Good afternoon. Welcome to Airgain's Second Quarter 2019 Earnings Conference Call. My name is Christina, and I'll be your coordinator for today's call. Joining us for today’s call are Airgain's outgoing CEO and current Chairman of the Board, Jim Sims; newly appointed CEO, Jacob Suen; SVP of Engineering, Kevin Thill; and CFO, Anil Doradla. I would now like to turn the call over to Mr. Doradla, who will provide the necessary cautions regarding the forward-looking statements made by management during today's call.

Thank you, 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 third quarter 2019. 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 earning release and SEC filings, including its Form 10-Q, which will be filed today, August 8, 2019. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 8, 2019. 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 may include a discussion of non-GAAP financial measures, including non-GAAP net income, non-GAAP diluted EPS and adjusted EBITDA. Please see today's earnings release, which is posted on Airgain's website for further details, including a reconciliation of 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 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. Now with that, I would like to turn the call over to the Chairman of the Board, Jim Sims. Jim?

Thank you, Anil. Welcome, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the second quarter ended June 30, 2019, along with the appointment of Jacob Suen as a Chief Executive Officer of the Company which is available in the Investor Relations section on our website. I am very pleased with our second quarter 2019 results with sales of $14.5 million, down 3% on a year-over-year basis and above our guidance range of $14.2 million to $14.4 million. Key highlights in the second quarter results include a strong sequential improvement in the company-wide gross margin of 130 basis points to 46%, largely driven by the efforts that we put in place over the past several quarters around efficiency improvements on the manufacturing front along with favorable product and pricing mix. Like the last several quarters, we continued to be engaged with design wins across our consumer, enterprise and automotive markets and underpinning these wins are the ever increasing demand for complex antenna designs to support higher-bandwidth applications. The second quarter also witnessed healthy demands for applications around the automotive market. This was largely driven by strong demand of the new products launched in the past couple of quarters. As we entered into the second half of 2019, we remain bullish on the market as we leverage our Antenna Plus brand that is known across the industry for its innovation and first-to-market products. On the 5G front, we continued to be engaged across multiple programs as we highlighted in the previous quarter. We are excited and looking forward to the industry's transition to 5G over the next several quarters. Our engagements on the 5G front, Span Gateways, Small Cells and Automotive applications. We also reported second quarter 2019 GAAP…

Thank you very much for the kind words Jim, and good afternoon to everyone. As many of you know, I have been with the Company for over 13 years and during this time, I have seen Airgain steadily becoming one of the market leaders for complex antenna designs across the globe. Over the years, [time in] Airgain, I have witnessed the Company solving complex customer solutions that have resulted in superior performance across global deployments. I continue to have strong conviction in the Company's future and belief Airgain is poised to become a significantly larger company over the next several years and see benefits from continued demand for its products across the consumer enterprise and automotive markets. Going forward, I hope to build up on the direction that Jim has set for the Company over the past 15 months and I am eagerly looking forward to take on the new challenges and opportunities. While I will have more opportunities to interact in greater detail in the future, I would like to highlight some of the areas of strategic focus, including 5G opportunities and gaining greater share across the enterprise. Once again, I would like to thank Jim and the Board of Airgain for the opportunity and look forward to meet many of you on the phone or in person in the near future. I would like to turn the call over to our Chief Financial Officer, Anil Doradla, who will walk us through the financial highlights for the quarter. Anil?

Thank you, Jacob, and good afternoon. I will provide key financial highlights for the second quarter of 2019 and provide some preliminary color around third quarter 2019. Similar to previous quarters, we will continue to provide quarterly guidance as we believe this will provide more clarity to the investment community and keep us more focused on the execution front. That said, I would once again like to remind investors that our business is subject to short lead times and this may result in short-term quarterly fluctuations and our ability to accurately predict our business. Now coming to the second quarter 2019 highlights. Sales of $14.5 million declined 4% on a sequential basis and 3% on a year-over-year basis above our guidance of $14.2 million to $14.4 million. The strength in the second quarter was largely driven by robust demand in the automotive market. Second quarter gross profit was $6.7 million or 46% of sales versus $6.8 million or 45% in the first quarter and $6.6 million or 44% in the same period a year-ago. The strong sequential improvement of 130 basis points in the second quarter mark the second consecutive quarter of 100 basis points plus gross margin improvement and was largely driven by the benefits derived from our efforts over the last several quarters around restructuring our operations, combined with streamlining our relationships with existing and new contract manufacturers. Additionally, a favorable product mix driven on the robust demand in our automotive market also contributed to the strong performance. I would like to remind investors that we continue to maintain our long-term gross margin outlook of 44% to 45% and would recommend the street to model these levels for the remainder of 2019. Our GAAP net income totaled $0.7 million or $0.07 per diluted share based on 10.1 million…

