Q3 2024 Cambium Networks Corp Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to the Cambium Network's third quarter 2024 financial results conference call.
Speaker Change: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session.
Speaker Change: To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jacob Sayer, Chief Financial Officer. Please go ahead.
Thank you, Rivka.
Jacob Sayer: Welcome everyone and thank you for joining us today for Cambium Network's third quarter of 2024 financial results conference call.
Jacob Sayer: and welcome to everyone else as well for joining via the webcast.
Speaker Change: My name is Jacob Sayer. I'm the Chief Financial Officer of Candium Networks, and I'm joined by Morgan Kirk, our President and CEO.
Speaker Change: The financial results press release for the third quarter is accessible on the investor page of our website and has been submitted to the SEC on Form 8K.
Speaker Change: A transcript of today's prepared remarks will also be available on our investor page after the conclusion of the call.
Speaker Change: 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.
Speaker Change: Risks and Uncertainties Could Cause Actual Results to Differ Materially from Today's Remarks
Speaker Change: Except as required by law, Cambium Networks does not undertake any obligation to update or revise any forward-looking statements for any reason after today's presentations. It's our policy not to reiterate our financial outlook.
Speaker Change: We encourage listeners to review the full list of risk factors included in the Safe Harbor Statement in today's financial press release, and our most recent SEC filings, including the most recent 10-K and 10-Qs.
Speaker Change: 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 that's otherwise noted.
Speaker Change: A reconciliation of non-GAAP measures to GAAP is included in the appendix to today's financial results press release.
Speaker Change: Now let's turn to the agenda. Morgan will provide key operational highlights for the third quarter.
Speaker Change: And I will provide a recap of the financial results for the third quarter 24 and discuss our financial outlook for the fourth quarter.
Our prepared remarks will be followed by a Q&A session.
Speaker Change: And now I'd like to turn the call over to Morgan.
Thank you, Jacob.
Revenues for Q3'24 were $43.7 million.
Speaker Change: Recognizing the market challenges, we are pleased that the revenues were within the outlook range we provided during our Q2-24 financial results call on August 8, 2024.
Speaker Change: Equally important to note, we grew in all geographies in our enterprise business with revenues up sequentially by 34% to 15.2 million dollars.
Speaker Change: This was offset by lower revenues in our point-to-point TTP business, primarily due to lower defense revenues.
Speaker Change: While we are confident that defense revenues will grow next year, it appears that the defense budgets for communication equipment were constrained due to funding pressures from monies required in active conflict zones.
Speaker Change: Non-GAAP gross margin improved again quarter over quarter, growing to 42.3%.
Speaker Change: Operating margins also improved sequentially as we continue to lower our break-even point.
Speaker Change: Pre-cash flow was a positive $5.2 million during Q3-24 and our cash balance stood at $46.5 million as of September 30th.
Speaker Change: These results support our belief that the business is moving in the right direction financially, operationally, and strategically.
Speaker Change: Sales of Cambium's products out of the distribution channel, as reported by Cambium's distributors, were again higher for Q3-24 than our reported revenues, and we saw continued declines in channel inventories.
Speaker Change: We continue to expect sales in and sales out to be at equilibrium by the end of the year.
Speaker Change: Looking forward, lower channel inventories are expected to result in Cambium's revenue being more directly tied to end-user demand.
Looking at some new customer launches.
Speaker Change: One of the world's largest oil and gas companies and an existing Cambium Networks customer purchased PMP450Vs to upgrade their existing deployment of PMP450I for faster speeds in the six gigahertz band.
Speaker Change: The company also selected the CN Matrix TX2000 series industrial-grazed switch that supports extended temperature ranges and power over Ethernet capabilities, among other attributes required by outdoor environments.
Speaker Change: We saw similar adoption of PMP450V by other industrial customers in the United States during Q3 and expect to maintain that trend.
Speaker Change: We continue to drive growth in logistics and retail market segments as one of the world's largest retailers Selected our CN wave 60 gigahertz platform to provide wireless connectivity between retail stores and adjacent fueling stations
Speaker Change: and in their 37 major distribution centers connecting on-site primary and remote facilities.
