Good afternoon. Welcome to Airgain's Second Quarter 2020 Earnings Conference Call. My name is Simon, 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 a link available in the Investor Relations section of Airgain's website at www.airgain.com. [Operator Instructions] 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, August 6, 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 a discussion of non-GAAP financial measures, including non-GAAP operating expense, non-GAAP net income, non-GAAP diluted earnings per share and adjusted EBITDA. Please see today's earnings release for further details, including a reconciliation of the GAAP to non-GAAP results. Now, I'd like to now turn the call over to our CEO, Jacob Suen. Jacob?

Thank you, Dave. Welcome, everyone, and thank you for joining us on the call today. I'll start with an update on the second quarter, and a brief 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, following my remarks. Let's begin with AirgainConnect. In our May earnings call, we discussed our innovation around the migration to integrated wireless solutions with our new patented AirgainConnect platform launch, how it could be a gamechanger for Airgain in automotive markets and our next-generation Wi-Fi and 5G offerings. We also announced the first AirgainConnect product, which targets public safety in fleet vehicles. We have begun field trials and have inquiries from potential customers being processed. Earlier this week, we announced that we have received AirgainConnect device certification on AT&T's LTE network. You can now find our AirgainConnect product on the FirstNet website. We expect to see revenue begin to ramp in Q4 of this year. In addition to progress made on the product front, we are really pleased to announce that we have successfully engaged an additional contract manufacturer outside of China in Southeast Asia. Our new contract manufacturer services many companies globally, and is experienced in antenna manufacturing. They have already been qualified and began volume shipments as of this month. This allows us to mitigate potential China tariff impacts and diversify risk away from China, where our 2 existing contract manufacturers are located. We will continue doing business with our China-based contract manufacturers, as they have been great partners to Airgain. Now let's move on to our strategy, where I'll briefly revisit our strategy for the markets we currently serve. Specific to the consumer market, our strategy entails…

Thank you, Jacob. I'll begin by providing key financial highlights for the second quarter of 2020 as well as our outlook for the third quarter, qualitative commentary around how Q4 could play out and then a COVID-19 update. Second quarter 2020 revenue of $11.4 million was above the midpoint of our previous guidance range of $11.25 million. Revenue grew about $230,000 sequentially from Q1 to Q2 due to strength out of our consumer market revenue, as our large service provider end customers began ordering more aggressively following a pause from COVID-19 impacts, while both enterprise and automotive market revenue remained relatively flat from the prior quarter. Q2 gross margin of 47.1% was again above our long-term gross margin target range of 44% to 45%, as we benefited primarily from a favorable product mix shift. Non-GAAP operating expense in Q2 was $5.2 million, significantly better than the midpoint of our previous guidance range of $6 million. We benefited from lower travel and entertainment and cancellation of shows and exhibits during the quarter, both due to COVID-19 continuing to keep us home. We also saw material improvements of our guidance as we implemented discretionary cost-saving measures that are already positively impacting our operating expense. Excluded from non-GAAP operating expense was $654,000 in stock-based compensation expense and $124,000 in amortization of intangible assets. Adjusted EBITDA was $323,000 in Q2, well ahead of our expectations, mainly due to much improved operating expenses and higher gross margins. Non-GAAP net income in Q2 was $214,000 and Q2 GAAP net loss was about $736,000, both better than the midpoint of guidance. Moving to earnings per share. Our Q2 non-GAAP earnings per share was positive $0.02 based on a fully diluted share count of 9.9 million, and GAAP loss per share was negative $0.08 based on a basic…

Thanks, Dave. We continue to have robust demand for our products, and we are very excited about the prospects for us to grow in the second half of this year, even in this very challenging environment. We also deliver on reducing manufacturing risk away from China by expanding our contract manufacturing to Southeast Asia with a very solid and experienced antenna manufacturer. Our progress on our game-changing new platform, AirgainConnect, has already begun drawing attention from potential customers, and our field testing shows that our first product is performing to our expectation. We also successfully deliver on obtaining device certification on the AT&T network. Finally, I also stated in our last call that we believe the timing is right as the technological disruptions with 5G, next-generation automotive and technological shifts on the enterprise connectivity front will provide a favorable backdrop for companies such as Airgain. Progress with design wins and innovation in the past quarter continue to bolster my confidence in delivering long-term value to our shareholders. We appreciate those investors who have supported Airgain's progress during our strategic transition to a company with broader market diversification, delivering higher levels of innovative 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.

