Good afternoon welcome to Airgain's Third Quarter 2020 Earnings Conference Call. My name is Ian and I will be your coordinator for today's call. Joining us for today's call are Airgain's CEO, Jacob Suen, CFO, David Lyle, and Senior Vice President of Engineering, Kevin Thill.

As a reminder, this call will be recorded and made available for replay via link available in the Investor Relations section of Airgain's website at http://www.airgain.com. Following management's prepared remarks, the call will be opened up for questions from Airgain's publishing sell-side analysts. I would now like to turn the call over to Mr. Lyle..

Thank you and good afternoon to everyone. 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.

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, November 5th, 2020. Airgain undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

In addition, this conference call may include discussion of non-GAAP financial measures, including non-GAAP operating expense, non-GAAP net income, non-GAAP diluted earnings per share, and adjusted EBITDA. We have seen today's earnings release before further details, including a reconciliation of the GAAP to non-GAAP results.

Now I'd like to turn the call over to our CEO, Jacob Suen..

Thank you, Dave. Welcome everyone and thank you for joining us on the call today. I'll start with an update on the third quarter and a review of our strategy and then discuss progress we've made on key programs. Dave will then provide financial details, as well as a quick update on the impact of COVID-19 on our business. Let's begin with AirgainConnect.

In our August earnings call, we discussed our innovation around the migration to integrated wireless solutions with our new patent AirgainConnect platform launch. It could be a game changer for Airgain in automotive markets in our next generation Wi-Fi and 5G offerings.

We also discussed progress with our first AirgainConnect product, which targets public safety in vehicles in the US and is designed to provide exceptional emergency communications on AT&T's network, as well as on AT&T FirstNet gain [ph]. We have made great progress towards launching this product. So, we are excited to provide an update.

We are now operating in a phase that we call HPV control Introduction. The period just before AT&T launches service for HPV product on the FirstNet network nationwide. In this stage HPV control introduction phase we have been conducting field trials with prospective customers in our picking orders.

We have now substantially completed several field trials of our first AirgainConnect product and we have seen outstanding results with AirgainConnect outperforming conventional router modems.

On the revenue front for AirgainConnect we have already received purchase orders from one of our value add distributor partners and have received indication from three others for more purchase orders to be shipped this quarter. Therefore, we expect to generate about 500,000 in revenue in the current quarter from this product.

Looking forward into the first quarter of next year when we anticipate that the HPV feature we have been launched, we believe we will be able to sell our AirgainConnect product on a much broader scale. Now let's move on to our strategy.

With the year coming to a close, I thought it would be a valuable to revisit our strategy and provide some more clarity around the direction we're headed. As you are aware Airgain excelled throughout the evolutions of the IEEE [ph] protocol standards and is now in the US Wi-Fi antenna expert.

Over the years, we've diversified into cellular communications, starting with 3G technology and more recently IoT. And the number of wireless standards increase we adapt to develop solutions for many of them. Our initial revenue growth was driven primarily through the Tier 1 North American video service providers.

And to this day this end customers contribute meaningfully to our current top line revenue.

Those revenue streams, which we include in our consumer market revenue should continue to contribute significantly to our overall revenue over the next few years despite being a slower growth market versus our new addressable markets in the parts in automotive.

If you look back at our history, back in the days of 3G and Wi-Fi 1, 2, and 3, antennas were [indiscernible] devices have slowly begun to have more antennas per device, more frequency bands per device, shrinking form factors, faster product refresh cycles, and most stringent performance requirements.

This has made antennas the differentiating factor in the performance of these devices. As we move into Wi-Fi 6, which addresses more -- which adds new spectrum to deal with. And then sub-6 Tetra Hertz and millimeter wave within 5G [indiscernible] very complex.

The market is moving straight into our 4 competencies in opening up opportunities in the enterprise and automotive markets while we have been focusing on product innovations in recent years. On the enterprise market front, we are targeting new 5G device programs, primarily sub-6 gigahertz and Wi-Fi 6 and 6G opportunities for integrated systems.

This allows us to leverage our core competencies in advanced antenna designs in a markets that offers significantly higher selling prices in the 10s of dollars to hundreds of dollars range. In particular, we see opportunities in several enterprise submarket.

