Cambium Networks Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 7 speakers on the call.

Operator

Good afternoon. My name is Therese, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Cambium Networks Q1 2024 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Please be advised that today's conference is being recorded. Thank you. Mr. Peter Schumann, Vice President, Investor, Industry Analyst and Public Relations, you may begin your conference.

Speaker 1

Thank you, Therese. Welcome and thank you for joining us today for Cambium Networks' Q1 2024 financial results conference call and welcome to all those joining by webcast. Morton Kirk, our CEO and Jacob Sayer, our CFO are here for today's call. The results, press release and CFO commentary referenced on this call are accessible on the Investor page of our website and the press release has been submitted on Form 8 ks with the SEC. A copy of today's prepared remarks will also be available on our Investor page at the conclusion of this call.

Speaker 1

As a reminder, today's remarks, including those made during Q and A, will contain forward looking statements about the company's outlook and forecasted performance. These statements are based on current conditions, forecasts and assumptions. Risks and uncertainties could cause actual results to differ materially. Except as required by law, Cambium Networks does not undertake any obligation to update or revise any forward looking statements for any reason after the date of this presentation, whether as a result of new information, future developments, to conform these statements to actual results or make changes in Cambium's expectations or otherwise. It is Cambium Networks' policy not to reiterate our financial outlook.

Speaker 1

We encourage listeners to review the full list of risk factors included in the Safe Harbor statement, today's financial results press release and our most recent Form 10 Qs and 10 ks filed with the SEC. We will also reference both GAAP and non GAAP financial measures and specifically note that all sequential and year over year comparisons reference non GAAP numbers except where otherwise noted. A reconciliation of non GAAP measures to GAAP is included in the appendix to today's financial results press release, which can be found on the Investor page of our website and in today's press release announcing our results. Turning to the agenda, Morgan will provide the key operational highlights for the Q1 2024 and Jacob will provide a recap of the financial results for the Q1 2024 and will discuss our financial outlook for the Q2 full year 2024. Our prepared remarks will also be followed by a question and answer session.

Speaker 1

I'd now like to turn the call over to Morgan.

Speaker 2

Thank you, Peter. I want to begin by first introducing Jacob Sayer, our new CFO. For those of you who didn't see our press release, Jacob joined Cambium from Sensata Technologies, a global industrial technology company with over $4,000,000,000 in revenue, where he was most recently VP of Finance and Head of Investor Relations and previously held divisional CFO roles for the various segments of Sensata. Jacob has 15 years of experience with technology companies and another 17 years of experience in various investment banking roles. We are pleased to have him on board to help drive operational excellence, strategy, growth and value creation.

Speaker 2

I would also like to thank John Besserel for stepping up as Interim CFO for the past quarter. As expected, the FCC finished the process for the long awaited approval of 6 gigahertz spectrum in Q1, although later in the quarter than we had hoped, leading to lower than anticipated shipments of our point to multipoint PMP products. In the last week of the quarter, CAMBIA received final approval for our ePMP 4,600 6 gigahertz access point products and standard power subscriber modules with high power subscriber modules expected to be approved in May. Summarizing the performance of Q1 2024. Revenues for Q1 2024 were $43,200,000 The shortfall to guidance was mostly related to delays in defense orders in North America and Europe in the point to point PTP business, which decreased 34% sequentially.

Speaker 2

We expect sequential increases in this portion of the business throughout 2024. Our PMP business in North America was slower than anticipated, decreasing 14% due to the aforementioned timing of the 6 gigahertz product approval process by the FCC late in the Q1. The FCC approval is anticipated to drive sales of Kamium's new 6 gigahertz EPMP-four thousand six hundred and PMP-four fifty B product lines, both of which are available today. On a positive note, enterprise revenues improved 231% sequentially as demand improved and channel inventories levels declined. Also in April, we launched our first Wi Fi 7 product.

Speaker 2

While revenues came in only slightly below our outlook, gross margin did not meet expectations due primarily to an increase in reserves for excess and obsolete inventory of finished goods and components. We did see improved product mix sequentially during Q1 2024 as a result of increased enterprise revenues and we maintained good cost controls and tightly managed our operating expenses. Sales of Cambium's products out of the distribution channel as reported by Cambium's distributors were higher for Q1 2024 than Cambium's reported revenues and we saw corresponding declines in channel inventories. We continue to make good progress in clearing channel inventories and in aggregate the inventories are approaching healthy levels. We are diligently monitoring and managing channel inventories at shorter lead times and increased cost of capital may drive different behaviors by distributors than in the past.

