Good afternoon. Welcome to Airgain's Third Quarter 2019 Earnings Conference Call. My name is Julianne and I will be your coordinator for today's call. Joining us for today's call are Airgain's 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 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 fourth 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 earnings release and SEC filings, including its Form 10-Q, which will be filed today, November 7, 2019. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast November 7, 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 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 a 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 CEO of Airgain Jacob Suen. Jacob?

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 third quarter ended September 30, 2019, which is available in the Investor Relations section of our website. I am very pleased with our third quarter 2019 results with sales of $13.1 million, down 9% on a sequential basis and 17% on a year-over-year basis and within our guidance range of $12 million to $14 million. Highlights in the third quarter results include a strong performance on the company-wide gross margin front that was higher than our stated long-term margin goals in a year-over-year improvement of 270 basis points to 46%, largely driven by efficient improvements on the manufacturing front, along with favorable product and pricing mix. Additionally, the automotive market witnessed strong momentum as we continued to benefit on the revenue front from the new product launches in the second half of 2018. As we close out 2019 and enter into 2020, we remain bullish on this market as we leverage our Antenna Plus brand that is known across the industry for its innovation and first-to-market products. Similar to the last several quarters, we continue to secure new 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. Additionally, on the 5G front, we are witnessing increased customers' engagement at our five global R&D centers. Over the next several quarters, we expect to benefit from these new engagements and strongly believe that Airgain will continue to be a leading solution provider for complex antenna designs. We also reported third quarter 2019 GAAP and non-GAAP diluted earnings per share of loss of $0.01 and $0.05 respectively on the high…

Thank you, Jacob, and good afternoon. I will provide key financial highlights for the third quarter 2019 and provide some preliminary color around fourth 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 fluctuation and affect our ability to accurately predict our business. Now coming to the third quarter 2019 highlights. Sales of $13.1 million declined 9% on a sequential basis, and 17% on an year-over-year basis within our guidance range of $12 million to $14 million. Similar to last quarter, we continue to witness strength in our automotive business. Third quarter gross profit was $6.1 million or 46% of sales versus $6.7 million, 46% of sales in the second quarter and $6.9 million or 43% of sales in the same period a year ago. Similar to the last couple of quarters, we continue to benefit from operational efficiencies combined with favorable product mix from our automotive business. Once again, I would like to remind investors that we continue to maintain our long-term gross margin outlook of 44% to 45% and would recommend TheStreet to model at these levels. Our GAAP net income totaled a loss of $0.1 million, or a loss of $0.01 per diluted share based on 9.7 million shares compared to a GAAP net income of $0.4 million or $0.04 per diluted share based on 10.1 million shares in the same period a year ago. On a non-GAAP basis, our net income was $0.51 million or $0.05 per diluted share based on 10 million shares compared…

Thank you, Anil, and thanks to everyone for being on the call today. Before I open the call for your questions, I wanted to share a couple of closing thoughts. Since Jim took over as the CEO of the company in 2018, Airgain has made significant progress with operational efficiencies emphasis on fiscal discipline and greater shareholder focus. In many ways, while I assume leadership over a company that is in a much stronger position, I believe there's work to be done. My vision for the company is to transform Airgain from being a consumer-centric antenna company to being a one-stop solution provider that addresses the needs for global enterprise and automotive customers. This entails providing solutions that extend beyond our existing portfolio of antennas with greater content, both on the active and passive front. 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 favorable backdrop for companies such as Airgain. Over the years, Airgain has benefited significantly from technology disruptions as its core strength, have been around complex antenna design and deployment across Tier 1 global customers. We believe the next couple of years will be very exciting as we leverage our technological experience for new opportunities. Over the next several quarters, I will be happy to share with you our progress on this front. 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 analyst. [Operator Instructions] Your first question comes from Craig Ellis from B. Riley. Your line is open.