Speaker Change: The 60 gigahertz CN wave platform will also provide backup paths to existing fiber lines
Speaker Change: As discussed on our last quarter's call, Linnaeus's successful deployment of Cambium's 60 GHz CN Wave solution
Speaker Change: to provide gigabit access to over 4,700 homes on Walney Island off the west coast of England continues to impress due to both the rapid time to deploy, which is less than 12 weeks, and the high penetration rate, which was greater than 20% only weeks after deployment.
Speaker Change: Boneas has now been recognized by the United Kingdom's Wireless Internet Service Provider Association, WISPA, with their best gigabit wireless project UK WISPA award in October.
following multiple deployments at their sites.
Speaker Change: In the Caribbean and Latin America and Europe, Middle East and Africa regions, we completed our first deployment in the Pacific region at a franchised site of a global hospitality company.
Speaker Change: At the Samoa location, as with other sites, the Cambium Network's Wi-Fi 6-6E access points and CN Matrix switches are providing an exceptional guest experience and supporting the hotel's operations.
Speaker Change: The network upgrade was part of a hotel-wide renovation completed in October with a grand reopening. In Q4, we expect to complete additional development on our CN matrix switch that is required for broader deployment across the company's many brands in 2025.
Speaker Change: Looking now at some new product launches that are key to our future success.
Speaker Change: We released a 2x2 version of our PMP450V subscriber module, SM, that works in both 5 and 6 GHz.
Speaker Change: This product complements our 4x4 access point, AP, and our 4x4 SM, but at a lower cost. It is capable of more than 500 megabits data rate and expects to be the workhorse of
PMP 450 Networks
Speaker Change: The combination of back-to-back releases on the E-PMP 4000 line has significantly boosted performance across many fronts.
Speaker Change: Release 5.8 brought beamforming support and with release 5.9 significant scalability enhancements were added that allow operators to deploy higher numbers of SMs per AP.
Speaker Change: These advances combine to enable operators to offer more higher data rate packages and achieve price performance superiority.
Speaker Change: Also in Q3, we introduced MarketApps, a new advanced service hosted from our CN Maestro platform that provides apps for customers and end-users that are customized for specific use cases.
Speaker Change: The first two apps released in MarketApps are targeted at the multi-dwelling unit, MDU Market, which includes multi-family, student housing, assisted living, and similar environments.
These apps enable property managers, service providers,
and residents to manage Wi-Fi services with a simple workflow.
Speaker Change: The market apps framework will be extended over time with new apps targeted at different verticals and high-value use cases.
Speaker Change: Finally, total devices under CN Maestro Cloud Management in Q3-24 increased approximately 3% from Q2-24 and increased over 14% on a year-over-year basis.
Jacob Sayer: I will now turn the call over to Jacob for a review of our Q3-24 financial results and our Q4-24 financial outlook.
Thank you, Morgan.
Jacob Sayer: Turning to revenue for the quarter, Q3-24 top-line results of $43.7 million decreased 5% sequentially as good growth in our enterprise business was offset by declines in our P2P and to a lesser extent our PMP businesses.
Jacob Sayer: Looking at our revenues more specifically, our enterprise business grew 34% sequentially.
Jacob Sayer: As demand improved in all geographies, channel inventories continued to decline.
Jacob Sayer: Our PMP business declined slightly down 8% sequentially, resulting primarily from slower adoption of 6 GHz deployments in North America.
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Jacob Sayer: The P2P business declined by 32% sequentially due to weakness in defense orders, especially in Europe.
Speaker Change: While we typically expect defense to grow with historic trends in the second half of the year, this year we're seeing a delay in projects, as Morgan mentioned, due to current budget prioritization for active conflict zones.
by region.
Speaker Change: Europe, Middle East, Africa revenues, SMEA, decreased 19% sequentially, reflecting a decline in the P2P business for defense, somewhat offset by higher enterprise revenues.
Speaker Change: North America revenue was higher by 3%, driven by higher enterprise.
Speaker Change: Asia-Pacific revenue decreased by 14% sequentially on lower PMP and PTP revenues, again partially offset by higher enterprise revenues.
Speaker Change: and Central America, Latin America, CALA, improved by 11% quarter over quarter.