First, our current primary focus is on the traditional enterprise Wi-Fi where Airgain can leverage it's long-standing relationships with service providers and experience in gateways to win opportunities in next generation routers to a hyper things area Wi-Fi venues like stadiums and arena.

Second, we're seeing opportunities in industrial IoT, including end to end where we already have a small established set of customers from which to build up from. We think this is a large market opportunity in the longer term where we can leverage our experience in developing complex wireless systems.

Third, we see some smaller opportunities in those small cell markets where we can leverage expertise in in-home wireless systems by exploiting our existing relationships with service providers.

Four, while evaluating opportunities in 5G EDGE wireless access markets leveraging our service provider network experience to maintain in the 5G EDGE wireless access OEMs.

That being said the automotive market continues to be our largest core opportunity, primarily in the aftermarket, premarket with our recent introductions of AirgainConnect where we have a very large near-term opportunity that can be leveraged into a gamechanger platform for Airgain.

Also important for our historical topline revenue is our existing automotive aftermarket fleet product portfolio. Our strategy is to continue to leverage our gold standard Antenna Plus brand in the North American fleet and public safety auto aftermarket segments to generate revenue as we refresh the product portfolio interest 5G.

For the other OEM markets, we believe the landscape for antenna is changing significantly as antennas are now being integrated into different parts of the car and making local wire, small form factor, multi-antenna, complexity [indiscernible].

We're currently exploring opportunities in this market that will generate revenues beginning three to five years out. I would categorize these market as being in an exploratory phase and so the market matures and optimize future designs are better understood.

All in all, I firmly believe that we are addressing the right markets at the right time and we look forward and updating you on our progress with our strategy in the future calls. Now, I would like to provide an update on some key programs we've mentioned included in this earnings calls.

In Q3 we re-engaged in a significant enterprise Wi-Fi platform with one of the leading enterprise LAN networking equipment providers. This program was temporary [ph] due to COVID-19 and is now back in development and expected to move into production by the end -- by the second half of next year.

Our design success on this project has led to engagement into other significant programs with the same customer. One is enterprise Wi-Fi access point with high gain panel antennas that is expected to move into production in Q3 2021.

The second is SD-WAN access points with 5G wireless backhaul and we expect this program to rent in the second half of 2021. It is important to note that these are more complex antenna system design wins. So, the command selling prices is in the hundreds of dollars, well above our historical corporate averages.

Additionally, we're in the final stages of development of 5G sub-6 gigahertz industrial IoT in fixed wireless access programs for a North American enterprise IoT and Mobile provider. And we expect these programs to ramp next year. We're also in the final stages of design for multiple other fleet programs for Q1 in-car video system provider.

We expect these significant programs to go into production next year. Now, I would like to highlight some multiple design wins and key program initiatives structured specifically in the third quarter, across our markets.

On the consumer we continue to see momentum for our Wi-Fi 6 embedded antenna solutions where you see production orders were significant Wi-Fi 6 gateway program where North American Tier-1 up later, which we mentioned in our August earnings call. We expect volume shipments to ramp by year-end and continue into 2021.

Initial orders will also place for a Wi-Fi 6 CTE white band hybrid fiber wireless internet service provider in North America. We expect to see this program ramp in early 2021. Additionally, we do have continued to collaborate with several leading chipset suppliers from the Department of Wi-Fi 6E designs.

We continue to engage with these suppliers on the new platforms where high performance 6 gigahertz solutions and we have central Wi-Fi 6E products into multiple reference programs.

We are seeing an increase in demand for 5G cellular fixed wireless applications, which is in line with our strategy of winning the designs were more comfort internet technology is required. We do see initial production orders for the cellular fixed wireless access gateway for Tier 1 network infrastructure provider in North America.

We expect this program to building to production early next year. In the enterprise market we secure a design with one of the largest global energy management leaders for an outdoor IoT Gateway. We mentioned our investment on this program in our Q1 earnings call and as expected, initial production orders have been placed.

We expect this program to ramp in 2021. On the automotive front, we received our first purchase order for AirgainConnect from one of our primary distributors, one that offers an extensive product portfolio of public safety devices, which support the important communications for first responders.

