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spk04: Good afternoon. My name is Judith, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Cambium Network's third quarter 2021 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press start and the number one on your telephone keypad. Please limit yourself to one question and one follow-up question only. Thank you. Mr. Peter Schumann, Senior Director, Investor and Industry Analyst Relations, you may begin your conference.
spk07: Thank you, Judith. Welcome and thank you for joining us for Cambium Network's third quarter 2021 financial results conference call, and welcome to all those joining by webcast. Atul Bhatnagar, our President and CEO, and Stephen Cumming, our CFO, are here for today's call. The financial 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 8K 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 expected performance. These statements are based on current expectations, forecasts, and assumptions. Risk and uncertainties could cause actual results to differ materially. Except as required by law, Cambium Networks does not take 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's 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. 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, Cambium Network's President and CEO, Atul Bhatnagar, will provide the key investment highlights for the third quarter of 2021, and Stephen Cumming, Cambium Network's CFO, will provide a recap of the financial results for the quarter and our financial outlook for the fourth quarter of 2021. Our prepared remarks will be followed by a Q&A session. I'd now like to turn the call over to Atul.
spk00: Thank you, Peter. Oral demand and backlog remain strong, due to the continued need for expansion of broadband wireless communications networks, while supply chain challenges impacted Cambium's shipments during Q321. The supply chain challenges facing our industry are unprecedented, including shortages and rising costs for semiconductors, mechanical components, increased expedite fees due to extended lead times, and many supplier decommits, as well as increased freight expenses. By late August, Cambium had decommits from some of our larger suppliers for key components, which caused us to redesign some of our higher volume products with alternative parts from new suppliers. We remain cautious about supply for the next few quarters and are monitoring the situation and working with our key suppliers and manufacturing partners on a weekly basis until visibility and commits for calendar year 22 improve. As mentioned in our preliminary results, we now believe global supply and logistic constraints may last into calendar 22 based on several factors affecting the entire industry, including chip foundries getting additional fab capacity in place. We are not immune from future unforeseen events which could impact supply in future quarters. Cambium is taking very specific steps to address the supply constraints. We are pushing for supplier commits for calendar year 2022. We are providing 21-month forecasts to our key suppliers, and where necessary, we are redesigning products with more widely available parts to meet customer demand. Demand remains strong. We entered the fourth quarter 2021 with backlog up 57% year-over-year. Without the supply constraints, Cambium Networks would have met or exceeded the high end of the previous third quarter 2021 revenue outlook range provided on August 9th, 2021. Looking at our market position. This October, Cambium celebrated our 10th anniversary as a standalone company. We have built an innovative, sustainable, and prosperous business over the past decade and remain excited about the next wave of high-performance wireless broadband technology about to be unleashed in the upcoming months and years. Cambium has a promising future and our best years remain in front of us. Millimeter wave technology is taking hold with our 60 gigahertz products and our new 28 gigahertz 5G multi-gigabit fixed wireless products expected to be released during the fourth quarter for proof of concept POCs installations. During Q3 21, Cambium sold over 115 60 gigahertz starter kits in 30 different countries. And we presently have POCs for our 28 gigahertz CN wave going on in four different continents. We have shipped tens of thousands of these new 60 gigahertz CN wave products cumulatively. These products are changing the way fixed wireless is viewed by customers old and new and expands our serviceable available market bringing a standards-based multi-gigabit fixed wireless solution using licensed and unlicensed spectrum to network operators, serving residential, urban, and enterprise markets. Cambium's attractive cost of ownership makes our fixed wireless solutions a compelling choice for wireless infrastructure projects around the world. We continue to expect increased government spending on infrastructure products accelerating over the next few years as broadband is a lifeline to connect local communities and distributed