Thank you, Anil, and thanks to everyone for being on the call today. Before I open the call up to your questions, I wanted to share a couple of closing thoughts. When I took over the Company in 2018, we set out some specific goals to position the Company for the long-term success. This involves several changes across our sales, marketing, engineering, and operations organizations. As a result have shown over the course of several quarters, we have made significant progress across each of our business units. While the macro and customer specific issues are a near-term hiccup to the Company, I believe the Company is in a stronger position and is well positioned to leverage growth opportunities over the next several years. The Company's core strengths have been around complex antenna design and deployment across large service providers around the world. While the near-term poses some volatility, we believe the Company will be in a stronger position as we enter 2020 and beyond. A combination of 5G adoption and into the enterprise markets continued scaling of the automotive business and the upgrade cycle to the 802.11ax are just some of the key growth drivers. I am confident that under the Jacob's leadership, the Company will achieve new levels of success. And once again, I wish him all the best. And with that, we're open to questions. Operator, please provide the appropriate instructions.

Thank you. We will now take questions from Airgain's publishing sell-side analyst. [Operator Instructions] Our first question will come from Craig Ellis from B. Riley FBR. Please proceed.

Thanks for taking the question and team, congratulations on the strong job in a tough environment and in the report a quarter, especially on margins. I wanted to start with a couple of clarifications. Jim thanks for all the detail. Just summarize in the macro environment? Is it fair to say that what we have out there for Airgain is a similar situation to what we have three months ago, but more intensified cross-currents and related to that, how do you feel about market share on programs that had been in progress that may be somewhat impacted by the delays and other issues that are out there?

Thanks for the question. Look, what we are experiencing as we entered the third quarter, we indicated before that there were three clients that would be unaffected by what was going on in China. We're pleased that one of them now has developed and they start to produce in the third quarter. The other two, we really thought that would be into production or back into production this quarter. It’s just not going to materialize until the beginning of Q4. So it is what it is. It has nothing to do with our performance and nothing to do with our capabilities, it's just what's going on in China. I don't believe there is any impact on us losing market share. I just believe that the disruption that our vendors are moving substantial amount of business out of China, and then that part is delaying our ability to ship new products to them. So I'm optimistic about the future. I wish several clients would have gone into production this quarter. It just didn't materialize the way we had planned. On the other hand, I'm pleased with what we did do that – look, we went into all pieces of this operation here. Six, nine months ago, we got our operating expenses in control, we got our R&D up to five centers up and working, our integration between R&D and sales and working on new projects, I think were world-class. So we're in great position to leverage off this foundation of the expense and the margins that we have today.

Craig, this is Anil. Just building up on Jim's point. As you rightly pointed out, certain customer specific factors that he highlighted. But also the overarching team out there is something that we don't even have to get onto the call. There's a bigger thing playing out there. So again, I think I said this last quarter, when we look at kind of the range of our customers, we see different reactions right from people taking a pause versus doubling down in other countries. So it's a combination of those, plus as Jim pointed out, certain customers, and remember, we're a company where a handful of customers contribute to a larger portion of our business, right. So the movements are impacted kind of on both fronts.

I think one of the things you're going to see as we move forward. Our consumer business, which is the business that was impacted with the majority of what we just spoke about. Our growth though is really in the enterprise and our growth is in the automotive. Those have different characteristics, and we're really pleased on our wins on the enterprise and we're really pleased that even some of the automotive is going to production sooner than we thought. So I think over time our mix of business will become more positive and less effected by a single client or two clients.

Let me just take up on that point then because I wanted to ask some more strategic questions and I'll come back to a few OpEx items later. Jim, one of the things that we've seen from a lot of our companies is an observation that there's been a significant pickup in 5G related engagements in the last three months. And one of the things that you talked about – when you talked about things that are happening over the three different types of programs that you have with 5G. The question is you mentioned that coding activity has been good. Can you compare a coding activity or just design win engagement activity in the second quarter? What you've seen in other quarters in the past? And the second question would be, with respect to capabilities around some of the new growth initiatives that you have, whether it's the 5G test labs or other things. How do you feel the Company's position for some of these bigger waves that are upon us?