[Operator Instructions] Your first question comes from the line of Craig Ellis with B. Riley FBR.

Jacob and Dave, congratulations on the good execution. Dave, I wanted to start just understanding what you're seeing in the connected home business as you look at the third quarter and then into the fourth quarter. So in the third quarter, I think I heard you say that you've got 3 product ramps going and 2 others, but I think the latter 2 were associated with some inventory build. So what does that mean for the segment's ability to continue to grow in the fourth quarter? And then any color on the duration of those programs as we think about calendar '21 would be helpful.

Yes. The quick answer is that the service providers, as you know, drive a significant portion of our revenue. There's the main North American service providers are really what I'm talking about. They - as we've said historically, over the past couple of quarters that there was a product cycle transitioning going on, where some of the products that have been shipping for a while are starting to ramp down as some of the new ones are ramping up, and we're kind of right in the middle of that happening. Q3 is the first quarter where we saw a multiple of those starting to ramp. And in fact, I'd even talked historically about the fact that some of those were supposed to ramp in Q2 until COVID hit. So this is just kind of happening a little bit later than we originally expected, which is okay in this environment because it's not happening. That being said, the ramp should continue through the end of this year. And then we'll probably see some seasonal softness from providers in - pretty typical. But we'll have to see how the environment around COVID impacts those types of business. So far, it's been [indiscernible].

Got it. And then there was also an explicit mention in the press release and I think in your prepared comments that you're seeing an enterprise recovery in the third quarter. Can you talk a little bit more about that? And what can happen from here as we flip to year-end and into early calendar '21?

Yes. Good question. We have been kind of talking to the potential improvement or revenue growth out of enterprise for the past couple of quarters here. And we're finally getting multiple product ramps happening kind of at the same time. And that's really what's driving the revenue growth going into the second half and even into 2021, that it's interesting, however, because one of our larger programs, as you know, was related to enterprise in venues like stadiums and arenas that we had talked about historically. Because COVID has impacted, of course, stadium attendance and arena attendance, a lot of those products that we are working on got pushed out. So the growth we're seeing is happening despite the delay in those revenues. So we think on top of what we're seeing here, should in 2021, hopefully, if things start to - people get back to a more normal life in a year that we'll start seeing those revenues start to ramp up.

Got it. And if I could, just one more before flipping to Jacob, there was a mention that we could see AirgainConnect revenues in the calendar fourth quarter. Can you just help us with some of the visibility that you have, either with the customer inquiries that have already come in, the - what I believe is an established channel network that you could use in helping end customers with the products that you sell, et cetera, so we have a sense for what revenue could look like in the first few quarters as AirgainConnect gets going?

Yes. Maybe I'll start and Jacob, if you have comments after, you can fill in. In terms of the ramp, we've said historically, we expect to start to see the first material dollars, revenue dollars in Q4 for AirgainConnect - our first AirgainConnect product. We still expect that to be the case. That implies that the AT&T network will be ready to go and just by virtue of the fact that we expect those revenues to come in at that point in time. I can't - we can't talk specifically to AT&T's plans there. They'll have to articulate that. But we have confidence based on our continued discussions with them and all of our channel partners that, that's going to happen. Assuming that happens, we think we'll start to see - start in Q1 to get some pretty decent growth out of AirgainConnect and ramping through the entire year.

Got it. And then, Jacob, if I could just turn it over to you. We've been very attentive to the list of design wins that the company has been getting for the last year and it seems an increasingly long list. And I think the point with these design wins, or these are the higher value, higher-margin design wins that the company has been working on for the last couple years. So as we look at the list you provided today, which seems, by far, the most extensive that I've heard in at least 4 quarters, how do we think about the percent of product sales that's being driven by these new products? And how does that evolve over the next 4 quarters or so? Is it 20% in the fourth quarter? And can it double? Or how do we think about the trajectory of this new product momentum that you seem to have?

Really good questions, and without diving into the percentage, I'll just kind of let you know about the overall company trend. But so at this point, 2020, as Dave indicated, the bulk of the revenue still resides on the core consumer market. However, as you indicated in the last year or two, we are making a significant effort going after the enterprise and the automotive markets. And the design wins you're seeing, the design opportunities, we also described, we're already seeing that it's paying dividends. So I think that 2021, you're going to see a much bigger percentage of the revenue growth comes from the automotive and the enterprise as well. And I will not be able to elaborate about the exact percentage. But ideally, we see a major uptick in those two newer markets. And we do feel strongly about the potential, given the design wins we already started win this year.