We are very proud of the progress we've made over the past three quarters during a very dynamic period and especially the prospect of quote in 2021. Now, I'd like to turn the call over to our Chief Financial Officer, David Lyle who will walk us through the financials.

Dave?.

Thank you, Jacob. I'll begin by providing key financial highlights for the third quarter, as well as our outlook for the fourth quarter. Qualitative commentary around how 2021 may play out and then the COVID-19 update. Third quarter 2020 revenue of $13 million was above the midpoint of our previous guidance range of $12.75 million.

Revenue grew about $1.6 million sequentially, Q2 to Q3 from strength out of our consumer market revenue primarily due to pre-product ramps and initial inventory build from two of our large North American service provider and customers, while enterprise and automotive market revenues declined slightly from the prior quarter as COVID-19 kept our customers buying conservatively.

Q3 gross margin at 46.3% was within our guidance range of 46% to 47%. Non-GAAP operating expense in Q3 came in just below $5.5 million within our previous guidance range of $5.3 million to $5.5 million. Excluded from non-GAAP operating expense was $634,000 in stock-based compensation expense and $121,000 in amortization of intangible assets.

Adjusted EBITDA was $693,000 in Q3. Non-GAAP net income in Q3 was $587,000 and Q3 GAAP net loss was $261,000. Moving to earnings per share our Q3 non-GAAP earnings per share was $0.06 and GAAP loss per share was $0.03.

Finally, our Q3 cash, cash equivalent, and short-term investments with $38 million, up almost $3 million from Q2, primarily due to positive working capital changes. We did not repurchase any shares during the quarter. Now, I would like to provide an preliminary outlook for the fourth quarter of 2020.

In Q4, we expect revenue to be in the range of $12.25 million to $13.25 million or $12.75 million at the midpoint of guidance. We expect consumer market revenues to decline sequentially primarily due to initial inventory build that occurred in Q3 from two of our large North American service provider and customers as mentioned earlier in the call.

We expect enterprise market revenue strength in Q4 as a result of new product ramps at several customers and we expect our automotive market revenue to grow in Q4, primarily as we begin to see initial orders from our first AirgainConnect product.

We expect gross margin in the fourth quarter to be in the range of 45.5% and 46.5%, slightly lower at the midpoint versus Q3 and a product mix shift away from our consumer market revenue in the quarter. We'll put some minor pressure on our corporate gross margins.

We expect Q4 non-GAAP operating expense will be about $5.6 million plus or minus $100,000. The expected sequential increase in operating expense is primarily due to project investment in 5G projects and 2020 audit fees.

Excluded from our non-GAAP operating expense estimate was $630,000 in stock-based compensation expense and $121,000 in amortization of intangible assets. At the midpoint of guidance adjusted EBITDA in Q4 would be about $410,000.

At the midpoint of guidance, we expect Q4 non-GAAP earnings per share to be about $0.03 and on a GAAP basis we expect a loss per share of price tax. Although we are not providing specific annual financial guidance, I would like to revisit how we expect revenue to play out in 2021.

We expect consumer market revenue to remain a core foundational revenue base for Airgain with some small possible growth year-over-year as this is heavily dependent on the success of our top service provider and customers to deliver next generation gateway in client devices, the plan.

We expect our enterprise market revenue to grow year-over-year as we begin to penetrate with 5G sub-6 gigahertz and Wi-Fi fixed products into new sub-markets.

We expect the most significant growth year-over-year to come from our automotive market revenue, primarily from our newly launched AirgainConnect platforms first product, but also to a lesser extent growth from our existing aftermarket fleet market.

Timing and magnitude of the growth from our AirgainConnect product is highly dependent on the exact timing of when AT&T's HPUE network is launched throughout the country, which is a decision made solely by AT&T.

In terms of inorganic growth in technology expansion potential, we continue to evaluate opportunities that either expedite our time to market for a new innovative products or that help us gain the benefits of scale in our markets, especially in our growth markets enterprise and automotive.

Going up where we are today, we believe we are in a solid position to sustain for a challenging environment and are very excited about the prospects for growth in 2021, especially as it contained AirgainConnect. Our sustainability, comparability continue as we have a very solid balance sheet with a strong cash position and no debt.

