CMBM - NASDAQ

Good afternoon. My name is Steven, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cambium Networks’ Second Quarter 2024 Financial Results Conference Call [Operator Instructions]. Mr. Peter Schuman, Vice President of Investor, Industry Analysts and Public Relations, you may begin your conference.

Thank you, Steven. Welcome, and thank you for joining us today for Cambium Networks' second quarter 2024 financial results conference call, and welcome to all those joining by webcast. Morgan Kurk, our President and CEO; and Jacob Sayer, our CFO, are here for today's call. The financial results, press release and commentary referenced on this call are accessible on the Investor page of our Web site, and the press release has been submitted on a Form 8-K with the SEC. A copy of today's prepared remarks will also be available on our Investor page at the conclusion of this call. As a reminder, today's remarks, including those made during Q&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 to make changes in Cambium's expectations or otherwise. It is Cambium Networks' policy not to reiterate our financial outlook. We encourage listeners to review the full list of risk factors included in the safe harbor statement in today's financial results press release or most recent SEC filings, including our most recent Form 10-K and Form 10-Qs. 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 for 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 Web site and in today's press release announcing our results. Turning to the agenda. Morgan will provide the key operational highlights for the second quarter 2024, and Jacob will provide a recap of the financial results for the second quarter of 2024 and will discuss our financial outlook for the third quarter and full year 2024. Our prepared remarks will be followed by a Q&A session. I'd now like to turn the call over to Morgan.

Thank you, Peter. Summarizing the performance of Q2 of '24. Revenues for Q2 '24 were $45.9 million. We are pleased revenues were just above the midpoint of the outlook we provided during our Q1 '24 financial results call, with revenues up sequentially by 9% due to continued growth in our enterprise business with higher revenues in all geographies and growth in our point-to-multipoint PMP business. Adjusted gross margin improved again quarter-over-quarter muted by higher than expected reserves taken for excess finished goods and raw materials. Excluding the unexpected E&O charges, adjusted gross margins would have been 44.4%, above our guidance for the quarter. Operating margins improved sequentially as we continue to control expenses to lower our breakeven point. Free cash flow was negative $1.8 million during Q2 '24 and our cash balance stood at $42.6 million as of June 30th. Cash flow from operations was positive $2.4 million. This is the first time it was positive in six quarters. We believe the business is moving in the right direction, financially, operationally and strategically. Sales of Cambium's products out of distribution channel as reported by Cambium's distributors were again higher for Q2 '24 in Cambium's reported revenues, and we saw corresponding declines in channel inventories. We continue to make progress in cleaning channel inventories. anAd some of our partners are at appropriate levels of inventory, while other partners still have work to do. Sales in and sales out are expected to be at equilibrium by the end of the year, which is slightly longer than we had previously thought as shorter lead times and higher interest rates are driving distributors to a greater level of efficiency than in the past. Looking forward, lower channel inventories will result in end users demand more directly, driving increased revenues. Looking at some customer wins that are key to our future success. In the US, Cal.net, a provider of high speed wireless broadband and digital services in the Central Valley and rural Northern California, has deployed ePMP 4600 to serve residential and commercial users with improved service levels of 400 megabits per second downlink and 200 megabits per second uplink. They are providing high speed Internet service to agricultural operations, local businesses and residential customers, enabling increased productivity, improved video experience and a whole host of other broadband services. They selected Cambium as their supplier due to our value proposition, reliable, high performance service at an affordable cost. This, in turn, allows Cal.net to provide faster broadband speeds at a lower cost to their customers in the incumbent service providers. In England, Voneus, a rural broadband provider is leveraging Cambium Networks cnWave 60 gigahertz mesh technology to bring improved connectivity to Walney Island. Voneus is deploying Cambium's technology to make gigabit broadband available to more than 10,000 island residents. This collaboration aims to support the community's economic development and enhance educational opportunities for local students. Cambium was selected due to the speed at which the system can be deployed. This is enabled by leveraging existing physical infrastructure and combining with Cambium's mesh technology, which also reduces the total cost of ownership. In addition, in the enterprise space, the Indian Institute of Technology of Premier Public Technical University located in Dhanbad, India, selected Cambium's Enterprise Solutions to connect multiple academic and housing blocks across the university's campus. Now let's turn to upcoming product introductions since our last previous -- since our previous quarterly update. In June, we announced the release of a new PTP product for our commercial customers in the 80 gigahertz E-band, PTP 850EX. The product delivers 10 gigabit capacity and features a smaller form factor than prior product versions at a very compelling price. The E-band is ideal for building to building and other point-to-point connectivity as an alternative to fiber or as a backup to fiber and is used for applications such as backhauling outdoor WiFi and video surveillance. For channel partners, we have introduced a new concierge program called Elite, managed WiFi service providers, value added resellers and system integrators are eligible for this select program. The enhanced program introduces a new partner level, offering a host of benefits designed to accelerate growth, reduce risk and increase sales velocity. The program includes personalized support and the deployment of Cambium ONE solutions from a senior technical staff member assigned to the account as a consultant and expertise from specialized technical staff for onboarding and customer engagement. Finally, total devices under cnMaestro cloud management in Q2 '24 increased approximately 6% from Q1 '24 and was up 15% year-over-year. I will now turn the call over to Jacob for a review of our Q2 '24 financial results and Q3 '24 and full year 2024 financial outlook.