Got it. Thanks guys, and congrats on the AirgainConnect certification.

Your next question comes from the line of Alessandra Vecchi with William Blair.

Congratulations on the good quarter and strong execution as well. Just on the operating expense side, you guys have really done a tremendous job there. As we look forward, thinking about sort of more revenue coming from enterprise and automotive; how do we think about the potential investments there and how operating expenses might track from Q3 levels?

Sure. I'll take that one. My guess is that we're going to see OpEx increment up, kind of like what it's doing between Q2 and Q3. Part of the reason is that we are after certain talent that we'd like to go after out there. We're also kind of making room for a lot of that by discretionary belt-tightening and just trying to operate in a little bit more efficient way, which we've had success, as you can see on OpEx in Q2. We're going to continue to do that. So when it comes down to what OpEx is going to look like, although we're not guiding beyond Q3, it does look like we should remain kind of back where we were from a non-GAAP standpoint in the $6 million quarter range next year somewhere in that kind of ZIP code. I think it's going to depend also kind of a high-class problem is if AirgainConnect platform, the first product really takes off, and we have the opportunity to very quickly invest in other versions of it, for instance, 5G or something like that, we really think that we'll put a little more investment in there, which will impact our OpEx, but for obviously, pretty good ROI reasons.

Great. And then similarly, an extension of that going into the gross margin. Obviously, that target model of 44% to 45%, you guys have done a great job beating over the last numerous quarters. And again, as we look towards more enterprise, more connect, how do we think about that range? And are you sticking to that?

Yes. I think, as I said in the past, we're probably going to maintain that long-term model until we figure out what the AirgainConnect model will look like - and I think kind of the business is changing in a pretty significant way from kind of below the line. If you look at AirgainConnect launching, if we have success there, but also kind of the shift away from consumer and more towards enterprise as well as auto, but on the enterprise side. If in certain parts of enterprise, for instance, we have - you have to go get the big - the global players in traditional Wi-Fi, for instance. Those types of gross margins are going to put more pressure on our corporate gross margin. So if that enterprise revenue goes up and we win some of the big players out there, then more pressure. That being said, with AirgainConnect, where it's at and with some of the other opportunities that we're seeing out there, we're still getting pretty good gross margins today. So as it stands today, looking out into 2021, I think we're going to continue until '21 to be in kind of the range we're at. We may be able to even maintain that for a couple of quarters into 2021, and then we'll have to see how things play out between the mix of all.

Your next question comes from the line of Gus Richard with Northland Capital Management.

Just real quick, Jason, what is the delta in your content as you move from Wi-Fi 6 to Wi-Fi 6E and CBRS?

Okay. Yes, I mean, it really varies, and I can talk a little bit internal with Kevin. He would be to provide more detail. So certainly, overall, we don't anticipate changes because from 6 to 6E, I think that that adds more complexity. And it really depends on the carrier or the device application as far as how many antennas are going to go into a specific box. So - but overall, we don't anticipate the number to go down as far as relating to the specific application, let's say, from Wi-Fi 6 to 6E. We don't anticipate a decrease in content. But the complexity and the expectation of a particular device would make a difference there. So - and I cannot - Kevin can put some more color into it.

Gus, this is Kevin. Just to give you an indication, if you look at the trend that we're seeing now with the new product projects that we're working on. It's estimated about, I think, 75% of the newer designs that we're working on that we'll be introducing in the future and those future boxes are having - 75% of them are WiFi 6E [ph]. So it's really good because we position ourselves well with our upgrades of our facilities around the globe to where we knew this is happening. And now each location heavily in design in the Wi-Fi 6E antennas and stuff and so [indiscernible] that trend to grow. I think next year we'll even see more than 75% of the new projects that are coming in with that new technology.

Got it. And then when do you expect those designs to start to go into manufacturing, 2022 or will you start to see some of the second half of '21?

Yes. This year - next end of this year and actually going into '21. Most of the designs that we're working on right now are requiring the Wi-Fi 6E in them and stuff. So that will ramp up production in the fourth quarter and going into the first quarter of next year.

Got it. And then just thinking about seasonality going forward, you're going to have an increasing mix of automotive, which is a little bit different than your consumer revenue. Can you talk about what your expectations are for seasonality going into '21 and '22?