Before I turn it back over to Jacob, I wanted to give a quick update on the impact of COVID-19 on our business. We aligned our policies and procedures using a conservative viewpoint so the standard set by Federal and State recommendation. We have had little to no supply chain disruption and only a few customer delays.

Now, I'll turn it back over to Jacob.

Jacob?.

Thanks, Dave. We are very pleased with our performance during a difficult global environment in 2020 and I am very excited about the growth prospects for 2021 and beyond.

It bears repeating from prior earnings calls that we believe we are delivering the right products at the right time as to from the logical disruptions with 5G, next generation automotive, and technological shifts on the enterprise connectivity front. We'll provide a favorable backdrop for companies such as the Airgain.

Progress with design wins and innovation in the past quarter continue to bolster my confidence in delivering long-term value to our shareholders.

Well, I appreciate those investors who have supported agents to progress during our strategic transition for a company with broader market diversification, delivering higher levels of integrated wireless solutions and especially during a very challenging environment. And with that we are ready to open the call for your questions.

Operator, please provide the appropriate instructions..

Thank you. We will now take questions from Airgain's publishing sell-side analysts. [Operator Instructions] Your first question comes from the line of Craig A. Ellis of B Riley..

Thanks [ph] for all the detailed color. I just wanted to start by asking about the second half.

So, understanding that there was customer issue and connected home that somewhat inflated 3Q's revenues, it looks like combined second half revenues were about 1.2 million borrower than what we've put expected and you also have to $0.5 million from AirgainConnect in 4Q, so -- so if you look across the end markets connected home enterprise and auto how would you characterize their positioning in the fourth quarter relative what do you expected three months ago and it's one of them undershooting what those expectations would have been?.

Yes, hey, Craig, it's Dave. I'll take that one. A couple of different things are happening here. I think there is one large North American Tier 1 service provider that is actually at an inventory build in Q3 and therefore slowing down in Q4.

And then as we also mentioned there is a quite another large North American service provider who is actually launching a new box Wi-Fi 6 box that is slower to launch than we thought. We think it's going to be pretty decent size in 2021 in terms of growth year-over-year for that particular end customer.

So, we're kind of in this position where one has come down and the other half and starting to get to make up for -- for the ground and that's why -- and if you look at half versus an expected second half all of that is really in Q4, but I think the kind of good news to this is that we're able to -- if you look at the midpoint of guidance remain relatively flat, a little bit of decline and that's mostly because by the way that our enterprise design wins are just starting to ramp in Q4, which also will provide some growth for us in the following year..

Thanks for that, David.

And part of the implications of that for the first quarter then, so it sounds like we're starting to ship AirgainConnect, but that there is demand indications that could mean that shipments could be much more significant, I know we still need HPV official turn on from AT&T, but assuming we get that it seems like AirgainConnect should be up and it seems like now there is a program that was supposed to contribute more in 4Q that could likely be a bigger contributor, so and then we typically look at seasonality being down quarter-on-quarter in the first quarter, but do these things add up to sequential growth in the first quarter event?.

Yes, I'll start and Jacob you are always welcome to jump in here.

We believe we're going to see some growth not only out of AirgainConnect, so, yes, you're correct in Q1 we definitely expect to see growth there, especially if HPUE gets turned on when we believe it will, if that happens, we're going to see some decent size growth out of the AirgainConnect side.

That product is in the automotive market revenue that we have. But if you take that out we also believe that our historical aftermarket fleet revenue will start to kind of return in Q1 versus Q4, so we do think we'll get growth out of there also.

And then lastly, the enterprise side, we do think we're going to continue to see growth there we're expecting some decent size growth in Q4 relative to a very small base that it's growing off of.

With regard to consumer specifically and the service providers, yes, Q1 is typically seasonally soft, we expect that to happen in Q1 before we start to see resume growth going into Q2.

So, growth out of automotive, growth out of enterprise going into Q1, and then consumers kind of a question mark depending on how fast this new North American service provider ramps the new Wi-Fi 6 product that we were talking about earlier.