This is Carlin on for Craig. Nice job in the quarter, and thanks for taking my question. Anil, I want to start with you. As we think -- actually Jacob this goes for you as well. As we think about growth into next year, obviously some of the program push-outs have been a little bit disappointing, but what's going to be the bigger driver for growth? Is it going to be kind of the connected home and the 802.11 transition? Or auto growth has been really exceptional it looks like, and that seems like it could be shaping up for a pretty robust calendar 2020. What's going to be the bigger driver? Or what percentage split would you expect to see growth in calendar 2020?

Hey, Carlin thanks. I'll just make a couple of comments, and pass it on to Jacob. Look, at the end of the day when you look at the composition of our business, right, as you all know the vast majority of our business is driven by the consumer-centric. But when you look at our three buckets so to speak, you got the consumer, you've got the enterprise and you've got automotive. Obviously, the other two are smaller, but they're higher growth. But within the three buckets, automotives are skewing the nature of our business and will continue to do so over the next couple of years. So, as we look into 2020, just because of the composition of our revenue base, consumer will continue to be the biggest. And so the movements of our business will be driven by consumer, but when you compare it with 2018 or 2019 or even for that reason 2017, the automotive and the enterprise, which is a combination of M2M IoT and enterprise, they will actually start really influencing that. And Jacob, I'm sure you can add something to that.

Yes. I mean I concur with what Anil has stated. I think that the other thing is that we're seeing, for example, the FirstNet initiative in the U.S. We do really feel strongly that we can take advantage of that with some of the new innovation and new technology we are developing. So I think that we're well-positioned for the automotive market as well.

Got it. That's really helpful. And Anil I know that you had mentioned that you want us to continue to model gross margins in the 44% to 45% range which -- that we will do. But just -- now this is the second quarter in a row where we've seen 46% plus. What do we need to see to get more of a structural reset higher in that gross margin profile? Is it continued customer diversification and growth in the automotive business? Is it 5G business ramp? What confidently gets us over that 45% threshold?

Carlin that's a great question. That's something I struggle with every day too, right? I mean it's you're absolutely right we're doing better. So, I mean you -- in a way you answered your own question, which is the product mix. But fundamentally what we are grappling with internally is we got a mix shift which is favorable to us, but we have an investment angle too an investment angle in new products, new innovations. Jacob talked in his opening comments around the number of things we're doing on enterprise and 5G and that takes some effort. As a small company, when you prototype that has impact on our gross margin. So, at this stage I feel a lot more comfortable sticking with the 44% to 45%. But over time as we scale up to be bigger, as we kind of get through -- past some of these innovations that we're working on that impacts both the OpEx line as well as the COGS line, I think we're going to get some -- a little bit more clarity. But your points that you mentioned are right.

And is there any -- just to clarify I know when Jim had come aboard, he had mentioned some initiatives some self-help initiatives on the COGS line that he was working on. Are those now completely wrapped? Or is there -- are we maybe in like the seventh inning on those? Is there any kind of further initiatives that are going to bring that down structurally? Or is -- like you said is it really just mix?

So, in terms of the work that we had to do and what we've said including Jim, there was kind of an operations angle to it, an R&D angle to it, and a sales angle to it, right? All these kind of play into it. Whether you call it a sixth or seventh innings, tough to characterize. But definitely we have -- we've progressed well on it. There's still some work to be done. We're working with our CMs both in terms of the number of CMs as well as gaining more automation at these and these will also add. But yes, I mean to say that we've come a long way from where we started about 15 months ago I think that's a fair thing to say. And over the next two years, I think the shift will basically be the material mover to our gross margins.

Got it. And then if I can just ask one more and then I'll hop back in the queue. You had mentioned M&A obviously getting to the point now where we would expect something soon. What's a bigger priority for the company right now? Is it diversifying into new end markets with the current technology? Or is it adding technology that's going to create a more well-rounded active and passive antenna supplier? Any color there would be great. Thanks.

Yes, that's a great question. I'll take that question. I think it's a mixture of both. We -- I think that we are continuing the innovation not only on the existing market, but also into the newer market. And then we're going to look for -- if there's any tuck-ins that's going to really help us either from a technology front or from customers penetrating into the new market front. We'll do -- we'll look into all options.