Thank you, Morgan. Q2 '24 top line results of $45.9 million increased 9% from Q1 due to growth in our Enterprise and PMP businesses. Q2 results included additional inventory charges and supplier commitment reserves, which impacted gross margins by approximately $7 million, which was $5 million more than we expected at the beginning of the quarter. Had it all in line with expectations, non-GAAP gross margins would have been approximately 44.4%, slightly better than expectations due to stronger enterprise sales. We continue to work hard to manage our operating costs, focusing resources on those products and projects that are most critical for Cambium's future success. Turning to revenue in the quarter. The increase in revenue was mostly due to growth in the enterprise business, which grew 58% sequentially as demand improved in all geographies and channel inventories continues to decline. Our PMP business grew slightly up 1% sequentially, thanks to strength in our ePMP product lines in Europe and Asia Pacific. Our North America PMP business remains slow as service providers are still working to understand the nuances of the 6 gigahertz PMP solution before moving to volume deployments. The point-to-point business declined by 5% sequentially due to the completion of a large North American licensed microwave installation in the prior quarter in Q1, partially offset by increased defense orders in Europe. While we typically expect defense to grow with historical trends during the second half of the year, this year we're seeing a delay in projects due to budget prioritization, both for domestic and international defense projects. So looking at it by region, EMEA increased revenue 78% sequentially as a result of recovery in the P2P business for defense and higher PMT and enterprise revenues. North America was lower by 18% sequentially on lower P2P and PMP revenues, partially offset by higher enterprise revenues. APAC increased by 25% sequentially on higher enterprise and PMP revenues and Latin America improved by 8% quarter-over-quarter. Now let's move on to gross margins. Our non-GAAP gross margin for Q2 '24 continued to move in the right direction and was 33.5% compared to 22.7% in Q1 '24. The higher quarter-over-quarter non-GAAP gross margin was primarily the result of lower material costs, fewer rebates and an improved mix of higher margin enterprise revenues. Non-GAAP total operating expenses, including depreciation and amortization in Q2 stood at $23.3 million, lower by $3 million sequentially as we manage expenses lower and due to certain onetime benefits. Our non-GAAP net loss for Q2 '24 was $7.1 million or a loss of $0.25 per diluted share and compared to a non-GAAP net loss of $12.7 million or a loss of $0.46 per diluted share in Q1. Adjusted EBITDA for Q2 '24 was a loss of $6.7 million compared to a loss of $15.5 million in Q1 '24. Now let's move on to cash flow and the balance sheet. Cash provided by operating activities was $2.4 million for Q2 '24 compared to cash used in operating activities of $15.4 million for Q1. We are focused on improving the order to cash cycle, reducing inventories and managing working capital closely. Cash totaled $42.6 million as of June 30th and free cash flow for the quarter was negative $1.8 million. We continue to manage our cost base and have reduced our breakeven point to an approximately $55 million quarterly revenue run rate. Net inventories of $50 million in Q2 '24 decreased by $5.6 million from Q1, driven by both consumption and increased inventory reserves. E&O reserves are primarily driven by estimated long term demand for our products. These estimates can change over time and are dependent on the market, future technology development and anticipated technology migration. Our goal for 2024 is to reduce our inventories to approximately 90 days outstanding, and that's down from 157 days at the end of June. Moving to the third quarter and full year '24 financial outlook. Considering our current visibility, our Q3 '24 financial outlook is as follows; revenue between $43 million to $48 million; non-GAAP gross margin between 41.5% and 43.5%; non-GAAP net loss between $5.4 million to $3.8 million, or net loss per diluted share between $0.19 and $0.14; adjusted EBITDA is expected to be between a negative $4.4 million to a negative $2.4 million; and adjusted EBITDA margin between the negative 10.2% to a negative 4.9%. Our updated full year 2024 financial outlook is expected to be as follows; revenues between $180 million and $190 million; non-GAAP gross margins of approximately 37%; non-GAAP net loss between $29.4 million and a net loss of $24.6 million, or a loss of between $1.04 to $0.87 per diluted share; adjusted EBITDA margins are expected to be between a negative 16.2% to a negative 12%. In summary, excluding the E&O charge, we delivered what we promised in the second quarter. Looking forward, while the incremental steps may not be as large as we would like, the company is moving in the right direction. And we expect to continue to improve financially from here. I'll now turn the call back to Morgan for closing remarks.