Yes. What a great question. Now I'll start to answer and I'll turn over some of these specifics to Jacob since he's the one that runs all the sales and marketing for our organization. The first thing that happened during the quarter, we did put together a full group just focused on 5G now in the engineering, major change because we think there's a huge opportunity there. We've promoted somebody and that's one of the five centers that we have now to specifically go after 5G. What we are seeing in the six gigahertz and below, which is the first release of 5G in the small cells, in a lot of the new platforms that are coming out. Our win ratio there has been very good. We continue to win there. Now we're in the process of bidding opportunities around the millimeter wavelength and that's what you're going to see. A lot of that really won't go into production until next year. A lot of activity, we're bidding it, but you'll see some production probably closer to the second half of next year. But I'll turn that over to Jacob, so he's a little closer with the bids we've been doing in that specific area.

Yes. Hello, Craig. Jacob here. So in regards to your questions about quotation, we certainly have seen a substantial increase on the quotations in particular for the enterprise and the outdoor market. And that's where we have positioned our company to us. So and we expect this trend to continue the growth, so entering into the second half of the year. And then I think that you have also – what was your second question, again if you don't mind – remind me again.

Yes, the second part of the question was, there are some obvious areas where the Company's added capability in inter quarter at press release 5G testing labs. But what are some of the other things that the Company has done to prepare for some of the waves of growth that you see coming?

Kevin, do you want to take that?

Yes, I’ll handle it. Yes. We've gone ahead and upgraded every facility around the globe right now to go ahead and be able to test and measure at the higher frequencies. And like we said earlier, we released a press release on the five millimeter wave test lab that's up and running. So we can go ahead and make those measurements in-house and that capability that allows us to go ahead and develop the products faster. On prior to us opening up that we had to go out, outsource that testing, so now we can do it internally. And what that's going to do for us now is not only allow us to do testing, but also allows us to go ahead and attract more talent to come into our company to go ahead and work on those projects because we can do all this internally.

Great. And then the next question I have is more financial, it's more for Anil. Anil, clear explanation on the positive gross margin variance that operating expense also came in quite a bit better than I expected. Where there any one-time items like accrual reversals or all that a lowering of expense that would flow through into the back half of the year?

So let me break the question in two parts. Let me talk about the gross margins and I'll go into the operating expenses. I think what is happening on the gross margins is a couple of things. As Jim pointed out, we put in place a new structure, right. And what happens is it takes some time to realize the benefits and what you saw last quarter and what you saw this quarter is just kind of a continuation of that trend. There's another element to it, which is the mix. And as Jim talked about in his opening comments, he talked about automotive being strong. So I think that's kind of the two trends. Now, as I said, I would like to continue maintaining a 44% to 45% gross margin, not because there's fundamentally something wrong with the business that is reversing the business downwards. But what happens is as we go into 5G, as we go into new developments, it allows us and the team to make some investments on the gross margin front. So that's where I want to keep that. Now coming to your operating expenses. I think if there's one thing that the company has done since Jim's taken over is, introduce a heightened level of focus on the operating structure. And this was very clear and evident over the last four or five quarters that we've actually executed on. Now, look, I mean the way I look at operating expenses, there are always key necessary things that you just have to invest. But there's at times some optional things and some things that you time it. As the macro entered into an uncertain period, we had a higher level of scrutiny on the operating expenses and things perhaps that I would have typically spent in the second quarter, we chose to hold off till these things kind of recover. As far as the reversals and everything is concerned, one-off items, no, there was nothing. It's pure kind of blocking and tackling and making sure that every dollar we spend, there is a return. I would also like to say that, as we go into the third and fourth quarter, we would start putting some of our spending into use. So as you model, we can get into the details later on, but I expect to see a little pickup from these levels in Q3 and Q4.

All right. Just want to add one note on that. If you look at the income statement, we've held our R&D pretty steady. That's where in my opinion a year-ago, we were not investing into the R&D into this company the way we should have. So there has been really no reductions that are meaningful at all. It's really been around some of the marketing programs that are not going to come back. Those are one-time market programs that we've stopped. They were not adding value to the company and the G&A that we brought down and that's not going to come back. So I think all the measures and the efforts we put in are paying off in both the margins and paying off in the G&A and the marketing expenses.

That's very helpful guys. Before jumping back into the queue, Jim, congratulations on all you've accomplished as CEO. We'll look forward to being in touch [indiscernible] as Chairman. And Jacob, look forward to working with you as new CEO. Thanks guys.

Thank you.

Our next question comes from Gus Richard from Northland. Please proceed.

Yes, thanks for taking the question. In terms of the consumer, when I believe you said that that was a Tier 1, is this for a home gateway for a cable company?

Hi, Gus. Jacob here. It's not a cable company, but a telco company.