Yes. So, building upon that Carlin what Jacob said. If you look at Jacob's opening comments he talked about certain strategic imperatives that will influence over the next three to five years. And really in a nutshell what he was getting at was the enterprise the automotive and kind of the 5G. Jacob has done a lot of work with the teams and we've discussed a lot of M&A initiative. And really what we're really focused on is capabilities, right? We have great customers. Our name is like a marquee name across the industry so we don't have to struggle with that. It's -- the tougher problems in some ways are solved where we have great relationships with these great Tier 1 customers. What we need to do is diversify our product portfolio. And Jacob is focused on that in finding out those niche areas where we could get high return on our investment and accelerate our development.

Got it. thanks guys.

Thank you.

Thank you.

Your next question comes from Karl Ackerman from Cowen. Your line is open.

Hey good afternoon gentlemen. Thanks for taking my questions. Two if I may. [Technical Difficulty]

Okay. Karl you've got to speak up. I think your line is -- yes, now we can hear you. Karl?

[Technical Difficulty] today and do you expect Wi-Fi 6 to be additive? Or should we expect it to be more neutral as Wi-Fi 6 cannibalizes Wi-Fi 5 device applications in 2020?

So, Karl what we heard is your question was unless I missed the first part while you were breaking up. What we heard from you was is Wi-Fi 6 going to be additive or neutral relative to Wi-Fi 5, is that it?

In 2020. Correct.

Kevin?

Yes. I mean it's going to be additive. They're going to go ahead and eventually add those frequency bands as part of the requirements. And we're currently right now working on multiple designs that are going to go ahead and meet those new requirements that are going to be coming down.

Got it, helpful. And then I guess as a follow-up to that I mean how many design wins do we have today on Wi-Fi 6? And do you expect that to be the revenue associated with that [Technical Difficulty]?

Okay.

Since the requirement is not in place yet, I mean we are working preparing for those opportunities that are going to be coming in the pipeline and stuff. And so right now there is no requirement for Wi-Fi 6 in the hardware itself. What we've been doing diligently over the last six months is coming up with designs that will be able to meet those requirements when the hardware providers start to provide those requirements.

But it's fair to say Karl that there are a multitude of designs that will come to fruition. It's just that we're just trying to finalize some of the things that Kevin just talked about.

Thank you gentlemen.

Your next question comes from Gus Richard from Northland. Your line is open.

Yes. Thanks for taking my questions. Just to focus on the Wi-Fi 6 opportunity. Looking into next year on Wi-Fi 6, do you -- what's the mix going to be between triband 8-by-8 4-by-4? And is one better for you than another?

Yes. Gus, it's Jacob here. So, I'll try my best to answer your questions because a lot of them is still unknown. So, as we work with the Tier 1s, the good news is that it's an extension. It's an addition to what they are building today. So -- and we have a strong foothold in that regard. So they're working very closely in their next-gen stuff. So we are -- just as Kevin was mentioning we already working with them but a lot of the hardware is still not ready. And I think that a lot of them wanted to try band router. The challenge there is not only on the band, but it's also the value in return. So look for us we're going to support them whether it'd be triband, whether it'd be Wi-Fi 6 we're there for them. And we do have the capability to support all of those. It's more about when are they going to make that kind of decision? And it's great for us because it really opens up new opportunities. If we talk about going from 11ac to 11ax and then moving to the Wi-Fi, Wi-Fi 6 or the triband router those are all great news for us because it opens up new opportunities.

Okay, got it. And then you mentioned you're looking at active antennas. And I was just wondering if you could add a little bit of color as to is that 5G? Is it Wi-Fi? Is it another standard? And sort of when you say active can you just add a little more color as to exactly what you mean?