Thank you, Jacob. My first year with Cambium has been challenging. But as I assess our progress, I believe we have passed the most difficult point. For the past year, I've outlined three focus areas; improved operational excellence, platforming and optimizing our go-to-market for enterprise. We have significantly improved our operational performance with increased focus and new processes. We are streamlining our supply chain and reducing channel inventories, which positions us better for the future. Our platform work is underway and will bear fruit in faster product development, reduced lead times, improved efficiencies in operations and sales and lower overall costs. Our enterprise business is growing. And as we change the way we interact with our partners, I expect this to accelerate. Our PMP business is positioned to grow with the approval of both our ePMP and PMP product lines of 6 gigahertz offering faster speeds, improved reliability and increased bandwidth. We expect to see the benefit as our product ramps in North America as well as with the future opening of 6 gigahertz spectrum for PMP use in other countries around the world. Our enterprise business is at the start of a new product cycle with WiFi 7, channel inventories have been reduced and are switching software businesses offer competitive product line ups. Finally, I'd like to share my continued appreciation to all those involved in our transformation. The effort and loyalty are appreciated and I believe we'll be rewarded in the long run. With that, I'd like to turn the call back over to Steven and begin with the Q&A session.

[Operator Instructions] Our first question comes from the line of Scott Searle of Roth Capital.

Maybe Morgan, Jacob, just a couple of quick clarifications. Looking at the gross margins into the third quarter, you have them up slightly sequentially, but there were a lot of reserves that were taken in the second quarter. I'm wondering if you could clarify what those reserves or what are you thinking about and is embedded into those -- that guidance for the third quarter? And also, you talked about sell through being higher than sell-in, I think, from the WiFi product line or enterprise. The last couple of quarters, I think that's been in the $15 million to $20 million range. I wonder if you could clarify if we're still seeing that demand at those levels. And it sounds like you're expecting that to normalize by the end of this year? And then I had a follow-up.

I'll deal with the first half of that question, and I'll pass it to Morgan for the second. On the excess and obsolete, you're absolutely right. The charges have been pretty large for the last couple of quarters at $7 million each. They stem from a series of tests that we do from an accounting perspective with regard to the component balances and finished good balances that we hold and that are held at our suppliers. For the third quarter, embedded in the guidance is just under a $2 million assumption for E&O. We don't have a current list of those products in terms of where we'd expect to see that, it's just a placeholder at the moment. But we do expect it to reduce substantially from where we've been the last couple of quarters.