Speaker 2

As communicated previously, we expect channel inventories to be back to normal by the end of Q2 2024, which will result in sales in and sales out approaching equilibrium. This should drive incremental improvements of sales into the channel and therefore an incremental improvement to revenues. Looking at some customer wins that are key to our future success. In the U. S, our enterprise business had a sizable win with the New Orleans Convention Center, a project which is expected to ship throughout the year.

Speaker 2

This win includes over $1,000,000 of enterprise gear and was the result of Cambium's ability to deliver industry leading performance in unique high density dynamic deployment. The entire upgraded system will run on our CN Maestro X single pane of glass management system. The flexibility in dynamic reconfiguration is critical for the center and demonstrates the versatility of Cambium solution. In Australia, Glencore, one of the largest mining companies in the world selected Cambium's 1 network to deploy and manage Cambium's fiber and Wi Fi upgrade for a large mining camp. This deployment will consist of a mix of over 350 indoor and outdoor Wi Fi access points and Cambium's fiber ONTs all managed by CN Maestro.

Speaker 2

The combination of indoor and outdoor WiFi and PON based interconnectivity from a single vendor results in a tightly integrated cost effective and efficient solution efficient network. In the PMP space, we had a significant win with a wireless service provider in Kenya, Safaricom for a 3 year deal to roll out residential and business connectivity using our ePMP product line. Cambium 1 based on technical strength, ease of deployment and the cost effectiveness of the solution. Now turning to upcoming product introductions since our previous quarterly update. In March, we announced our first Wi Fi 7 access point with the launch of our new X7-35X

Speaker 3

Tri

Speaker 2

Radio Tri Band 2 plus 2 plus 2 units. WiFi 7 is another step forward in wireless connectivity, offering data speeds reaching up to 9.2 gigabits, ensuring lightning fast downloads, seamless streaming and lag free experiences. While pushing the boundaries of performance, WiFi 7 remains backwards compatible with all previous WiFi standards. WiFi 7 works with Cambium's Cambium Networks cloud managed or on prem Centimeters Maestro management system for secure end to end network control. Finally, total devices under CN Maestro Cloud Management in Q1 2024 increased approximately 4% from Q4 2023 and were up 15% year over year.

Speaker 2

I will now turn the call over to Jacob for a review of our Q1 2024 financial results and Q2 twenty twenty four and full year twenty twenty four financial outlook.

Speaker 3

Thank you, Morgan. While the Q1 twenty twenty four results are below expectations, we do see the business beginning to improve and can now look forward to growth. The Q1 2024 revenue shortfall was isolated to delays in government orders in the P2P business and the timing of approval for the 6 gigahertz P2P solutions later in the quarter than expected, the impact of which we expect to be behind us shortly. Q1 2024 results included additional inventory charges and additional supplier commitments, which impacted gross margins by approximately 7 $1,000,000 and reflect the current state of the markets and product demand. Without these charges, gross margins would have been approximately 39.2%, which would have been closer to the original forecast at the start of the quarter, but only slightly lower due to the impact of mix within defense products and P2P.

Speaker 3

We continue to work hard on managing our operating costs to align with the current forecast for 2024 and are focusing resources on those products and projects that are most critical for Cambium's future success. Turning to the quarter, Cambium reported revenues of $42,300,000 for Q1 2024. Revenues increased by 5% or $2,100,000 sequentially. The majority of the increase in revenues was the result of improved order volume for our enterprise business in both North America and Europe, albeit from a low base. While PMP revenues decreased 14% quarter over quarter due to delayed timing approval for 6 gigahertz products in the United States and the territories.

Speaker 3

This was partially offset by some recovery for the PMT business in Europe during Q1 2024. D2P defense revenues were lower due to delays for defense orders in Europe and North America after strong year end results. By region, Europe increased 146% sequentially as a result of recovery in the enterprise business, while other regions decreased with North America lower by 7% due to timing of defense orders impacting the P2P business and delays in the approval for 6 gigahertz products hurting the PMP business, while CALA dropped by 8% and Asia decreased by 10% sequentially. Moving on to our gross margins. Our non GAAP gross margin for Q1 2024 was 22.7% compared to a negative 25.1% in Q4 2023.

Speaker 3

A higher quarter over quarter non GAAP gross margin was primarily the result of lower rebates and higher enterprise revenues and lower freight costs, although we are once again impacted by the need to increase inventory reserves and had a lower mix of high margin, higher margin defense products. In Q1 2024, our non GAAP gross profit of $9,600,000 was higher by $19,700,000 sequentially due to lower excess inventory charges, higher enterprise revenues and lower rebates. Non GAAP total operating expenses including depreciation and amortization in Q1 2024 stood at 26 $400,000 or 62.3 percent of revenues. When compared to Q4 2023, non GAAP operating expenses were approximately flat during Q1 2024. The quarter over quarter operating expenses had higher G and A due to increased professional services and higher bad debt expense, offset by lower payroll and less spending on R and D materials.