Now let's move on to gross margin.
Speaker Change: Our non-gap gross margin for Q3-24 continued to move higher and was 42.3% compared to 33.5% in Q2.
Speaker Change: The higher quarter-over-quarter non-GAAP gross margin primarily reflects lower E&O and losses on supplier commitments.
We continue to work hard to manage our operating costs.
Speaker Change: As we discussed last quarter, focusing resources on those products and projects that are most critical for Cambium's future success.
Speaker Change: Based upon our actions, non-GAAP total operating expenses, including depreciation and amortization, in Q3'24, stood at $22.1 million, lower by $1.2 million sequentially.
Speaker Change: as the steps we have taken to better manage and reduce our expenses continue to have an impact.
Speaker Change: We have now reduced our adjusted EBITDA break-even point to an approximately $50 million quarterly revenue run rate.
Speaker Change: We also saw the impact of these actions on our non-GAAP net loss for Q3-24, which was $3.8 million, or a loss of $0.14 per diluted share. An improvement from the non-GAAP net loss of $7.1 million, or a loss of $0.25 per diluted share during Q2.
Speaker Change: We saw an even larger improvement in our adjusted EBITDA for Q3-24.
Speaker Change: which was a loss of $2.3 million compared to a loss of $6.7 million for Q2.
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Now let's move to cash flow in the balance sheet.
Speaker Change: Cash provided by operating activities was 8.9 million dollars in Q3-24. Significantly higher than the cash provided by operating activities at 2.4 million dollars in Q2.
Speaker Change: We are focused on improving the order to cash cycle, reducing inventories, and managing working capital closely.
Speaker Change: Cash totaled $46.5 million as of September 3, 2024, and free cash flow for the quarter was a positive $5.2 million.
Speaker Change: Net inventories of $43 million in Q3-24 decreased by $7 million from Q2-24, driven primarily by consumption.
Speaker Change: Our goal is to reduce and then maintain our inventories at approximately 90 days outstanding.
Speaker Change: As noted in the press release, as of September 30, we remained in compliance with our monthly liquidity covenant for outstanding bank debt at each measurement point during the quarter.
Speaker Change: But we were not in compliance with our trailing consolidated EBITDA covenant as of September 30.
Speaker Change: The company was also not in compliance with its monthly liquidity covenant as of October 31st.
Speaker Change: The company is seeking a forbearance from the bank and is working with them to address its non-compliance with these covenants.
Speaker Change: Moving to the fourth quarter financial outlook. Considering our current visibility, our Q4 2024 financial outlook follows.
Revenues between 40 and 45 million dollars.
non-gap gross margin between 42.5 to 44.5 million 44.5 percent
Non-gap outputting loss of between $3 to $5 million.
Speaker Change: An adjusted EBITDA is expected to be between a negative one to a negative three million dollars.
Speaker Change: and adjusted the DA margin between a negative 2% to a negative 7%.
Speaker Change: In summary, we delivered on what we promised for the third quarter and continue to take action to improve our financial results.
Speaker Change: Looking forward, while the improvements may not be as large as we would like, we are confident that the company is moving in the right direction.
Speaker Change: We are controlling the discretionary aspects of the business by lowering expenses, and as a result, we expect our results to continue to improve financially from here.
Speaker Change: I'll now turn the call back over to Morgan for closing remarks.
Thank you.
Morgan Kirk: I have consistently focused the organization on improving operationally, platforming, and optimizing our go-to-market for enterprise. We're starting to see results.
Morgan Kirk: As an example, our operational costs are lower and we are using less capital in our supply chain.
Morgan Kirk: At this year's WISCpalooza, the wireless service provider show, we announced our new PMP platform, Evo.
Morgan Kirk: This solution converges two of our major product lines, ePMP and PMP450, into one unified platform.
Morgan Kirk: It offers a migration path and a roadmap to solutions that provide best-in-class performance with economic viability by merging traditional off-the-shelf Wi-Fi chips with customized FPGA components.
Morgan Kirk: Our architecture has been well received and we are currently in full development, ensuring that we're able to meet the future needs of our industry.