enterprises around the globe. Turning to the results of the third quarter 2021, revenues of $75.9 million came in above the $75 million provided in the preliminary results announced on October 21st and fell below the outlook of $88 to $92 million, announced during the Q221 earnings call. Non-GAAP diluted EPS of 23 cents was below the outlook announced during the Q221 earnings call of between 30 and 34 cents per diluted share. The inability to ship products due to the greater than anticipated supply-constrained environment negatively impacted our financial results. Looking at revenues across four different product lines, Our point-to-multipoint PMP business revenues decreased 16% sequentially and increased 16% year-over-year as we continued to see strong momentum in network traffic, increased demand for CBRS solutions, and broadening interest in our new product introductions, although obtaining components was a more difficult challenge than anticipated at the start of the quarter. The point-to-point PTP business was lower by 1% sequentially during Q321, with component shortages affecting shipments, although we had higher shipments for federal products, while year-over-year decreased 23% due to delayed shipments for backhaul products. Our enterprise Wi-Fi business was the most impacted product line, decreasing 41% sequentially due to a paucity of semiconductor chips, although Wi-Fi increased 8% year-over-year, during Q321. Demand remains very healthy for our enterprise business, but it remains a challenging environment to ship products. Looking at some notable customer wins and new product developments. In North America, the cities of Aurora, Colorado, and San Jose, California, both the third largest cities in their respective states, have completed deployments of 60 gigahertz CN waves to provide gigabit speed backhaul for their city's aging wireless infrastructures. Aurora was given coronavirus aid relief and economic security CARES Act funding, which was allocated to improve IT infrastructure to benefit public safety, voice and data, LAN extension, video application, and credit card processing. Aurora replaced an aging 50 megabit per second microwave network with a 60 gigahertz CN wave gigabit capacity fixed wireless broadband network. The city of San Jose deployed outdoor public access Wi-Fi networks in strategic corridors throughout the downtown area. Cambium Network's 60 gigahertz CN wave distributed network infrastructure covers approximately 60 city blocks to transport the free Wi-Fi connectivity for residents, visitors, workers, and businesses throughout strategic downtown corridors to the internet point of presence. The downtown Wi-Fi project is the latest step in improving the city's digital infrastructure to support San Jose's smart city vision and digital inclusion and broadband strategy. Within our industrial customer base, a North American railroad operator selected our PTP-820 for its range, throughput performance, small footprint, and superior reliability. We displaced a competitor and will be working with this customer for additional field deployment opportunities moving forward. The enterprise hospitality market continued to recover. We had a win at a resort in Hawaii, the Maui Villas Resort, for our new outdoor Wi-Fi 6 product for coverage across the resort. Cambium's outdoor Wi-Fi 6 performance is significantly better than our competitors, resulting in a massively lower cost of ownership. For example, the Maui Villas Resort required 50% fewer access points than our competitors. Less equipment means less labor, maintenance, power, and simpler management of the network. Cambium's first mover status for the FCC's 3.5 GHz CVRS spectrum continued to benefit our PMP450 products. and our CBRS SaaS service in both the US and its territories. As of today's call, we now have over 115,500 devices managed by our CBRS SaaS service, an increase of approximately 12% since we reported last quarter. In the Europe, Middle East, and Africa region, EMEA, recent strategic wins since our last call include we had a major enterprise win in the education vertical in Morocco against larger competitors to provide a national carrier 20,000 Wi-Fi 6 APs for deployment and CN Maestro X software at major public universities to connect 12 campuses comprised of 278 buildings. Cambium was selected for our superior technology and value proposition. In Northern Holland, the Duna Mayor Education Group A school district comprised 22 secondary schools with over 13,000 students selected Cambium's Wi-Fi 6 access points to upgrade their network and move from an on-premises implementation to the cloud. The education group selected Cambium for our better performance and lower total cost of ownership than the competition. Cambium Networks had a key managed service provider win in the U.K. with Yfinity, to deploy Cambium's CN matrix switching solution for a significant multi-dwelling unit opportunity in the UK government. This adds CN matrix switches to the portfolio of Cambium's wireless fabric products already