Speaker 3

Our non GAAP net loss for Q1 2024 was $12,700,000 or loss of $0.46 per diluted share that was below our outlook for the quarter and compared to a non GAAP net loss of $28,200,000 or a loss of $1.01 per diluted share during Q4 2023. Adjusted EBITDA for Q1 2024 was a loss of $15,500,000 compared to a loss of $35,200,000 in Q4 2023. Moving to cash flow. Cash used in operating activities was $15,600,000 for Q1 2024 and compares to cash used in operating activities of $6,200,000 for Q4 2023. During Q1 2024, we continued to execute on converting receivables into cash and managing working capital closely offset by the net loss.

Speaker 3

Turning to the balance sheet. Cash totaled $38,700,000 as of March 31, 2024, an increase of $20,000,000 from Q4 2023. The sequential increase in cash primarily reflects a draw of $40,000,000 on the company's $45,000,000 revolver, partially offset by the net loss. Material purchases to suppliers and capital expenditures. As we look forward, we are focused on conserving cash by minimizing operating expenses, lowering capital expenditures and continuing to convert inventory into revenues.

Speaker 3

We expect to be EBITDA positive during the second half of calendar twenty twenty four and have reduced our breakeven profitability to below a $60,000,000 quarterly revenue run rate. Net revenues sorry, net inventories of $55,600,000 in Q1 2024 decreased by $11,300,000 from Q4 2023. The inventories were lower sequentially driven by both consumption and due to higher reserves. As a reminder, our goal for 2024 is to reduce our inventories balance to closer to $40,000,000 In summary, 1st quarter revenues turned out slightly lower than anticipated because of delays and timing of the defense shipments as well as the FCC granting approval of 6 gigahertz spectrum later in the quarter than we had hoped. Ambient expects to soon receive our final approval for 6 gigahertz ePMP high power products.

Speaker 3

On a positive note, we had higher enterprise revenue as market conditions are starting to improve. Our gross margin improved sequentially as a result of lower rebates and higher enterprise revenues in a very competitive business environment. We continue to see improvements in channel inventories and remain vigilant about managing costs, which should benefit future operating performance. During Q1 2024, we saw an improving start for enterprise business as the channel inventories continue to decline. As we regain scale for enterprise, we expect to improve our operational efficiency each quarter this year.

Speaker 3

For the PMP business, we now have approval by the FCC of the 6 gigahertz spectrum, which will help that business. For the P2P business, we are pursuing several large defense opportunities. And we continue to work to consolidate a smaller number of product to a smaller number of product platforms for our overall business for the next few years. Moving to the Q2 and full year 2024 financial outlook. Cambium Networks' financial outlook does not include the potential impact of any possible future financial transactions, acquisitions, pending legal matters or other transactions.

Speaker 3

Considering our current visibility, our Q2, twenty twenty four financial outlook is as follows: revenues between $43,000,000 to $48,000,000 representing growth of approximately 2% to 13% sequentially. Non GAAP gross margins of between 40% to 42%. Non GAAP operating expenses including D and A between $24,600,000 to $25,600,000 leading to a non GAAP operating loss between $5,400,000 to $7,400,000 Interest expense net is expected to be approximately $1,800,000 and non GAAP loss, net loss of between $5,400,000 to $6,900,000 or net loss per diluted share between $0.19 $0.24 Adjusted EBITDA is expected to be between negative 4 point $2,000,000 to negative $6,200,000 and adjusted EBITDA margin between negative 8.8 percent to negative 14.4 percent. We expect a non GAAP tax benefit of approximately 25 percent and we expect to have about 28,000,000 weighted average diluted shares outstanding. Cash requirements are expected to be as follows in Q2.

Speaker 3

1st, a pay down of debt of $700,000 cash interest of approximately $1,700,000 and capital expenditures between $1,500,000 $2,500,000 Our full year 2024 financial outlook is expected to be as follows: revenues between $205,000,000 to $225,000,000 representing a decrease of 7%, up 2%, non GAAP gross margins of approximately 40%, non GAAP net loss between $11,600,000 to a net loss of $18,000,000 or a loss of between $0.41 to $0.64 per diluted share Adjusted EBITDA margin between negative 2.2 percent to negative 6.8 percent. And for the year, capital expenditures are expected to be approximately $9,000,000 to $11,000,000 I'll now turn the call back to Morgan for some closing remarks.

