will continue to drive revolutionary change in those products.

And then as far as the streaming devices, we've always kind of -- our thought process has always been as long as there's a Wi-Fi chip we like streaming devices. People bring up questions about what happens if the boxes go away.

Well, the Wi-Fi chip is going to exist whether it exists in one device or another and it's always been our belief that all those Wi-Fi chips we feel pretty comfortable need antennas. Where it's located is probably less of a concern, but making sure that we are participating with the designs of those products.

Understood and I appreciate the color. If I may, earlier in your prepared comments, you talked about displacing a key competitor during the quarter with one of your customers and that would be a meaningful revenue contributor for you. I was just curious if you could talk about the size of the opportunity on maybe at least an annual basis please.

Yes, and I couldn't do that off the top of my head, so I wouldn't -- I don't want to go there. We'd probably have to get the sales guys in here. But it's a request from an existing customer where we are providing embedded products already that was looking to consolidate. If I believe that's the one I'm thinking of, they were looking to consolidate their -- all the antenna supply chain.

Understood. And one final one for me on gross margins. And I am circling back to the previous question. How should we think about the linearity of gross margins extending into the second half of the year, particularly as we contemplate Antenna Plus adding to the results?

And you've got I think the large TV provider that you had in 2016 appears to be less of a headwind to margin. Earlier in your comments you mentioned margins are, quote/unquote, in the range. But why wouldn't margins stay within the high 40% level for the next few quarters. Thank you.

Thanks, Karl. No, I think that's what I'm saying about the range. As you know and we've always stated that our models are based around 40%. And I think we've -- and I'll give a lot of credit to our team and Leo and growing those, making sure we maintain those margins. So I think that we -- clearly our vision is that those margins going forward for the next couple quarters would stay in that 45%-ish to 47%-ish range. That would be -- that's surely our plan.

(Operator Instructions). Tom Sepenzis, Northland Capital.

Congratulations on the good quarter. Just to follow up on that, can you speak to longer-term the impact? I believe originally when you announced the acquisition of Antenna Plus the idea was that margins would continue to grow moving forward as that increased in the mix. Is that still the plan or do you think it settles then around the 45% to 47% range?

I will let Leo take a crack at that one.

That's a (inaudible), Tom, it's a tough one. Obviously if the existing base of Antenna Plus products increases in mix it will help the margin -- it will help the margin. But in the end, once we did the audit on Antenna Plus, the margins weren't so far out of line to make a big turn one way or the other. So at the end of the day I think our margins, like Chuck said, we feel pretty comfortable maintaining the 45% plus on a go-forward basis at least for the [quick] foreseeable future.

Thank you. And then in terms of that acquisition, G&A obviously was up in June, but was back down on a non-GAAP basis. What should we be expecting in September? Are there going to be additional acquisition expenses that come back out or is that just one time?

For the September quarter, a lot of it is dependent, but right now if things were to cut off as of today the acquisition costs in the second -- in the third quarter would be de minimis.

Great. In the prepared remarks in the press release you had mentioned that units were actually down, but ASPs in the number of antennas per device were up, which led to the upside in the revenue. I'm just wondering what was the cause or where was the weakness in terms of the units and what are you expecting here in Q3?

Year-over-year it was in the TV section, TV demand from last year compared to this year.

Okay, great. And then Q3, do you expect a rebound there or --?

I would suspect in Q3 we'll continue to see ASP increases and probably flatness on devices for the same reason and then number of (inaudible). I think what we also said in our prepared remarks is that we are going to move away from those KPIs because with the addition of Antenna Plus they've become a little bit nonsensical.

And as we move more into the IOT space, the LoRa space and the connected car space, those KPIs yes, to reiterate, they do become a little irrelevant to our business.

Sure. And then lastly, just in terms of this new router win. Did I understand that right? This is for an external antenna product in addition to an existing embedded relationship with that customer?

Hang on. I just want to make sure I get the right one, Tom. That one, the one you are referencing is bi-pole connected enterprise and home market retail, small business.

Thank you very much. Appreciate it.

Craig Ellis, B. Riley.

Yes, thanks for taking the questions and nice to be on the call with you guys. Chuck, I wanted to follow up on some of the comments about long-range wide-area networks and specifically LoRa. You mentioned that you are participating in programs there. The question is, is it both on the hub side and the endpoint side? And if so, can you characterize the content differential for you, hub versus endpoint?

I know on the hub side it's definitely going to be a larger -- it's definitely a larger device. We are working on that with a carrier deployment, so it's an external or enterprise device. And then obviously the endpoints -- we are participating in the endpoint designs as well. Those tend to be much smaller lower ASP type products. Because it's really many to one when you look at it from that perspective.

Yes, our prior work is usually 1,000 or as much as 10,000 to 1 endpoints versus hubs. Related to that, are there --?

We certainly haven't quantified that. I think every deployment is a little bit different. I can tell you we are working on some things in Asia where that might be true. I'm talking about the carriers. I'm not sure that those numbers are that big, but they are big enough that they obviously make sense including the technology in their networks.

Okay, that's helpful. And just sticking with that and following up on your comments regarding deployment. It's very earnings here in terms of deployments really driving I think a deep enough and broad enough set of use cases that we can have a clear idea of how things are trending.

But for your technology are there applications that are particularly well-suited either on the hub side or on the endpoint side? For example, with endpoints, more asset tracking versus other things? Anything stand out with the work that you've done so far?

It's really peripheral and additional devices that the carriers see security could be a lot of different things that fit within the networks that they are already providing. In Asia we are looking at problems primarily with (inaudible) let's call it public equipment and tracking those and notifying where people like to steal things off the streets and it causes problems in the transportation network.

Okay, that makes sense. People want to keep the things they own (laughter). Moving on; both you and Leo noted that the KPIs were becoming less relevant as the portfolio evolves after picking up Antenna Plus. Any color on what you might do to help the Street keep track of some of the more important longer-term trends for the Company? Or is that just under review at this point?

It is under review at this point. That's one of the reasons that we added the non-GAAP EPS to our disclosures this time was because that started to make more sense. And we will evolve it to what seems to give people better information than some of these -- these KPIs can get a little bit misleading once the mix gets all kind of jumbled up.

Got it. Thanks, guys. Appreciate the help.

Thank you. 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 investors@Airgain.com. I'd now like to turn the call back over to Mr. Myers for his closing remarks.

Thanks, everybody, for joining us. We definitely appreciate your support. Thanks for joining us for today's call. And as always, I want to especially thank our employees. If it wasn't for them none of us would be here and our partners and our investors and we're happy to support you. We look forward to updating you on the next call. Operator?

Thank you for joining us today for Airgain's second-quarter 2017 earnings call. You may now disconnect.