selected by Yfinity, including PMP450M and 60 GHz CN Wave. In the APAC region, we had a great quarter with several significant wins. The Australian Turf Club, a premier owner and operator of thoroughbred racing events and hospitality venues across Sydney, selected our indoor and new outdoor Wi-Fi 6 products, switching an XMS cloud to support stadium seating, hospitality suites, and general use areas requiring high-density deployments. A large internet search engine provider in India selected Cambium's PTP-550 to extend connectivity. The initial deployment is 20 locations. This is the start of a recurring deployment expected to go to 400 locations over the coming year. In Malaysia, in the state of Selangor, Cambium won a new CCTV project with Smart Selangor, a state government program with a vision to make Selangor a smart state through the optimization of digital technologies. This project featured Cambium's PTB670, EPMP 3000, and EPMP Force 300 products. Cambium beat out a number of fixed wireless competitors to win this project. In the Caribbean and Latin America Cala region, Cambium continued the long chain of success in Peru with a sizable win at a new government-sponsored agency for program Proyecto Selva to provide indoor and outdoor enterprise solutions for 1,300 public institutions. We won this project due to Cambium's advanced technology ability to deliver, and total cost of ownership, and Cambium's outstanding customer support. We had a win with our 60 gigahertz CN Wave technology at a large internet service provider in Puerto Rico, which moved from a trial to the deployment phase for business customers. Turning to new product introductions since our previous quarterly update. Before our next earnings call, Our first Wi-Fi 6E product will bring even more performance benefits, including utilization of up to 1.2 gigahertz of new clean spectrum in the 6 gigahertz band. Cambium's expertise and history with multi-radio access point designs enables us to deliver differentiated Wi-Fi 6E products. Our three-radio 4x4 technology, the XC3-4, will offer up to 700 160 megahertz channels. Wi-Fi 6E enables improved performance, increased capacity, and lower latency that enables a new set of high-density use cases. We are also working on a new set of high-performance 6 gigahertz products for fixed wireless access, which are on the product roadmap for introduction during calendar 2022. We begin extensive field trials and proof-of-concept deployments for our 28 GHz CN Wave 5G and R fixed wireless product with revenues ramping during calendar 2022. 28 GHz CN Wave will further expand our serviceable available market SAM as both new and existing customers demand higher broadband performance at the edge of their networks. Our 28 GHz product is expected to be price-disruptive compared to the existing equipment providers and feature lower operating costs and complexity compared to existing mobile-centric solutions. The 5G fixed solution from Cambium is simple. No complex infrastructure. Fiber rollout can take months or years. Future generations of this product will feature wider channels, include an increased capacity from the use of our MU-MIMO technology, carrier aggregation, and channel bonding. The capital and operating expense of Cambium's 5G fixed solution is much less than that of a 5G mobile solution or even fiber, especially when the subscriber density becomes less than that of dense urban areas. An increasing number of countries are opening up the 28 gigahertz band in the MAR region, including Slovenia, Croatia, and Spain. Many service providers are interested in using millimeter wave for fixed wireless access in areas where it's not possible to use either fiber or traditional mobile technologies like 4G or 5G, which require a high density of customers to justify the business case. Turning to our CN Maestro cloud software, our end-to-end cloud-powered connectivity solution to manage the network from a single pane of glass. the CN Maestro cloud software continued to experience strong user growth. Total devices under cloud management in Q321 totaled over 718,300, an increase of 16% from Q221 and up 47% year-over-year. Looking at our channel, in Q321, we expanded our channel presence by adding 475 net new channel partners sequentially, and over 2,270 net new channel partners year over year, which represents an increase of approximately 5% sequentially and 27% year over year. This September, we had a very successful set of Cambium Connections online webinars for our end customers and partner community. We had over 4,200 registered attendees, which represented an increase of approximately 50% from our previous Cambium Connections events in February. We also returned to in-person events with a significant presence at the largest WISP trade show of the year, WISPA Palooza 2021, held in mid-October in Las Vegas, at which Cambium was recognized as the manufacturer of the year. I will now turn the call over to Stephen for a review of our Q321 financial results and Q421 outlook. Thanks, Atul.
