Good afternoon. Welcome to Airgain's First Quarter 2020 Earnings Conference Call. My name is Ian, and I will be your coordinator for today's call. Joining us today for the 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, May 7, 2020. Airgain undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this earnings call. In addition, this conference call may include a discussion of non-GAAP financial measures, including non-GAAP operating expenses, 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 will start by giving a quick update on the impact of COVID-19 on our business then move to our recent announcement regarding AirgainConnect followed by a brief review of our strategy and progress we've made during the first quarter. Dave will provide financial details following my remarks. Let's begin with the impact of COVID-19 on our business. Today our employees remain mostly unaffected aside from the natural adjustments of our work from home policy. Our two contract manufacturers in China which supply products generating the bulk of our overall revenue, continue to operate and fulfill our demand. As it pertains to our customer demand and its potential impact on current revenue, we are seeing strong bookings in Q2 versus historical quarters at this time during the quarter despite Q2 revenue being somewhat impacted by COVID-19. Dave will discuss this in more detail later in the call. In our February earnings call, we discussed our innovation around the migration to active wireless technology. How it could be a gamechanger for Airgain in automotive markets and our 5G offerings. We are very pleased to have just announced our new patented AirgainConnect platform. AirgainConnect is a cutting-edge platform that combines an integrated antenna system in a modem inside of a single rooftop enclosure. And this is a platform that specifically targets public safety and police vehicle applications. AirgainConnect represents a new level of advanced product solutions for Airgain, enabling the highest allowable connectivity to public safety and automotive fleet, automotive OEM as well as 5G connectivity. Today, a typical vehicular installation for cellular connectivity includes a rigidized router with a modem installed in the trunk of a vehicle connected by roughly 16 feet of coax cables to…

Thank you, Jacob. I'll begin by providing key financial highlights for the first quarter 2020 as well as our outlook for the second quarter and then update our commentary around how 2020 could play out. First quarter 2020 revenue of $11.2 million was just above the midpoint of our previous guidance range of $11 million. Revenue declined about $1.8 million sequentially from Q4 2019 to Q1 2020 primarily due to impacts from COVID-19 and was more modestly impacted by seasonal softness in our consumer products revenue. This decline was slightly offset by modest sequential improvements in enterprise product revenue with automotive revenue coming in about the same as last quarter. Based on feedback from our customers, we believe our Q1 revenue would have been over $1 million higher, primarily in consumer product revenue, if not for the impact of COVID-19. Q1 gross margin of 47.5% was above our long-term gross margin target range of 44% to 45% as we benefitted primarily from process improvements implemented in our Arizona production facility and to a lesser extent, a favorable product mix shift. Non-GAAP operating expense in Q1 was $5.8 million, in line with our expectations. Excluded from Non-GAAP operating expense was $668,000 in stock-based compensation expense and $131,000 in amortization of intangible assets. Adjusted EBITDA was negative $356,000 in Q1, ahead of our expectations mainly due to higher gross margins. Non-GAAP net loss in Q1 was $478,000 and Q1 GAAP net loss was about $1.2 million, both better than the midpoint of our guidance. Moving to earnings per share, our Q1 2020 non-GAAP and GAAP earnings per share of negative $0.05 and negative $0.12, respectively, based on a basic share count of 9.7 million, was better than the midpoint of our previous guidance of negative $0.11 on a non-GAAP basis and negative…

Thanks, Dave. Before I open the call for your questions, I wanted to share a couple of closing thoughts. We are very fortunate to continue to have solid demand for our products and are very excited about the prospects for us to grow in the second half of this year, even in the face of a very challenging environment. This speaks to the importance of our products in an environment where connectivity is essential and speaks to the heritage of quality and performance we provide to our customers. The launch of our AirgainConnect product serves not only as a critical pivot point in our company towards our transition to a more diverse solutions capability delivering higher levels of integration, but also as an example of how our team can make significant innovations in the face of a rapidly evolving market. We look forward to announcing many new innovative products through this year and beyond. Lastly, 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 continued to support Airgain's progress during our strategic transition to a more diverse company with broader market diversification, delivering higher levels of integrated wireless solutions. 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 of B. Riley. Your line is open.

Thanks for taking the question, and team, congratulations on the way you navigated the first quarter. Jacob, the first thing I wanted to do is just follow-up on all the AirgainConnect comments. So that's a very exciting product. Can you give us some color on the cost parameters of AirgainConnect versus existing solutions? And when you take that to market, clearly there's a performance benefit, but how does the cost of AirgainConnect to existing capability?

Hey, Craig. Good to talk to you. So specifically, I just want to make sure I answer your questions correctly. Certainly, the AirgainConnect, it's a really exciting product and we indicated previously that's something we've been working on for the last several quarters and finally it has launched. And you also saw the press release earlier that we're working with AT&T FirstNet prospect. As far as - I think you mentioned, you're asking about the cost, am I correct?

Yes.

Yes, so right now, I think that it's going to be a high margin business for us in the north of I would say 50 points plus.

