Risky Signals As Antenna Maker Airgain Launches IPO

San Diego-based antenna maker Airgain (Pending:AIRG) is set to make its initial public offering to the Nasdaq stock exchange this Thursday.

Having filed a prospectus with the SEC last month, the company originally planned to raise around $17 million, although since that time that figure is now been revised down to $14 million.

The firm specializes in making complex antennas for use in smartphones, Wi-Fi routers and set-top boxes, and provides design services and prototyping for customers seeking to improve performance in over-the-air WLAN device testing.

If Airgain’s figures from 2011 to 2015 are anything to go by, the company is in good shape. Having lost $270,000 last year, its profits in the previous four years grew from $10 million to just under $30 million – and despite that loss in the first quarter of 2016, sales grew in the same period, up 49% from the similar quarter the year before.

In theory, Airgain’s potential market is huge. Catering to the already expansive demand for new innovations in technologies requiring maximum throughput – video streaming, media adapters and access points, among others – the company believes the advent of the Internet of Things (IoT) will provide a further growth opportunity going forward.

And Airgain is correct to see IoT as a major growth opportunity within the sector. It’s expected that in the next five years the number of wirelessly connected devices will double to almost 12 billion. These devices all rely in some way or another on either Bluetooth, NFC (near field communication) or Wi-Fi – just the kind of wireless technologies that require complex antenna systems of the sort that Airgain already specialize in.

However, according to the company’s prospectus, Airgain has a laundry list of problems that store up trouble for the future.

Of particular concern to Airgain is the fact that a sizeable portion of its sales are made by only “a few customers,” with its top three clientele in 2015 representing 28%, 15% and 12% of its sales, respectively. Worse still, those same three buyers represented 34%, 15% and 7% in the three months ending March 31, 2016.

Airgain also cites the case of a product which reached the end of its lifecycle on June 30th, 2014, and which had accounted for over $3 million of sales in the six months leading up to that point. And this was not a rare or one-off event – this is an issue which affects almost all of Airgain’s intellectual property.

Other risk factors identified by Airgain are as follows:

• Its supply chain management is fragile, relying on a small number of suppliers and distributors for all of its products.
• Airgain’s market is constantly developing, and the company acknowledges that it might not develop as favorably as it has been doing so far.
• The business depends on constant innovation, and this cannot be guaranteed.

But perhaps the most worrying aspect to this IPO comes in the following passage in the prospectus:

Our products are subject to intense competition, including competition from the customers to whom we sell.

Antenna solutions are an established technical field with low intellectual property and technological barriers to entry.

So not only is the success of Airgain’s future sales dependent on a small number of customers, but those customers may very well out-compete Airgain in the technological field in which they excel.

One such competitor to Airgain was SkyCross, another firm specializing in Radio Frequency (RF) solutions. Airgain bought out SkyCross’ North American interests in January of this year. The acquisition gave Airgain access to crucial sales accounts and engineering resources, but also expanded its customer base into “more diverse product categories and antenna solutions.”

But no doubt other competitors lie in wait, and unless Airgain can acquire them all, this cloud remains still very much on the horizon.

This all points to a very unstable foundation upon which Airgain is set to build. Even with its 48 U.S. patents, Airgain’s position does not look strong.

Optimists might, however, take succor from the fact that, so far at least, Airgain has been successful in its chosen market. There are no positive indications that this will not be the case in the future, and as Airgain alluded to in its prospectus, this is a growth industry – and few others are as well-positioned to benefit from it as the San Diego-based company.

The IPO is scheduled to take place on Thursday, August 11th, and the underwriters will be Northland Capital Markets.