Summary
- CMBM has a strong portfolio positioning and is well-positioned for long-term growth. However, there are near-term uncertainties due to macroeconomic conditions and cyclicality in customer investment behavior.
- CMBM's revenue growth, product mix success, and cost control led to a higher than expected profit margin in 4Q22.
- CMBM's lower FY23 guidance may dampen investor enthusiasm, and it may be best to take a "wait and hold" approach.
Investment thesis
Cambium Networks ( CMBM ) has a strong portfolio positioning that makes me optimistic about the company's prospects for long-term growth. The key reason for my belief is that service providers have been investing and rolling out connectivity solutions across the globe, with Wi-Fi being a crucial component. However, there are some near-term uncertainties due to the bad macro backdrop and the cyclical variation in customer investment behavior.
With a material increase in supply, a more profitable product mix, and effective cost leverage, CMBM was able to report strong results for 4Q22, positioning the company for double-digit growth in revenue and profits in fiscal years '23 and '24. On the flipside, the PMP product cycle is expect to gain momentum only in 2H23, and is currently experiencing a downturn as service providers await the transition. This led to management guiding to a slower start to the year than originally anticipated. This has resulted in a revised FY23 guide that falls below their long-term growth model of 15% to 17%. However, despite the forecast of 50% gross margins in 2023, management still has faith in its ultimate objective of achieving gross margins of 51-52% in the long term. This belief is backed by several factors, such as the decline in inflationary costs, an increasing proportion of Enterprise and Defense sales, a greater involvement in software, and the benefit of cost leverage. In my opinion, the 2023 forecast is more mixed than expected, and the delay in returning to a long-term growth model is likely to dampen investor enthusiasm this year.
The high demand for Wi-Fi 6 and 6E solutions drove a significant increase in Enterprise Wi-Fi of 64% year over year, one of the highlights of the FY22's performance. As a result of continued momentum from its customer verticals, management believes that Wi-Fi growth will remain stable, ranging from 20% to 30% in 2023. However, PMP revenues dropped by 44% year-over-year in FY22 as service providers waited for the launch of new product cycles with 28 GHz and 60 GHz products. I believe the decline is not a structural one, but just a matter of timing as these new products are expected to ramp up in the second half of 2023 and continue throughout 2024. In contrast, a sizable federal defense deal in 4Q22 contributed to PTP's 20% year-over-year growth. In 2023, management expects that Defense spending will be the primary factor in the supporting growth of PTP.
Based on the factors mentioned above, I hold the view that the company's substantial growth will likely occur in 2024. In the meantime, I believe a “wait and see” approach or purchasing a small amount for exposure would make sense.
Earnings results
Revenue growth, product mix success, and cost control all contributed to a profit margin that was higher than expected. In 4Q22, CMBB made $84.5 million in revenue, $32 million of which came from Wi-Fi, $30 million from PMP, and $21 million from PTP. The positive product mix, increased volumes, and decreased freight costs all contributed to the 49.% gross margin. The operating profits amounted to $13 million, indicating operating margins of 15.6%. This was facilitated by a more stringent control over variable compensation and headcount, resulting in EPS of $0.36.
Product transition
The fact that CMBM is devoted to bringing out cutting-edge product lines excites me. During the 4Q22, the PMP segment showed sequential growth, thanks in large part to the sale of 60 GHz products. The growth is welcome, but I don't think it will be sustained if the revenue stream remains as lumpy as it has been. Importantly, management stressed the significance of the hundreds of customers who have already deployed the 60 GHz product across the globe. Networks can now support anywhere from a thousand to five thousand users. In regards to the 28 GHz, management has only recently begun to sign multi-million dollar contracts with customers.
As for the 6 GHz PMP product, CMBM has 20 customers participating in Proof-of-Concept trials for the 6 GHz PMP product at the moment. Management, as far as I'm aware, is still on the lookout for potential beta testers (the ePMP 4600). It was also noted by management that the 6GHz offering cannot be expanded upon until the FCC approves the 6GHz band for Fixed Wireless usage, which is anticipated to occur in 2H23. As a whole, these new products are anticipated to begin ramping up in 2H23, which I believe will serve as a major performance driver for FY24.
Enterprise segment
4Q22 saw continued enterprise growth, with Wi-Fi sales reaching $32m. As for FY23 outlook, management anticipates a 20-30% increase in revenue. While I do not doubt that Wi-Fi strength has been a solid lever for revenue growth, I am skeptical as to how long this trend can be expected to continue. Therefore, I would caution against projecting a linear growth rate forward from the current situation.
Guidance
Revenue for the 1Q23 is guided to be between $74 million and $80 million, with gross margins guided to be between 49.2% and 50.8%. As for EPS, it is expected to come in the range of $0.14 to $0.23.
The lower FY23 guidance is a major factor in my decision to take a "wait and hold" stance, as it may have an effect on short-term stock performance but will likely not be a significant problem in the intermediate or long-term. Guidance for FY23 revenue growth is revised downwards slightly, but earnings guidance is still better than expected. New guidance from management for FY23 points to revenue of $327–$345 million, or 10%–16% growth, which is slightly lower than the mid-teens growth mentioned in 3Q22. Meanwhile, EPS was guided to $1.17-$1.25, indicating greater operating leverage than initially expected, and gross margins were projected to reach 50.0% in 2023.
Conclusion
CMBM has a strong portfolio positioning that makes it well positioned for long-term growth, although there are some uncertainties in the near term. The company's focus on innovative product lines and new technology is impressive, and I expect significant growth to occur in 2024. Despite a strong FY22 performance with strong revenue growth, the company's revised FY23 guide falls below their long-term growth model of 15% to 17%, which may dampen investor enthusiasm this year. Therefore, I recommend taking a "wait and see" approach or to purchase a small amount for exposure.
For further details see:
Cambium Networks: Adopt A Wait And See Approach For FY23