Excellent. And that really hands off to my next question. So David, the business has operated well above the target gross margin model in I think it's 4 out of the last 5 quarters, so it's been at 46% or higher. Given that performance and given things like AirgainConnect that look like they'll be gross margin accretive, is it time for investors to start thinking about a new target model range, something closer to 45.5% to 46.5% or something higher than where we've been centered previously?

Yeah, it's a good question. We've been contemplating that exact question. We have to really get through a little bit more of this product cycle transition before we make a formal transition in our long-term model which is 44% to 45%. That being said, we did guide 45% to 47% in Q2 and I think that's possibly sustainable. It's really going to depend on when those product cycle transitions happen with material revenue. With some of these pushing out a little bit, that changes the dynamic a little bit. But at the end of the day, you're right, we have gotten some kind of a better overall portfolio as it stands today in terms of gross margin. So we're not going to change the long term gross margin target yet, but I think for the rest of this year, we're kind of in a safe range at this point. Keep in mind that we do have products, quite a few products below that threshold as well as above that threshold, so trying to narrow into a really tight range is a little bit difficult, especially like I said, through this product cycle transition.

Yep, that's a fair point especially in this environment. Then lastly, David, if I could, nice to see the order strength. One of the things we're hearing from a lot of companies in this environment, wherever they are in the electronic supply chain, is that there is order activity in excess of end demand because into the crisis, supply chain inventory was so lean and then there were stock outs and many place still are in some. So can you just help us understand what Airgain is doing to make sure that as it takes in orders it is really scrubbing those and is ensuring there's good robust end demand behind those and it's not just buffer inventory stocking to put a cursor somewhere downstream? Thanks, guys.

No problem. First of all, we spent an inordinate amount of time having our sales, business development team reach out, not only over the past several weeks, probably the past 3 to 4 weeks now, to end customers as well as direct customers to figure out exactly what's going on with that dynamic. What we discovered is that we now have, at the end of the day, a much better picture of what's going on. I think what our more detail in our guidance for Q2, especially the qualitative guidance we gave beyond that, attests to that known variable. Again, who knows what's going to happen with COVID-19 over the next several months, but assuming not too much changes, we have confidence that we're going to grow in the second half still.

You next question comes from the line of Alessandra Vecchi of William Blair. Your line is open.

Hey, guys, congratulations on the - sorry for the background noise, but congratulations on the good quarter in a tough environment. My gross margin question was already asked, but I was hoping maybe you could help us think about operating expenses given all these new product transitions or product growth in the second half and sort of the Connect product coming out. How does that sort of tee up OpEx for this year and next year?

The direct answer is that I think we're probably going to hang out in this non-GAAP OpEx range of about $6 million a quarter going forward. You're right, the AirgainConnect has impacted OpEx a little bit. It did in Q1 where we actually spent more money trying to get the AirgainConnect launched and ready to go. But we also dialed back some of our more discretionary spending and obviously some of the travel spend went down, so we were able to offset that increase. Going into the second half, we're really going to have to see when we actually get a material launch, we think it's going to be pretty confidently at this point Q4 in terms of material revenue for AirgainConnect. Which may mean in Q3 we have a little uptick. But I think we can offset that with continued discipline around our overall operating expense in terms of the things we can control.

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

Hi, guys, this is Sam on for Karl. Another on AirgainConnect if that's okay. AC-HPUE is definitely a step towards deepening your smart infrastructure portfolio for smart fleets. And I'm just curious if the product lifecycle of this platform might be different than your existing enterprise portfolio of products? And then I have a follow-up please.

Hey, good to talk to you again, Sam. Regarding your questions, so we are anticipating for a product of AirgainConnect, I mean it's a platform and the HPUE version is targeting for LTE band currently. So we are expecting a product lifecycle typically about 2 to 3 years. Now we also know that 5G is on the horizon. And what's so unique about this product is that it's going to provide easy migration. So think about that. Traditionally, if the customer is going to go up with 5G, they're going to have to go to the trunk, replacing the modem in the back of the trunk as well as the antenna system at the rooftop. Now what's so unique about our solutions, the AirgainConnect, is that in the future, as they're going to 5G, likely CBRS band, all they have to do is replace that module or our AirgainConnect device at the rooftop and that's all they have to do. So as far as the lifecycle, I would say it's 2 to 3 years and once 5G takes off, that could be another 3 to 5 years.

Got it, that's helpful. Thank you. Then one on Wi-Fi 6, can you discuss how the FCC's vote a couple of weeks ago to allocate the sub 6 spectrum, sub 6-gigahertz spectrum for unlicensed use could further accelerate adoption for your Wi-Fi 6 portfolio? I mean it sounds like you guys are already seeing a significant design ramp here across a couple of different programs, but I'm just curious how this could be incremental.

Hi, Sam, it's Kevin. Yeah, we've been working on Wi-Fi 6E for a while now in preparation for this rule from FCC. So I see that we're in position that when they start to go ahead and require these new designs in their hardware, we're ready for them.

There are no further questions over the phone lines at this time. I turn the call back over to the presenters.

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 first quarter 2020 earnings call. You may now disconnect.