Morgan Kirk: In addition, our recent software releases for both our PMP450 and E-PMP product lines significantly improve both legacy and current shipping products, creating genuine optimism about our near-term opportunities in the important PMP business.
Morgan Kirk: Equally exciting is how our enterprise business is now moving in a positive direction.
Morgan Kirk: This reflects our emphasis on this high potential portion of our portfolio.
Morgan Kirk: We have made significant changes in go-to-market by specializing some of our sales force, focusing on specific verticals in both sales and product features, and implementing a concierge service for our most important customers.
Morgan Kirk: I believe the progress we have made has been significant and expect it will produce meaningful results for the company.
Morgan Kirk: While our defense business results were disappointing in the past quarter, I'm encouraged both by the positive technical feedback we continue to receive on significant future programs and the size and scope of our pipeline both in the U.S. and overseas as leading indicators for our future business.
Morgan Kirk: I'd like to close by thanking our Cambium employees for their continued dedication to our mission and strategy. The transformation we are going through requires their continued tenacity and we are grateful for their effort.
Morgan Kirk: With that, I'd like to turn the call over to Ritka and begin the Q&A session.
Ritka: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
Ritka: Our first question comes from the line of John Roy of Watertower Research. Your line is now open.
John Roy: Great, thank you. So I have a couple questions. One, you were talking about the market challenges, certainly the defense stuff.
The market's not quite as challenging in the future.
Speaker Change: Gross margins are certainly on an upward trend. The big movements over the last couple quarter in gross margin is really getting our own house in order from an inventory perspective.
Speaker Change: and the resulting excess and obsolete inventory charges dropping away, we're now down to just about a normal level for those E&O charges and certainly they continue to decrease but in a smaller pace for next year.
Speaker Change: The normal operating range for Cambium should be in the high 40s to around 50% from a gross margin perspective. And so, you know, certainly with a helping revenue line or increasing revenue line, we'd expect to approach those levels as we go through next year.
Speaker Change: If you look though, I'll just add on to that, if you look at the markets, I think certainly our defense market has better than
Speaker Change: average margins on it. And as that increases, margins overall for the company will increase. In the commercial segments, there is still a great deal of price pressure.
Speaker Change: and we're dealing with that the best we can, but I don't expect that to be alleviated during most of next year. We continue to see that type of pressure going on in the market.
Great. Now, thanks. On the defense stuff, I mean...
Speaker Change: I kind of know the answer to this, but do you feel like it's delayed or pushed out or it's just lost opportunity at this point?
Speaker Change: So we're very comfortable in saying the business didn't go to somebody else.
Speaker Change: Okay. However, so that's sort of a push-out comment. Right. What you don't know in this business is whether governments just say, I can do without, so the program doesn't go to its entire fruition.
So that's the way I'd answer this.
Yeah, yeah, I got it. So now, on the...
Goodbye.
Speaker Change: on the bank situation. Can you give us any color on expectations for resolution of that?
John Roy: I really can't, John. We're in negotiations with the bank. Obviously, our private equity firm is involved in that as well.
John Roy: So there's no real news other than the covenant breaches that took place at the end of September and again at the end of October and that we're in negotiation with them so there's nothing concrete that we can signal to folks just yet.
Speaker Change: Understood. And the last question I have is, I mean, obviously enterprise is doing better.
Speaker Change: which is great. Do you feel like enterprise is kind of like the future for Cambium and kind of where you're headed?
Speaker Change: Yeah, so I think for the past year I've been signaling sort of the following direction.
I think that the point-to-multi-point market is...
Speaker Change: being compressed by a variety of forces. And while I think the work that we're doing there will allow us to maintain share, maybe even grow it, depending on how we execute things, I don't see this as a growth market in and of itself.
Speaker Change: And the defense market is lumpy. So if you look at Cambium as a whole, this is our growth area.
Got it.
Thank you.
All right. Thanks so much, gentlemen.
Thank you.
Speaker Change: I am showing no further questions at this time, so I would like to turn it back to Jacob Sayer for closing remarks.
Jacob Sayer: Thank you very much for joining Cambium's third quarter earnings call, and this concludes today's conference call.
Speaker Change: Thank you again for your participation in today's conference. This concludes the program. You may now disconnect.
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