Speaker 2

We continue to work with our channel and end customers to manage inventory and improve efficiency while maintaining service levels. This has and continues to impact revenue. However, we believe we started this work earlier than others and expect equilibrium to occur by the end of Q2. We continue to focus on our internal processes to ensure that we don't over correct and fail to meet our customers' demand while minimizing inventory throughout the supply chain. Our PMP business is well positioned to grow with the newly released 6 gigahertz spectrum as our WISC customers compete with other broadband solutions on speed and reliability.

Speaker 2

Our platforming activities continue to progress with both architectural decisions and beginnings of development of both hardware and software. While the benefits from these initiatives will be in the future, it is one of the most important actions we can take to impact our long term prospects, driving faster initial development, increasing feature implementation time and lowering costs. After my initial review of the business last fall, over the past 3 months, I've been working with our go to market teams and our customers to make sure where we are going is aligned with where our customers need to go in our highly competitive markets. I am pleased with the level of access Cambium has to its end customers and the interest our channel has in driving the business forward. I intend to continue to be directly involved with our sales force and customer base to ensure that the direction we're going and the decisions we're making are fully aligned.

Speaker 2

While there continue to be challenges both internally and throughout the industry, I'm encouraged to how we meet these challenges, solve problems efficiently and effectively and help move the industry forward. I'd like to share my continued appreciation for the efforts and collaboration of our employees, partners, customers as well as the investor support. With that, I'd like to turn the call over to Therese and begin the Q and A session.

Operator

Thank Our first question today comes from Scott Searle with ROTH MKM. Your line is open.

Speaker 4

Hey, good afternoon. Thanks for taking my questions. Jacob, congratulations and welcome aboard.

Speaker 3

Thank you very much.

Speaker 4

Maybe just a quick clarification. I'm not sure if I heard it, but Morgan in the past I think you've talked about enterprise or Wi Fi sell through. I'm wondering if there was a number there. Also wanted to clarify the gross margin impact on reserves. I think it was about $7,000,000 wanted to clarify that.

Speaker 4

And then looking into the guidance for the full 2024, it implies a pretty significant uplift in the second half of this year, I think north of 58,000,000 a quarter. What gives you the comfort and visibility at the current time? And then I had a quick follow-up.

Speaker 2

Yes. So I'll start off, Scott, with the question on enterprise sell through. It maintains a healthy level, very similar. I think we've said in the past in the $15,000,000 to $20,000,000 range, the range we're giving you and it hasn't changed much this quarter at all. And we're working to start to drive that number up.

Speaker 2

And I'll let Jacob talk specifically to your other portions of questions.

Speaker 3

Yes, you heard correct, Scott, in terms of the gross profit impact on E and O reserves. That was $7,000,000 in the quarter. And then the last bit of your question was regard to the uplift in the second half of the year. You're absolutely right. We are inventory contraction in the sales channel with distributors falling away.

Speaker 3

That's been a pretty significant headwind for the company as inventory levels have come down over the last four quarters. We expect that that process will come to an end here near the end of Q2 of this year.

Speaker 1

Great. Thank you. Very helpful.

Speaker 4

And if I could, Morgan, from a high level, BEAT is starting to get into the grant phase, still early, significant number of dollars that are available there, right, in terms of the 42,500,000 dollars But wireless has been, I guess, the 2nd candidate technology for that, right? It's a fiber first mantra in effect. But there are initiatives to try and push wireless as a viable medium within the B deployments, particularly given that this is a last time effort to connect the unconnected and that wireless is a much more cost effective medium to be able to do that. So I'm wondering what your early thoughts are in terms of wireless and point to multipoint participation in the B program and specifically maybe coupling 6 gigahertz into that conversation? Thanks.

Speaker 2

Sure. So a couple of things. So ARDA funding, which has been out for a while, requires a set level of speed, but does not require license spectrum. So 6 gigahertz is absolutely applicable toward this and our customers are eagerly starting to deploy and want 6 gigahertz for that. In the case of bead, bead has some additional restrictions.

Speaker 2

Bead can only be put on license spectrum. So that has to be done in the 3.5 gigahertz range. And while we think there will be some uplift from this, it is probably not so much a 2024 event, probably more like a 2025 event.

Speaker 4

Great. Thanks. I'll get back in the queue.

Speaker 1

Thank you.

Operator

Thank you very much. One moment please. Our next question comes from Simon Leopold with Raymond James. Your line is open.