Yes. I can take a shot at that. I think we're not going to see on top line revenue, the typical seasonality just because of the - we expect the shift or the transition to these new products happening over the next kind of 18 months' time frame. The transition, do you want to take this, Jacob?

Yes. So we do anticipate that we're going to see the automotive revenue to start increasing, specifically in the aftermarket segments, right? And then the AirgainConnect, we're going to see how well the AT&T network - there is some reliance also on the AT&T side, as well in the FirstNet. So we're going to be - I think that right now, we feel very promising about the mixture, I think, starting next year, especially the second half. We're going to see a substantial amount of that coming from the automotive, the AirgainConnect platform. And the enterprise would also come into play as well. But at this point, I don't think that we can tell you exactly what - what's - how is it going to play out from a percentage-wise.

Yes. And let me just finish up my thought there. I thought Jacob wanted to chime in. So I let him go. On the consumer side, with the service providers, specifically, we're going to see seasonality in Q1 and Q2, like I said before, which we typically expect. And because they drive a material portion of our revenue, you're going to see some pressure there. That being said, with the ramp and growth out of enterprise that we talked about as well as AirgainConnect, we think that we have the potential to outgrow that seasonal softness during that time frame. So - and that's kind of what I mean by there's a lot of things happening below the top line that are changing pretty significantly for the just mix between those kind of submarkets. Does that makes sense?

It does. I guess, just to be really blunt about it, do you think you can be flat sequential in the fourth - in the first quarter? Will the uplift to the new product ramps, be enough to offset the seasonality of the normal consumer market?

Yes. I don't want to get into the position of guiding revenue that far out. However, just qualitatively, if you kind of look at the potential impact of something like an AirgainConnect product revenue, even if we're shipping a small amount, it can produce a pretty material size of revenue for us. So I think that's kind of the big lever for us, which will ultimately answer your question.

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

A few questions, if I may. Regarding AirgainConnect, I think you have the opportunity to broaden out that product to other carriers utilizing band 14. Have you locked in firm orders yet across the channel, across multiple partners that is driving your enthusiasm for the fourth quarter and next year? I guess if you could just quantify the number of channel partners embedded within your outlook for AirgainConnect as you think about the linearity of that growing in 2021, that would be very helpful.

Yes. I think I'll take a quick shot, and then Jacob, maybe you can follow-up. The bottom line, unfortunately, we can't get into that kind of detail on this call. We're getting quite a few inquiries about from potential customers, but it's a little early. We just got the product certified field trials internally and excellent. And we know the interest in the market is there. Outside of that, I think getting into some of the customer details is probably not appropriate [indiscernible].

Yes. I mean - but just to reiterate Dave's point, we are getting a lot of interest. And even talking to AT&T, FirstNet, they are more willing to work with us and want to put a really good focus on this product launch.

Got it, that's helpful. Just on the - well, it sounds like you have - you certainly have several new programs across consumer gateways and routers ramping over the next 2 quarters. I'm curious how many of these programs are new business to you versus replacing a previous program, I guess that would indicate greater top line leverage for you going into 2021?

Yes. Some of the new products that we're talking about ramping now are the product cycle transition products I was talking about on the service provider side, so call those placement products. And - but if you kind of look down the line of enterprise and even auto, those are all kind of more [indiscernible].

Even couple of the programs I mentioned earlier, the design win we are now getting in Japan, that's new. And the thing that got me really excited as well is we talk about the European leisure market. That's a brand-new opportunity that's presenting to us, so the pandemic actually creating that particular opportunity. We had mentioned about the 20% increase with the registration certification. And that presents a really good opportunity for us, and it's in line with what we try to grow with the aftermarket as well.

Got it, that's helpful. Last question, if I may. You indicated that enterprise should hold up well into the second half of the year. I was hoping you could provide a bit more commentary on what you're seeing in that market, because one of your larger customers noted some challenges in campus networking and outdoor wireless, though indoor wireless is holding up well. So if you could just speak to the puts and takes you see in enterprise over the second half relative to your Wi-Fi 6 portfolio, that would be helpful.

Yes. I think it's a little bit trickier because the revenue historically out of enterprise was really almost immaterial. It was very small. So we're growing off a very small base. Now that we've won some new designs with some of the big traditional Wi-Fi enterprise players, those are just launching. So it might not exactly match with what's happening in the general market.

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'd now like to turn the call back 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. Operator?

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