spk01: Cambium had revenues of $75.9 million for Q321, compared to the original outlook of $88 to $92 million, provided at the time of our second quarter earnings call on August the 9th, and ahead of our preliminary outlook of approximately $75 million announced on October the 21st. As we've mentioned in our preliminary results press release, the change in outlook primarily reflects increased global supply constraints impacting the shipment of products. While our backlog and end demand remain strong, with backlog increasing by 8% quarter over quarter and 57% year over year, revenues decreased by 18% quarter over quarter, and we're up 4% year over year. On a sequential basis for Q3 21, revenues were lower by $16.8 million. The lower revenues were primarily the result of fewer shipments of our PMP and enterprise Wi-Fi solutions, which remained supply-constrained. PTP products declined 1% sequentially, to tobacco products remaining supply-constrained, although we did have increased shipments of federal products due to seasonality. Moving to our gross margin, non-GAAP gross margin of 47.8% decreased by 190 basis points compared to Q3-20. The year-over-year decrease in non-GAAP gross margin was a result of increased component costs as well as higher freight and distribution costs called by expedited shipping. On a sequential basis, non-GAAP gross margin in Q3-21 of 47.8% was 220 basis points lower than Q221. The lower quarter-over-quarter non-GAAP gross margin was the result of high component costs and increased freight and distribution costs, less mix of higher margin Wi-Fi products and lower revenues. Our previously announced pricing increases should begin to help offset some gross margin degradation during the latter part of Q421. We are also implementing surcharges to offset the effects of the supply chain disruption. We're doing everything in our power to support customers and deliver next-generation products, but recognize we are temporarily impacted by escalating costs. We believe the impact to gross margin is transitory as we navigate the global supply challenges. In Q321, our non-GAAP gross profit dollars of $36.3 million were approximately flat compared to the prior year and decreased by $10 million sequentially. Non-GAAP operating expenses, research and development, sales and marketing, general administrative, depreciation, and amortization in Q321 increased by $2 million when compared to Q320 and stood at $27.6 million, or 36.4% of revenues. The majority of the year-over-year increase in non-GAAP operating expenses was a result of higher R&D resulting from increased spending on upcoming technologies and and higher sales and marketing due to increased headcount and to support more marketing activities. When compared to Q221, non-GAAP operating expenses decreased by $1.2 million during Q321. Quarter over quarter, our R&D spend decreased due to slower hiring, while G&A spend was lower due to variable compensation and improved operating efficiencies. Non-GAAP operating margin was 11.4%, down from 14.6% during Q3 20 and 18.9% of revenues in Q2 21. Adjusted EBITDA for Q3 21 was $9.6 million or 12.6% of revenues compared to $11.4 million or 15.6% of revenues for Q3 20 and compared to $18.4 million or 19.9% of revenues for Q2 21. With lower revenues due to the spike constraints, We temporarily lost some operating leverage in our business, although we remain committed to driving our adjusted EBITDA to our target model of 18% to 19% of revenues. Moving to cash flow, cash provided by operating activities was $11.8 million for the third quarter of 2021. The quarter-over-quarter increase in cash was primarily the result of the positive impact for net income in improved working capital management. We had a good quarter of working capital management with $10.1 million reduction in accounts receivables offset by an increase in accounts payables and only a slight increase in inventories. This compares to $16.4 million of net cash flow provided by operating activities for the third quarter of 2020 and $20.1 million for the second quarter of 2021. Non-GAAP net income for Q3 21 was $6.7 million or 23 cents per diluted share compared to $7.8 million, or $0.29 per diluted share for Q3-20, and non-GAAP net income of $12.9 million, or $0.45 per diluted share for Q2-21. The lower non-GAAP net income compared to both the prior year and the prior quarter's results was primarily due to the lower revenues impacting gross margin dollars and high costs until the supply chain normalizes. We're able to reduce operating expenses during the quarter and plan to manage our operating expenses accordingly until the supply constraints improve. Turning to the balance sheet, cash totaled $58.6 million as Q3 21, an increase of $7.2 million from Q2 21. The sequential increase in cash primarily reflects positive net income and strong working capital management and includes a $2.5 million reduction in debt. Net inventories of $28.8 million in Q3 2021 decreased by $300,000 year over year and were higher by $400,000 from Q2 2021. While the supply chain remains an ongoing challenge, we are working to increase our inventory position over the next few quarters to help support the growth of our business. In summary, the third quarter was tougher than anticipated due to the scarcity and high component costs as well as decommits from some of our supply chain partners, which impacted shipments. Our order book remains strong. We are at the start of new product cycles, and we expect to benefit from increased government funding in our wireless broadband business as we exit 2021. Our federal business is also developing very well, and we expect the federal business to accelerate during 2022. Once the supply issues are resolved, we expect to regain scale, improve operational efficiency, and make excellent progress on achieving our long-term target operating model. Moving to the fourth quarter 2021 financial outlook, please note that Cambium Network's financial outlook does not include the potential impact of any possible future financial transactions, acquisitions, pending legal matters, or other transactions. Accordingly, Cambium networks only include such items in our financial outlook to the extent they are reasonably foreseeable. However, actual results may differ materially from the outlook. Considering our current visibility as of November the 4th, 2021, our Q421 financial outlook is expected to be as follows. Revenues between $73.5 to $77.5 million. non-GAAP gross margin between 45.5 to 47%, non-GAAP operating expenses between 28.5 to $29.5 million, and non-GAAP operating income between 4.9 to $6.9 million. Interest expense net of approximately $900,000, and non-GAAP net income between $3.3 million to $4.8 million, or net income between 11 cents to 17 cents per diluted share. Adjusted EBITDA between 5.8 to 7.8 million dollars and adjusted EBITDA margin between 7.9 to 10.1 percent. A non-GAAP effective tax rate of approximately 19 to 21 percent and approximately 28.8 million weighted average diluted shares outstanding. Cash requirements are expected to be as follows. Cash flow interest expense is approximately $400,000, and capital expenditures are between $2 to $2.3 million. I'll now turn the call back to Atul for some closing remarks.