The second part of your question had to do with the level at which our inventory was destocking. It's less than it was in the past but still on the order, call it, the $10 million range, it's destocking on a quarterly basis.

I think it was POS…

Morgan, just to clarify. So the delta in the sell-in versus sell-through was $10 million. Is that roughly the range that we're talking about for the second quarter?

Absolutely, those are the types of numbers, yes. Remember those number come from our supply -- our distributors, so they're not accurate. So I can only give you a range but around that number.

And if I could on the point-to-multipoint front, it's been a couple of years of headwinds through the multiple product cycles, spending patterns, et cetera. But I'm starting to hear -- it sounds like you're becoming more optimistic about its gigahertz product cycle. So I'm wondering if you could give us some broad based thoughts in terms of how you're thinking about 2025 in terms of it contributing? And maybe wrap that into the B conversation in terms of the dialog that you're having with customers and how that kind of feathers into that funding opportunity. And in aggregate then if I look at point-to-multipoint, we're under $20 million on a quarterly basis. It peaked at close to $60 million a quarter. When we start to get to a normalized environment, maybe in the second half of next year, what's the bogey in terms of revenue run rate that we should be thinking about?

I feel like Rodney Dangerfield. One question in 27 parts, so I'll try to make sure I answer all of it. In terms of PMP and how we foresee the future, while I don't think speed will have a measurable impact in '25, probably will happen late '25 or '26 before that really has an opportunity. We speak to customers, they're putting their plans in, they're trying to get state governments, 26 of which now have been, call it, funded by the Fed. They're trying to get their plans in and then there will be a progression to get money and then there will be a plan to roll out. And eventually, that will turn into equipment for us. We've been speaking to them about that. And so that's sort of our view on that. It's the late '25, early '26. There's still a lot of questions around it because today, it requires licensed spectrum. And remember, 6 gigahertz is unlicensed spectrum. There are some thoughts that this may change that could have a material positive impact for us. The reason I'm more, I guess, I'm more optimistic is that we've kind of what I think hit a floor in terms of people's low point on their spend. And we're starting to have a better appreciation for what it will take to roll out 6 gigahertz services. We thought this would happen faster, but I am optimistic that it will happen in, I'll call it, the next few quarters as people figure out what it takes to avoid the incumbents, deploy these systems and get the higher data rates and returns they want with their customers.

Well, Morgan, I don't know if you'd be willing to go this far, but I'll call it normalized or more normalized environment. What do you think point-to-multipoint revenues look like on a quarterly basis?

So I'm not prepared to answer that at this point, but I will take that for for future reference to you.

Our next question comes from the line of Simon Leopold of Raymond James.

I want to see if maybe you could unpack your thoughts about the full year forecast, because basically you've given us September and given us a full year, so that allows us to determine what you're assuming for the fourth quarter? And basically, it looks like you averaged $36 million-ish in 3Q and 4Q. I'm just wondering if there's a good reason why the fourth quarter shouldn't be showing further signs of improvement. Basically, I'm looking for a trajectory and whether or not you think I’m misinterpreting it or if there's some aspect of the macro that you're concerned about? Just help us unpack what applies for the fourth quarter.

So if you unpack the guidance at the midpoint of that $185 million, you can kind of back into a number close to $51 million for Q4, that's pretty simple math. So it is an improvement sequentially, that's what we're expecting in the fourth quarter. These are down from our prior expectations with regard to weakness in defense, which we mentioned on the call and some slow ramps, especially in the 6 gigahertz space for PMP. But we are expecting sequential improvement, especially as we go into the fourth quarter.

So [driving] that I guess, is what I'm looking for…

What's driving the lower forecast from prior or what's driving it up…

What's driving the sequential improvement? So sort of where is the recovery coming from…

Yes, it's coming from sequential enterprise growth and then some growth in PMP.

[Operator Instructions] I am showing no further questions at this time. I would now like to turn it back to Peter Schuman for closing remarks.

Thank you, Steven. During Q3 '24, Cambium Networks will be meeting with investors in Chicago on Tuesday, August 27th at the Jefferies Technology Media and Consumer 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.