2023-06-28 12:07:09 ET
Summary
- CMBM has shown resilience in a difficult macroeconomic climate, with a 25% increase in revenue and gross margin expansion in 1Q23, driven by the successful introduction of new solutions.
- The US government's spending initiatives around broadband, which could total up to $100 billion, present a significant growth opportunity for CMBM.
- I recommend a hold rating on CMBM, with a cautiously optimistic view on the business, and will only turn positive if 2H23 growth trend is inline with management expectations.
Investment thesis
Solutions for wireless broadband networking are one of Cambium Networks (CMBM) specialties. The company sells a variety of products, including wireless fabric. Products such as wireless-aware switches, network management software, and intelligent radios are also included here. The stock price has fallen by about 25% since my last update, and I remain cautiously optimistic on CMBM because the company is making progress toward its short-term goals despite mounting macroeconomic headwinds. The management team has projected flat to slightly lower revenues for 2Q23, which I expect had a negative impact on the stock price. But I think we should be looking ahead to 2H23, where I expect 2H23 to see a rapid increase in revenue, thanks to the commercialization of PMP products and the approval of 6GHz products later this year. I reiterate my hold recommendation CMBM as I think we should continue monitor to see how 2H23 performs.
Resilient business
Despite the difficult macroeconomic climate, CMBM had a strong performance in 1Q23, highlighted by a 25% increase in revenue and an expansion of gross margin compared to 4Q22. I believe that CMBM's success in introducing new solutions like Wi-Fi 6 and 6E is what has led to increased demand at the Enterprise level and improved gross margins, which in turn led to this success. In addition, supply chain bottlenecks are back to where they were before the pandemic. The strong secular trend of data consumption, innovative solutions, and a robust go-to-market strategy put CMBM in a strong position to weather the potential business slowdowns caused by political tensions. As a result, I expect CMBM to continue demonstrating resilience during this difficult period.
Tailwind from government spending
On top of the already strong secular tailwind for data consumption, I believe the US government spending initiatives around broadband might be an additional major growth driver. Collectively, the total budget seems to range over tens of billions of dollars (possibly hitting $100 billion), including various subsidies and spending around broadband, RDOF , and BEAD . CMBM is set up to take advantage of the industry's anticipated boom in investment activity. Despite the fact that it is impossible to predict exactly when this inflow of funds will be made available and when CMBM will be able to acquire them, I think this is a good indicator of the demand we can expect in the coming quarters. With an LTM revenue of $312 million, CMBM would more than double in size if it could secure just 0.3% of that $100 billion budget.
Innovation drives growth
CMBM's PMP segment experienced a significant drop sequentially as service providers shifted their focus from current PMP 450 products to next-generation gigabit solutions, most notably the 6 GHz 4600 ePMP product. Once the FCC approves the 6 GHz band , which is expected to happen soon, I anticipate this solution will drive PMP segment growth in 2H23. CMBM Fiber's recent release of XGS-PON 8- and 16-port OLTs and ONTs (current still in beta stage) for use in both indoor and outdoor settings is another area I anticipate will see growth. There won't be much of a revenue boost at the start since the scale is still small, but I anticipate things will pick up in the second half of FY23 and beyond. The product will help Cambium compete for FTTP deployments, which account for about half of CMBM's current customer base, and will be aimed at mid-tier Service Providers. I anticipate that CMBM will initially target its existing customer base within the CMBM ecosystem to roll out its Fiber service. Since CMBM has dealt with the Wi-Fi opportunity before, this fiber penetration strategy should go off without a hitch. Given that hardware is a commodity, I agree with management that it is prudent to concentrate on distinguishing the service manageability and simplicity of the complete solution.
Risks
Competition in the wireless market
Increased data transfer rates are driving innovation in networking protocols and hardware. To me, this opportunity raises the stakes for CMBM's competitors, given the presence of both well-established rivals and promising newcomers in the market.
Reliance on channel partners
Distributors and value-added resellers are crucial to CMBM's success; however, if they fail to promote and support CMBM product sales or maintain sufficient stock levels, CMBM could fall short of projections.
Conclusion
I recommend a hold rating with a cautiously optimistic view on the business, and will only turn positive if 2H23 growth trend is inline with management expectations. CMBM has demonstrated a resilient business performance in 1Q23, with revenue growth of 25% and gross margin expansion despite the challenging macroeconomic climate. The successful introduction of new solutions has contributed to increased demand and improved gross margins. Innovation, particularly in the PMP segment and fiber solutions, is expected to further drive growth in the coming quarters. Importantly, the strong secular trend of data consumption and government spending initiatives around broadband present significant growth opportunities for CMBM.
For further details see:
Cambium Networks: Business Remains Strong As Supported By Secular Trends, Government Spending