Hi, Gus, this is Kevin. There's a couple of areas where we're working in right now. If you look at the enterprise market where we've got some opportunities that’s come in where we provide more than just a passive antenna and that's really exciting for us, because of the fact that it's an area that we want to go ahead and expand our business opportunities in and so that's one arena. And the other one is in the automotive side. We're working on some pretty innovative creative designs that I think really will have an opportunity to be a game changer for us itself. So, I can't get into specifics but I think as Jacob said, next year over the next couple of quarters and we'll possibly be able to go ahead and roll those things out. And also we have -- on the 5G front, we'll be displaying at CES. Some of our 5G millimeter wave beamforming technology so --and that's another area that we're actually working in and pursuing. So that's more than just the passive antenna.

So Gus this is a finance guy trying to give a shot at technology. So let's see how it goes. But when we talk about active versus passive the key thing which I see, which I look at Kevin and his R&D team, it's not like we're building semiconductor chips or active components right now. So I think the way we're looking at it is in phases. We have the design capability, the IP and we're partnering up with these third-party providers. So it's not like we're developing everything internally. So we're going to take it in phased approach the first-phase approach kind of risk reward from a risk-reward point of view is partner with these guys create the innovation on the IP and then we'll go from there and see how it plays out.

Got it. Very helpful. And then you mentioned in the opening comments Chinese customers are looking to diversify away from U.S. vendors. Could you talk a little bit more about that? Are you seeing some pull away in China moving forward?

Yeah. So these are great question by the way. I think that this is -- really what's happening is that with the tariff situation that's really well known. Companies in the U.S. we are looking for options. If you only have a Chinese supplier you're going to look for options just like we are even with the CMs right? We're going to look for factories outside of China to mitigate our risk. The reversal is also true for the Chinese based customers, partners they are also concerned about what is --- hey, can I shift in the closer kind of shift as an example. So because of that, they're also looking for other options. So it'll be antenna, whether it'd be chipset. So that's where we made up particular statement.

Got it. And how big are those customers are as a percentage of revenue in the current quarter?

So we're not breaking it on. And a couple of things Gus that's a qualitative statement when Jacob talked about that. See because there's a multitude of factors, which we don't even have to go through the call because all of you guys know it's well publicized. Now the behavior of a particular customer is driven by multiple factors. So for us to say that yes it was because of this particular reason, they acted upon is very difficult to see. It is fair to say. And as it's reflected in our results, it is not localized it, is across and it's not limited to us right? It's -- this is something that we're seeing across the whole ecosystem. So we've internally tried to identify some of these things whether we could localize it. But again at the end of the day as Jacob pointed out it is all about risk mitigation. It's all about trying to continue growing minimizing the risk and company specific factors really.

Thanks Gus.

Your next question comes from Alessandra Vecchi from William Blair. Your line is open. `

Hi, guys congratulations. Jacob, especially congratulations on your first full quarter and really delivering in a tough environment.

Thank you.

I just wanted to circle back a little bit on some of your comments with regards to automotive and the strength in the quarter and some of the design wins. I believe you guys said last quarter that you had eight to 10 new products shipping in the second half. I was wondering, if you could elaborate a little bit more on what those types of products are and what specifically within automotive or fleet aftermarket they're targeted at? And then similarly if you could just expand a bit on the large order you commented on for one of the largest transit systems if that's I assume for buses? Or if you could just maybe clarify that a little bit as well?

Sure Alex. Hey, I'll take a stab and then Kevin will provide a little bit more color on maybe the technical aspects. So what ends up happening is you design something, our sales force takes it out, goes on the road shows it to the customers, they do their testing. They do their evaluation, they do their RFIs RFPs. So there's a certain time delay. And if you go back to what we said call it in the second half of 2018. We had a little bit of an air pocket with our automotive business. So if you look -- go back into what we saw -- said it was a little bit of an air pocket. And what we also said is that because we're focused on next-generation products. These were a dozen or odd I can't remember exactly somewhere there. And basically what happened was that it takes 6 8 10 months before they translate into revenues. Now one of the key aspects of our automotive business is in addition to us being very innovative and having a good performance, we typically have found that we're first to market when we compare with some of our competition refers to market and that's a very attractive feature. So all those new products are finally getting into revenue stage right now. And they do have a multi-quarter, multi-year life-cycle on that. On your second part of the question is, it's a very large top 10 metropolitan area within the country. It typically is much like applications vehicular movement applications and it's a marquee win. We believe that sometimes when other cities other municipalities look at the bigger guys using a certain technology, well, that's a validation and test in the real-world that these guys are doing something well. So we're very excited with that. As you all know some of those products tend to be high-margin high-ASP products. So it gets back to our mix shift as we go into 2020, and it will help us. So I'll let Kevin talk a little bit about the nature of the product, because by the way he's the one who discovered all those products.