spk00: While we are clearly disappointed with our Q321 results, multiple growth drivers remain intact for Cambium's future success, including our multi-gigabit wireless products such as Enterprise Wi-Fi 6 and 6E, new wireless-savvy switching products, 60 GHz CN Wave, and our 28 GHz mmWave solutions for fixed 5G wireless, as well as our software-as-a-service CN Maestro X solution. We expect increased scale should benefit our future operating results, and we remain focused on judiciously managing our costs while continuing to invest in innovative products to maintain our technology edge. Our vision to help bridge the digital divide using our advanced wireless fabric solutions remain constant. Cambium continues to work diligently with different governments, enterprises, and agencies to deploy our wireless solutions. If it can be a wireless solution, it will be a wireless solution. Finally, I would like to show my appreciation for our employees, partners, and customers for their perseverance during these unprecedented times. This concludes our prepared remarks. So with that, I would like to turn the call over to Judith and begin the Q&A session.
spk04: Thank you. Ladies and gentlemen, we will now open the call for your questions. To ask a question, you will need to press star 1 on your telephone. Again, it's star, then the number 1 on your telephone keypad. To withdraw your question, please press the pound key. May I again remind everyone that you'll be in the Q&A queue to please limit yourself to one question and one follow-up question only. Thank you. Our first question comes from the line of Samic Chatterjee of JPMorgan. Your line is now open.
spk06: Hi. Thank you. This is Joe Cardoso on for Samic Chatterjee. So just one question for me. You know, it sounds like the revenue headwinds from the supply impact was roughly 15 to 20 million in the September quarter. You know, how much of that was related to the decommitments in the quarter, and is that largely behind you now, or is that expected to bleed into the December quarter as well? And then just relative to your December guide, are you baking in a similar supply headwind of 15 to 20 million, or is the expectation that headwind increases as we go into 4Q? Thank you.
spk01: Yeah, so this is Steven. You know, when we came into Q3, we had a very strong backlog position, and even the first month, and I think we mentioned this on our last quarter's earnings call, that we had pretty much 100% of our guide covered. Just to give you perspective of what we went through, from a supply perspective, we felt we had comprehended and de-risked many of the supply challenges when we gave that guidance. And really what we've seen also in previous quarters, because it's not like Q3 or previous quarters we hadn't seen any level of decommits. But what was different for us in Q3 as we started to sort of head to the latter part of August, I would say we saw an elevated level of decommits from our suppliers. And that really continued through the rest of the quarter. I think one other overlay to this, so that was probably the majority of the reason for the miss, but we also were able historically to tap into secondary market options, which were a nice little lever for us in previous quarters. And so we saw that side of things start to dry up also in Q3. And areas around that, we actually saw some really dramatic price increases, auction-like behavior, where we couldn't always participate. So that left us with some meaningful constraints. And I think, in general, the constraints went across high-end semiconductor chips as well as the lower end. And it didn't really matter whether you had a 50-cent part missing. It still meant you couldn't ship the product. I think from an overall Delta perspective, I think it was somewhere between $12 to $16 million to answer your original question. In terms of headwinds for Q4, our sense is we're seeing things, I would say, stabilize. I can't say that we're seeing things necessarily improve. Overall, our suppliers... Commits have started to extend a little bit more, a little bit more maybe beyond a month or five weeks. But we are still seeing decommits, but we've built that into our guidance.
spk06: Thank you. Appreciate the call.
spk04: Our next question comes from the line of Rod Hall of Goldman Sachs. Your line is now open.