Okay. And then in terms of – I noticed it was a tri-band 4x4, in the new designs that for Wi-Fi 6 that are going to be coming out. Do you see those being 4x4 dual band, 4x4 tri-band or 8x8 or what sort of mix do you expect?

Yes. I think that we based on what we're seeing – I think that you're going to see more 4x4 and 8x8 and you're going to see more dual bands and the tri-band. That's what we're seeing from the customer space.

Okay. All right, perfect. Absolutely, that's very helpful. And then on the automotive win, what is the application? Is that telematics? Is that vehicle tracking? What can you give a little bit more color on that?

Yes, it's more for infotainment. So I'll call it infotainment, right. It's the system, the sound system, the display et cetera and kind of vehicle.

Okay. That's interesting.

We're actually finding that the infotainment is going to have, I think, a higher volume in a closer time to market than other aspects of the automobile, because the whole car has become an entertainment center.

Right. And that's so a Wi-Fi design, I'm assuming, not LTE 5G.

Wi-Fi and Bluetooth.

Yes and Bluetooth. Okay. Got it. And then in terms of the enterprise…

Gus, just one point I just want – this is Anil, I think the thing that I would like to highlight, I don't know whether it was missed by some investors, but if you look at our narrative on automotive, especially on the OEM, we've been talking about late 2021, 2022 and so forth, right. And as Jim pointed out in his comments, this is something that's happening much earlier than we expect in 2020. I think that's a very important thing. And it's very exciting within the company because, typically in technology you see projects and typically they move out. This was one of those great things that are moving in and we are pretty optimistic on this. So I think this is going to really shape our Company over the next five years.

Right. And this is automotive OEM, correct, the European automotive OEM?

We won't get into the geography, but it's fair to say it's an OEM.

Okay. You said, I think in the prepared remarks that European, but anyway.

Gotcha.

And then in terms of the enterprise, you're putting more effort into that and I'm assuming this is access points and I was wondering when you might expect those winds to ramp?

Yes. Actually, we are doing very well in that regard. So we're expecting some of these to ramp as early as the end of this year and we are talking about heavily engaging with some of the top-five players in the world today.

Okay. And does that – can you in terms of support required for the customer per dollar of opportunity? How does that compare to the consumer space?

It's much higher. You talk about ASPs. You talk about close to the $100 so even more compared to $2 to $5 for the consumer. And that's why we feel really good about the market we are going. So building upon the strength we have already built up on the wireless side.

Okay. So you're content in these enterprise applications are did I get that right? It could be as much as $100 for per box.

Yes. Yes.

Okay.

Gus, it's as much as $100, that's the key thing. It's not like every design is going to be $100, so.

But substantially above what we're doing in the consumer and embedded consumer.

Yes, exactly.

Okay. And so again, this is cellular plus Wi-Fi or – am I getting that correct?

Well, I think within multiple projects we are working on. But needless to say, I think that none of them is below 20, right.

Well I think what he's asking, is this Wi-Fi? Is it frequency bands?

Yes, frequency bands, yes, it's a cellular bands, it's a Wi-Fi bands that we're covering, yes, and some of the IoT bands also.

Okay. Got it. All right, that's it for me. Thanks so much for taking the questions.

Thanks, Gus.

Thank you.

Thank you.

Our next question comes from Karl Ackerman from Cowen. Please proceed.

Hi, Jacob. Congrats in the appointment, and Jim, it's great to see you still heavily involved in your new role. A few questions for me, but to start, I guess I understand the trading balances are influencing global growth. But in reality this is now the second quarter in a row, we have seen sequential and year-over-year revenue deceleration. And so, I guess I'm trying to just get a sense of where you think we are in the cycle for DOCSIS upgrades across carrier networks. And I have a follow-up.

So I think DOCSIS, I think that is getting – becoming much more mature. Now all of them will talk about the ax version as well, right, and then the Wi-Fi 6, right. So from a – on the MSO side, 3.1 I think it's getting to be very stable. Now they are looking into an upgrade into the 11ax and in the Wi-Fi 6, so that's what – so we expect these to continue for the next two or three years.

Karl, this is Anil. In terms of your comments about the sequential decline, you're right. This time of the year typically we're into a seasonally strong pattern and it's not been the case. I think I just want to get back to our business model, right. We tend to be focused. Our significant revenues come from our top 10 customers and we tend to be more exposed to large telcos and service providers. And all it takes is a handful of these guys going on the positive side or even going on the other side and that's what shows up in our results here. So I think as Jim and Jacob pointed out, one of the things we're doing is to diversifying ourselves from some of these consumer oriented service provider businesses. And that's why we focus on Antenna Plus, we focus on automotives and focus on enterprise, our trends which are going on. So it's one of those things, the lifecycle of a small company, which is growing exposed to a little bit more concentrated set of customers.