Speaker 5

Hi, guys. This is Victor Chiu in for Simon. You noted lower than expected 6 gigahertz shipments this quarter because of the delayed FCC approval. Does that shortfall kind of mostly roll into Q2 or is that recovered kind of through the balance of the year? Maybe how do we think

Speaker 4

about that?

Speaker 2

Yes. So there are still, I'll call it learnings to go on in 6 gigahertz. So I don't think that just rolls into Q2. It's probably more rolling throughout the year. So 6 gigahertz is different for our customers than 5 gigahertz because of AFC, because they have to be granted various pieces of spectrum and then how they can use it varies based on what current users of the band are doing.

Speaker 2

And so I think we're going to see some learnings, and this will take sort of 3 to 6 months for people to really get a better understanding of how they do mass scale deployments and then we'll see a significant takeoff on it. I'd probably model it to take on throughout the year.

Speaker 5

Okay. So even without the delay, the 6 gigahertz ramp is a little slower than kind of what

Speaker 3

you're expecting?

Speaker 2

Than we had originally had to say, yes, I think that's a good way of putting it.

Speaker 5

Okay. That's helpful. And then just a quick follow-up. Can you give us an update around progress with the adoption of the 60 gigahertz products and how we should think about momentum around that?

Speaker 2

Sure. On 60 gigahertz. So we're actually finding success in this product line with, I'll call it, enterprise customers more than we have thought. We're using it for a variety of projects, but I'll call it our original intended base, but we're finding that there are other markets. So I'm hopeful with that.

Speaker 2

But it's a slow build, I would say. It's not going to be a step function. It's going to be a continued drive and increase. And the reason for this is economics. There are specific areas where this makes a lot of sense where you have to transport a lot of data for a relatively short distance.

Speaker 2

And you don't want to be have any chance really of interference. And so it's not like what I expect to happen in 6 gigahertz where after a teething period you see a big uplift. This will just be a slow growth.

Speaker 1

That's helpful. Thank you.

Operator

Thank you. Our next question comes from George Notter with Jefferies LLC. Your line is open.

Speaker 6

Hey, guys. Thanks very much. I guess I was curious about the gross margin structure of the business. I think I heard you say 42% is the target for the year. But if you just sort of step back and think about where the gross margins would naturally land, obviously in Q1 you had some E and O expense.

Speaker 6

You mentioned that obviously, you're going to have some more scale relative to the run rates right now as the inventory comes off, the business rebounds. Like what do you think a good sort of run rate gross margin would be as the business normalizes?

Speaker 3

Probably, George, in or around the 40% range for the business. Obviously, there's a range of gross margins by product family. It would depend being at the higher end of those, but yes, 40% overall is probably a good modeling rate.

Speaker 6

Got it.

Speaker 2

So are you referring to for this year, are you referring to long term?

Speaker 6

Long term.

Speaker 2

Okay. So I think we have historically sort of modeled in kind of 50% was our target

Speaker 5

and we

Speaker 2

were hitting a few points below that. I think we're going to it's going to be a bit before that occurs. With the excess inventory and channel, the enterprise margins are suppressed as everybody is competing to get inventory out of channel. And that probably won't recover tremendously until Wi Fi 7 becomes the dominant term. And so the long term margins, we should be able to move back up as we get scale.

Speaker 2

But as Jacob said, for this year, that's what we're looking at.

Speaker 6

Got it. So do you think that's sort of 45% gross margin of 43% or 47% like any kind of thought on what that might look like?

Speaker 2

Yes. I think the long term, it's certainly my goal is to have a north of 45. And I think with our government business, which is higher than normal and with our focus on enterprise, which is higher than average, I believe those are 2.

Speaker 3

Got it. Okay.

Speaker 6

And then I think you mentioned a bad debt expense going through G and A. Was that in the pro form a financials or excluded? I guess I'm trying to figure out how big that is and if it's in the numbers I'm looking at.

Speaker 3

About $600,000 and it's in the non GAAP numbers. We haven't excluded it. Okay. All

Speaker 6

right. Thank you very much.

Operator

Thank you very much. I'm showing no further questions at this time. So I will turn the call back over to Peter Schuman, Vice President, Investor, Industry Analyst and Public Relations for the closing statements.

Speaker 1

Thank you, Therese. During Q2 'twenty four, Cambium Networks will be presenting a meeting with investors virtually on Thursday, May 16, 2024 at the Needham Technology, Media and Consumer Conference and on Tuesday, June 25 at the Northland Growth Conference. In the meantime, you're always welcome to contact our Investor Relations department at 847-264-2188 with any questions that arise. Thank you for joining us and this concludes today's call.

Operator

Thank you everyone. You may now disconnect from the phone call.

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