AIRGAIN INC annual report, FY2017

Airgain, Inc. — FY2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; the filing also provides unaudited fourth-quarter results. Airgain designs and sells antenna technologies for connected-home, enterprise, automotive and IoT wireless devices. Its 2017 sales were primarily to ODMs and distributors, with two customers accounting for 34% of annual sales.

Key financial results

MetricFY2017FY2016
Sales$49.5 million$43.4 million
Gross profit / margin$23.3 million / 47.1%$19.3 million / 44.4%
Operating income$1.0 million$3.5 million
Net income$1.1 million$3.7 million
Diluted EPS$0.11$0.40
Operating cash flow$(0.3) million$4.7 million
Cash and short-term investments at year-end$36.3 million$45.2 million cash
Year-end term debt$1.3 million$2.7 million
Working capital at year-end$36.4 million$41.6 million

Annual sales increased 14.0%, while gross profit rose 20.9% and gross margin improved 2.7 percentage points. Operating expenses increased 41.1% to $22.3 million, including higher R&D, sales and marketing, and general and administrative costs. Consequently, operating income fell about 72% and net income about 69%; diluted EPS also declined, with the comparison affected by a much larger weighted-average share count after the 2016 public offerings. Net margin was approximately 2.3% in 2017 versus 8.6% in 2016.

For Q4 2017, revenue was $12.8 million, gross profit $5.9 million and net income $0.6 million. Q4 2016 revenue was $12.6 million and net income $1.1 million. The quarterly figures are unaudited.

Cash, debt and liquidity

Operating cash flow was negative despite reported net income, primarily reflecting working-capital movements, including increased accounts receivable. Investing cash outflow was $27.8 million, mainly from $22.0 million of purchases of available-for-sale securities and $6.3 million paid for Antenna Plus, partly offset by security maturities. Financing used $2.1 million, including $1.4 million of debt repayments and $1.3 million of share repurchases.

The $10 million revolving facility was undrawn at year-end. In January 2018, Airgain amended its Silicon Valley Bank facility, increasing the revolver limit from $3 million to $10 million, subject to an eligible-receivables borrowing base, and extending its maturity to January 2020. The term loan matures in December 2018. Management stated that cash, cash equivalents and operating cash flows should meet working-capital needs for at least 12 months.

Material changes and management commentary

  • FY2017 revenue growth included $5.2 million from Antenna Plus, acquired in April for approximately $6.3 million cash. The acquired assets contributed $0.4 million of net income after acquisition.
  • Organic device shipments declined by 8.2 million to 45.4 million; antennas per device rose from 2.97 to 3.49, and average selling price per device increased from $0.79 to $0.96. Lower television and set-top-box volumes, product end-of-life and delayed customer upgrade cycles affected results.
  • Management expects continued investment in engineering, sales, marketing and new markets; it did not provide quantified earnings or revenue guidance. It cautioned that delayed 802.11ax and DOCSIS 3.1 customer rollouts shifted sales timing and that future product mix could reduce gross margin.
  • The company repurchased 135,000 shares for $1.3 million at an average $9.40 per share under a $7 million authorization; approximately $5.7 million remained available at year-end.
  • The 2017 Tax Act reduced the federal corporate tax rate to 21%. Remeasurement of deferred tax assets contributed to tax expense, while substantial tax-loss carryforwards remain subject to possible ownership-change limitations and valuation allowances.

Risks, contingencies and unusual items

  • Customer concentration is material: the two largest customers represented approximately 21% and 13% of sales. Sales are also concentrated among a limited number of customer devices and product programs.
  • Most manufacturing is outsourced to two China-based contract manufacturers, with no long-term manufacturing commitments; supplier disruption, component shortages, quality issues or transition delays could affect shipments.
  • Competition, price pressure, variable customer purchasing cycles and short product lifecycles create risk to revenue and margins. The filing notes that market demand and customer upgrade timing are difficult to predict.
  • The lender has a security interest in substantially all assets other than intellectual property. Credit covenants and default provisions could constrain operations; the company reported covenant compliance at December 31, 2017.
  • Ordinary-course legal proceedings were disclosed; management did not expect their outcome to materially affect financial condition or business. No significant accrual was recorded for potential contract-manufacturer cancellation liabilities.
  • Management assessed disclosure controls and internal control over financial reporting as effective at year-end. The auditor did not provide an internal-control attestation because of the company’s emerging-growth-company exemption.

Important facts for investors to verify

  • Whether customer upgrades and new programs offset lower device volumes, product end-of-life effects and the disclosed rollout delays.
  • How much future revenue and profit are attributable to Antenna Plus and whether its expected synergies are realized.
  • Cash conversion and working-capital trends, particularly receivables, alongside the use and availability of the revolver and compliance with amended loan covenants.
  • Whether gross margin holds up as product mix changes and operating expenses continue to rise.
  • The status and usability of tax-loss carryforwards, including any Section 382 ownership-change limits and deferred-tax valuation allowance changes.