I appreciate that. As a follow-up, are you seeing anything in the competitive environment given the weaker demand outlook, presence – in the context of pricing both from merchant providers and from enhanced OEM engineering departments?

Yes. Maybe I should try to address it. I think externally from competitors, I don't think this has been a material change and what we've seen over the past year. It's not unusual as you get maturity in a product lifecycle that some of the customers of ours, who have capabilities internally want to compete because they're trying to cut costs and improve their margin. So we are seeing some of that as we go forward. But I'm pleased to see that in majority of the cases, we're able to outperform. The advantage we have is that, we have hundreds of projects that we've done. We have close to that amount in development at any one-time and we can quickly move what we've done in one client and that technically move the technology, but the learning that we've had there and move it to another client to show differentiation in performance. So we continue to focus on performance, hence our reason to making darn sure that we beefed up the R&D organization. We brought in the key people that could help with that, and we work closely with marketing to understand what we have to do in each vertical. But it is fair to say that we'll always have pressure from internal R&D capabilities, specifically as it relates to the consumer. That does not exist as we move into the enterprise, and it does not exist at least what we've seen so far in the automotive, both the OEM and the aftermarket.

That's helpful. Last one for me as a follow-up, could you discuss the automotive opportunity? You alluded to for the first half of 2020, and how you see the linear area of that business, both from an aftermarket and in an OEM perspective from now until those design wins gain momentum in late 2021 and 2022? Thank you.

Yes. So I mean the older OEM that we discussed, they actually supply to several – potentially several other Tier 1, if you want to call them, right. And we do expect that this particular opportunity it's not going to be in the millions initially, but in the hundreds. Now I think that the market for infotainment, as Jim mentioned earlier, we really see that going to be a big market as we move forward. It's the big data. People are not wanting to watching video from their costs. So we expect a lot more opportunities in the next several quarters. On top of that, we're also focusing on the bigger module that's going to have the LTE, the AM/FM, the Wi-Fi et cetera and ADAS as well. And that's going to – that takes a little bit longer life cycle. But overall we do see the market alluded being a big market for us in the next three to five years. Does that answer your questions? Karl.

Yes, it does. Thank you, Jacob.

Our next question comes from Alessandra Vecchi from William Blair. Please proceed.

Jacob congratulations on the promotion. Seems like a little earlier than expected, so wonderful news for you.

Thank you.

Anil and Jim, just sort of on the auto opportunity, how – in the past you've talked about being a little bit capacity constrained on the fleet side of things. Is the upside this quarter a fair assessment to say some of that capacity has been alleviated? And then as well, have you started reaping the benefits of the Axon partnership? I believe, do announce either last quarter or in Q1.

Clearly, and I'll let both Kevin and Anil maybe address part of this. Look, part of the – we think upside potential now and going forward is in the Antenna Plus business and the management team there has worked diligently to expand our manufacturing capabilities and going forward. So I'm comfortable that we can start to expand that business on a more predictable basis based on the work that was done. So that was a lot of the work that was accomplished during the last six months. And I'm really pleased with the results.

Yes. Alex, this is Anil. You're right. Good observation. Yes, some of the capacity constraints have been relieved. And just to share some insights what we've done, we're adding on people both permanent staff as well as temporary part-time. We just are initiating a night shift, so while we were doing kind of a daytime, now we want to run a two shifts. So aspiring to be a 24/7 company on that front. What we're also doing is, we're expanding our manufacturing, some of the SKUs that we can't build here. We're looking at our existing things in China and doing that. And over the next six months, both Jacob, Jim have actually strategized on how to take this brand on a more global basis. So we're very optimistic. We believe that some of the constraints have been relieved and we're benefiting from it, but there's still a long way to go and there's a significant opportunities.

Perfect. That's it for me. Everybody else hit my other questions.

All right. Thanks Alex.

Thanks.

Thank you so much.

There are no further questions at this time. I would like to turn the call back over to Jim Sims for final remarks.

Look, I wanted to thank all of you for joining us today on the call. And I especially want to thank all of our employees, our partners, our investors for their support and their continued support as we go forward. I look forward to updating you, all of you on the next call if Jacob invites me to be part of that call.

You are always welcome.

I'm now the strategic Chairman and strategic Advisor and trying to get my handicap lowered by one. Operator?

Thank you for joining us today for Airgain’s second quarter 2019 earnings call. You may now disconnect.