spk10: Yeah, hi, guys. Thanks for the question. I wanted to come back to – kind of how to think about the revenue cap that you're experiencing. It looks like, you know, it's kind of in this mid to high 70s, a couple quarters here, and then maybe supply gets a little bit better as we head into the year, the beginning of the year. I'm just curious, like, do you expect to kind of be between that 75 and 80 million revenue level for the first quarter or two, or do you think that this is kind of the low point and revenue starts to ramp up from here? I just, you know, kind of curious what the trajectory of revenue looks like from here, and then I've got a follow-up.
spk01: Yeah, I mean, Rob, this is Steven again. I think in this environment, it's pretty dynamic. So quite frankly, it's tough to be that precise and give you that narrow number, especially another quarter out. You know, I'll go back to my earlier comments. Our sense, as we see at the moment, is things are stabilizing. And so they're not necessarily getting any worse, but we don't see any sort of indications of them getting materially better. I'd like to think as we go into Q1, uh, we can, uh, we can improve upon that. Um, but it's tough to be too precise at this point in time.
spk10: Okay. Okay. And then I wanted to ask on pricing, um, you, you know, you've talked about price increases. Just curious if you can quantify how much are you increasing prices? And one of the things, I mean, of course we're seeing this across all of our companies. So, you know, it probably feels somewhat unique to you, but it isn't at all, of course, and nor are price increases. Um, Just curious how sticky you think those will be. Do you think you'll maintain those increased prices for all of 22? Do you expect to roll them back? I mean, what's your strategy around pricing here?
spk01: Yeah, Rob, so cast your mind back to our Q3 earnings call. We actually mentioned that we were going to have a price increase that would go into effect at the end of Q3. And so our plan, as we see at the moment, is to try to recover as much as we can around this higher input cost. But we recognize that the impact won't necessarily be immediate. You know, I think our customers recognize the challenges and they're not terribly surprised about the pricing actions given the fact that it seems many of our competitors are doing something similar. I think we're proactive in getting ahead of it. We mentioned this, as I say, on our last earnings call. The new pricing went into effect at the end of Q3, so that will start to work its way through the system towards the end of this quarter, and once we burn off the existing backlog and really have more meaningful impact as we go into 2022. I would say the other item that we're executing on at the moment, and you heard about it in the prepared remarks, is we're implementing surcharges to handle this inflationary environment and help offset the effects of the supply chain costs. These will go into effect this quarter. And again, I think you should expect to see the larger impact of that in sort of the first half of 2022 in attempts to recover these costs. I would say from the initial pricing increase that we implemented, we didn't see much in the way of cancellations. I think, if anything, we saw, as you can expect, a little bit of acceleration on booking activity as our customers tried to get ahead of this. But I would say, in general, things are pretty sticky for us.
spk00: Yeah, maybe one quick comment. The changes which have happened in the industry are pretty permanent. People working from home need for more broadband. Government really bringing connectivity projects in all communities. Technology shifts are happening towards millimeter wave, Wi-Fi 6. Those things are driving the demand. So demand remains strong. And I think all the changes we have made, whether it's surcharge, whether it's pricing, We always have advisory council of customers, channel partners. We always run by them, and they understand the changes we are making, and we have pretty good support. If anything, Cambium will remain very proactive in keeping the business model very healthy and gross margins in a good, strong zone. So some of these things we're describing, they are temporary speed bumps, and they have slowed our velocity, but they will not slow us down as we fast-forward.
spk10: Yeah, I don't think, Atul, anybody thinks that the demand has gone anywhere for this kind of business. It's just a question of, you know, what to expect trajectory-wise. And then there is a lot of question on pricing. You know, how much are the – well, that's one thing you guys didn't answer. How big of a percentage increase have people seen? Is it like a 10% increase in average prices or 15% or can you quantify that?
spk01: Somewhere between that 10% and 15%.
spk10: Okay. And then the other big question we get a lot is how sticky. You know, it sounds like I think you're saying pretty sticky, but you'll keep reviewing it with your customers over time. Is that sort of the way to interpret this, or will you just flex them right back down again?
spk01: We are laser-focused on this. We're monitoring it daily, weekly, and looking, obviously, at new booking activity and POSL through. So, yeah, we're watching this like a hawk, but our census is pretty sticky.