Right now, I'd rather think [ph] conservatively because I think we're going to see growth out of those other market revenues..

Okay. And then, my last question before hopping back in the queue.

It's helpful to get the color on calendar 21, consumer, small year-on-year growth, enterprise growing, obviously auto has potential for explosive growth, but with the visibility that the company has today and not looking for specific guidance, but I think investors typically look for Airgain to be capable of 10% to 20% growth.

Did those things add up to growth in that range.

Could it be above that range or for some reason would it be below that range and if so why would that be?.

Yes, I want to answer that specifically because we don't do annual guidance, but just to give you some color about how we think about it. If you look at the historical automotive added to the AirgainConnect product in the automotive side, we're going to see some decent size growth out of automotive.

It's the same thing with enterprise, but not to the extent that we expect out of automotive and then I think you know after we get to start to see some -- some of these North American service providers come back, which I think is probably more heavily weighted to the second half of the year, especially given COVID that we'll see that start to grow a little bit that won't be the largest growth driver versus the other two markets.

So, you add it all that up and this plan, actually delivered without any surprises related to COVID or anything else, I think the possibility is definitely there to grow in the kind of ranges, you're talking about..

Got it. Thanks, David. And I'll hop back in..

[Operator Instructions] Your next question comes from the line of Karl Ackerman of Cowen. Your line is open..

Hey, good afternoon gentlemen. Two questions if I may. The residential Wi-Fi 6 upgrade cycle appears to be meaningfully ramping across the supply chain. The service provider inventory build appears to offset this a little bit in the fourth quarter, but do you see this inventory overhang abating exiting the December quarter, that's my first question.

Then secondarily, because you have pretty good exposure to the Wi-Fi 6 upgrade cycle, both on the residential side and enterprise side, could you address both the size and magnitude of the opportunity you see in front of you at least for the residential side of the next year or two?.

Yes, I'll address the first question, you talked about the inventory buildup in Q3, when will that go away, it certainly could by the end of the year. Q1 is typically soft for us with these service providers, so that's kind of a to be seen depending on how soft that quarter is. But certainly, you're right.

This could start to come back in Q1 and we're planning a little more conservatively and assuming that we continue and then start to see kind of resume growth into Q2 at this point..

Yes. And Karl, Jacob here. I'll address the second question. So, I was going to make sure I got your questions correctly, you are looking into the potential opportunities on the residential side, but given the fact that you think that….

That is correct..

So -- look, I think the pandemic actually contributed positively that you've got more people in home.

So, there is a greater need for wireless products, performance, expectations, but some of the challenges is those are along with installation, we have been talking to several service providers, where they -- they are not allowed, the same people to go inside people's homes.

So, some of those contributing to not so much about a lack of demand, but a lack of deployment, but how did they go in there with the pandemic issue. But overall, we do feel good about this thing, it's going to end, I think sooner than later, and we're going to be well positioned.

I mean all of those demand is going to come back and I think that once the pandemic is over these people can go in and do installations then I see in uptick..

Got it. Thank you. You've previously indicated that content for enterprise Wi-Fi 6 can be tend to perhaps hundreds of dollars for enterprise and enterprise and SMB mortgage have been soft to date, but you mentioned some new wins in your prepared comments.

The question is, are you seeing any notable pickup in this market and perhaps could you discuss the -- some of that design activity that you've had, as you think about the layering throughout calendar 2021. Thank you..

Great question, Karl. I mean for me very [indiscernible] about enterprise market for us as a company. I think I mentioned earlier, there were a couple of key flow once we want in 2020 early in the year that we are expecting to ramp, but due to COVID-19, I mentioned some of the installation for the stadiums, for the arena that push out to 2021.

And we still want those projects, just a timing issue. And those are substantial projects where the ASP it's in the hundreds of dollars. And we're also entering several other projects design wins, so overall I would expect significant growth in the price market for us in 2021..

Thank you..

[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 at investors@airgain.com. I would now like to turn the call over to Mr. Suen for his closing remarks..

Thank you for joining us on today's call. I especially want to thank our employees, partners and investors for their continued support. We look forward to updating you on our next call up later..

Thank you for joining today's Airgain's third quarter 2020 earnings call. You may now disconnect..