Thank you. Yeah, what happened was that if you think about it in 2018, we started to go ahead and design some pretty creative innovative antennas. And when I say innovative we were able to go ahead and combine multiple bands in one housing. And what that's done is translate into customers out there, who have specific requirements that they want to have say maybe even two routers going back to one antenna, and stuff which allows the simplification of the installation and give them the same performance. And so they've tested them over a year. And when we can put nine antennas in one housing, and get really good performance, it just show the end user that, hey, maybe this is the route we need to go. We don't need to have two antennas on the vehicle to have maybe four antennas on one and five on another one, we could take the nine antenna of configuration and use that and get a really good performance. And so that's what's happened. And some of those product designs that we've worked on back in early 2018, well now you're seeing going through the testing phase now into the procurement phase, but we're seeing the benefits of those designs back then. It's like any other industry, you go ahead and come up with these new ideas and it takes time for the marketplace to realize the advantage of those new ideas, and then they start the first stem. And this really should go ahead and be an opportunity for us to roll them to other major cities, which we're going to go ahead and use the same technology and stuff. That's what we're hoping for to see that you have a big carrier like that, that's working and using your product it should lead to future business. So that's exciting from a revenue standpoint.

That's really helpful. Similarly, that actually just reminded me that, I believe you guys had commented a few quarters ago about being a little bit supply constrained or being a little constrained on the – on your ability to sort of meet antenna demand. Can you just update us on sort of your initiatives to increase supply and how that stands now?

Yep. So Alex on that front what we've done is, we used to have one shift, and we've actually moved it to a two shift, so we've got double the capacity that we've worked on. We've also actually augmented with some of our international CMs, who are helping us with that. So that is something that we addressed, and the nature of the supply constraint also could be sometimes volatile, because you get this large one order from a particular a large metropolitan transit authority and immediately creates kind of a short-term constraint. But we've actually increased our capacity. And if you look at our opening statements, we've been pretty positive on the automotive this quarter and last quarter. So I'll just leave it at that and say that we've addressed many of those issues.

Perfect. That's it for me.

All right, Alex.

Thank you.

Thank you.

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

Hey. Sorry about dropping off. Just another follow-up, if I may. We understand that one of your larger home gateway router customers is experiencing some supply-chain realignment efforts. But could you just speak to the design wins you have across either that customer and more broadly the landscape of not just cable MSOs but some of the connected-home OEMs that would indicate demand for your antennas picks back up not just in December, but as we think about 2020 ramp? And then, could you just talk about some of your key design wins that should ramp next year as well as we think about your top line opportunity? Thank you.

Yes. Pretty good questions, Karl. So it looks like you already know a lot of the landscapes out there and I'll just highlight some of the up and coming design wins or shipping products. Certainly, one major shipping product we're going to have next year is relating to OTT. It's from one of the top-tier telco not MSO customers. But we will be – we're expecting high volume, expecting huge growth from that perspective. And certainly, as we discussed earlier a lot of the telcos and MSOs not only domestically, but internationally are going through this transition either from the ac to the ax or some newer product. I think that's really going to help us and we already – pretty much we are all in the top three telcos MSOs both in domestically internationally. So you should see that here in the U.S. you should see that in Europe as well okay?

Karl, did we lose you? Okay.

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. This concludes today's call. Thank you for your participation. You may now disconnect.