spk10: Pretty sticky. Okay, that's great. Thanks very much for the caller.
spk04: Our next question comes from the line of Simon Leopold of Raymond James. Your line is now open.
spk11: Thanks for taking the question. You talked about doing some redesigns associated with the chip constraints, which makes sense, but trying to get an understanding of how to think about that impact, assume it shows up in your R&D and would kind of be a one-time or short-term incremental expense. Is it large enough that it's worth calling out, and how should we think about that going forward?
spk00: Simon, thank you for the question. The redesign is for actually in some ways none of the mill parts. Interestingly, the sophisticated chips, whether it's Wi-Fi 6 or 60 gigahertz or 28 gigahertz, the big chips, by and large, we knew the surprise, and we could deal with that. It's the smaller chips, which are not that sophisticated, that supply also dried up. So there, the redesigns are mostly done. They are short-term. They were pretty quick speed, and we took care of that, and some of the products actually will produce even in Q4, but the majority will come in Q1. So it's not a big expense impact. It's just a significant inconvenience, which we had to go through to just make sure we don't depend on a part which is in paucity.
spk11: Thanks. And then, Atul, in your prepared remarks, it left me with an impression that you feel like the supply chain constraints ease around the turn of the year. And this is – I'm admitting my interpretation – But it's in contrast to the tone of many of the other conference calls we've joined recently where I'm interpreting most companies saying it's going to be very difficult through at least the first half of 22 and we don't recover through much of the year. Basically, the entire year looks challenging. And I just want to see if there's a good reason to think that your experience may be different than other networking companies in terms of supply chain constraints?
spk00: Yeah. So, Simon, as we see it right now, I think our feeling is 2022 will be in some ways the reverse of 2021. In 2021, first half was very strong. Second half, we have these speed bumps. In 2022, I think first half will remain. We are pretty cautious, and that's what we're watching. We're working very closely with our chip partners. I think the first half will be similar. There may be tad improvement, but not a whole lot. It's the second half we are counting on good improvement. And let me give you a little more color on that. We have weekly meetings with our top five, top six chip suppliers, both at working level as well as senior level. And we are monitoring commits. They themselves have a better visibility than they had before. So we feel pretty good in terms of our visibility commits as they are being communicated to us both by their lower-level organization as well as the senior leadership. So there's a lot more alignment. So I would say second half of 22, we should see improvement. First half, we are very cautious about. That's how I would like you to interpret our comments.
spk11: Thank you. That's very helpful. Appreciate it.
spk04: Our next question comes from the line of George Nutter of Jefferies. Your line is now open.
spk02: Hi, guys. Thanks very much. I guess I wanted to ask you about channel inventory levels. You know, obviously lots of moving parts here with supply chain constraints. Certainly there's the demand side of things also. But where do you think inventory levels wound up at quarter end in terms of weeks or relative to last quarter?
spk01: Yes, Stephen. Channel inventories for us, and we've spoken about this a lot in the past, we've got some pretty good tools in terms of managing that on a monthly and a weekly basis. Channel inventories came up a little bit, which actually we think is a good thing in this environment. I think that's by design to certainly from a distributive side of things. But that's also partly because they may not be able to get the complete set of products to allow them to ship things out the door as well. So, We monitor this very carefully. We look at the POS sell-through. We're not concerned about it, but if anything, it came up a little bit, which is a good thing.
spk02: Got it. Okay, and then one other one, if I could. On your inventory levels, you know, I saw the sequential improvement in September, but if I go back a few quarters, I mean, you guys were kind of working down inventories, which is, I guess, counter to what many other companies are doing in this environment. Is there... I guess I'm trying to understand sort of the narrative around how you've been running inventory levels and what should we expect going forward?
spk01: Yeah, I mean, our inventory levels clearly are not the desired level that we want given the rate of growth of the company. I think coming into the supply constraint challenges, we actually had a very healthy level of inventory that allowed us to weather certainly the first half of the year very nicely. We're at a point now where our, you know, our inventory is about 60-odd days, 66 days. They're not our desired level. I think in this environment it's tough to put additional inventory on the shelves and build any sort of buffer, but ultimately we want to target back to that sort of 80 to 90 days, and we intend to do that over the coming quarters pending these supply constraints. Great.
spk02: Okay. Thanks very much.
spk01: Thanks.
spk04: We have a question from Scott Searle of Rock Capital. Your line is now open.
spk08: Good afternoon. Thanks for taking my questions. Hey, guys, I was wondering if you could clarify, in terms of the fourth quarter guidance of 75 to 77, what you actually have visibility to from a supply standpoint right now. Do you have strong commits there? What's your level of confidence in terms of coverage that you have against that? I'm not sure if you provided a number as well in terms of what the actual demand is looks like in the fourth quarter, just to kind of help us calibrate on that front. And also, looking at the September results, Europe was surprisingly strong, and I thought that that was a big Wi-Fi region. So I'm wondering if there's some different sourcing issues that you have going on from a supply standpoint across the different regions, or is there anything to read into that? And then I had a follow-up.
spk01: Yes, Scott, I'll take a few of these, and maybe a talk can add a little bit at the end. But in terms of commitments from a supply perspective – You know, and we go through this pretty extensively with our vendors. We're meeting with them almost daily. So we have commits from our vendors, and we sort of have backups of backups to support the guidance that we've given you. So, you know, I hope that we will be able to do a little bit better than that, but clearly it's a very dynamic environment. From a demand perspective, You know, we have a very healthy backlog coming into the quarter. You know, from a guide perspective, we have well over 100% of bookings and backlog already in place to support that number. So it really comes down to us just working that supply dynamic. But we've de-risked it, and we're being hopefully appropriately conservative with regard to that guide.
spk00: Yeah, so... Scott, a couple of quick comments as well. EMEA is a region where the enterprise business and the channel establishment, they led that for Cambium. There's a very strong run rate business for enterprise. There's also a very strong resurgence back of hospitality in enterprise. So we feel pretty good about both enterprise business as well as the point-to-multipoint business. But I want to make one more point. EMEA will lead Cambium Networks in the establishment of 28 gigahertz. 28 gigahertz adoption is extremely strong for our fixed wireless products in EMEA. And I think as we go into proof of concept, and as we said in the prepared remarks, all four continents we have POCs going, very innovative, disruptive pricing, MU-MIMO product for 28 gigahertz 5G. So you will see EMEA continue to accelerate in point-to-multipoint business, as well as enterprise business. And defense arena for Cambium, and our prepared remarks touched upon that. We feel very good about 22 when it comes to defense. Our funnels have diversified with multiple countries. Our funnels are also taking into account POR, plan of record programs, which have recurring revenue. So EMEA in general, not just the enterprise and PMP, but also the defense side of EMEA will also be accelerating. So hopefully that gives you a little color about EMEA.
spk08: Very helpful. And if I could then, Atul, to follow up on one of your comments, the new product portfolio, specifically thinking about 28 gig and 60 gigahertz, can you give us an idea in terms of the magnitude and the size of some of these deployments and then coupling that into the supply discussion? Sure. Are there specific constraints or issues related to any of those products that are going to impact the ability for that to ramp up? And maybe as well, you know, CBRS and 3.5 gig products as they start to ramp up and RDOF opportunities. Are any of the newer things that are coming down the line, are there concerns from a supply standpoint, given that you're new to the game in those areas? Thanks.
spk00: Scott, excellent question. Let me touch upon it and see if I can answer. 60 gigahertz, relatively speaking, in terms of supply in – Q3 was better positioned because we are a leader. We are fast emerging as number one player in 60 gigahertz. And I think you'll see market research reports, I would say, over probably the next quarter to two quarters coming out. And you'll see Cambium extremely well positioned. We are overtaking 60 gigahertz companies who were there for four or five years. And in one year, we have shipped tens of thousands of products. We have 400 new customers with 60 gigahertz, and at the beginning of the year, we probably had eight or 10 as we had just shipped that product, Q420. So very well positioned. 60 gigahertz is growing approximately 44% CAGR in the, between 2020 to 2024. And this is a market research report which we can get you access to. This is 650 group. And the 28 gigahertz, market will grow 100% between 20 to 24. This is also 650 group market research. So we feel very good about the demand there, the Cambium innovation. Now, when it comes to supply, I think both products will have some level of supply challenges because whatever impacts, remember what I said, sophisticated chips we're dealing with, but also none of the milk chips are impacting. So it's not necessarily the 28 gigahertz chips but sometimes it's just Ethernet 5 chips or other very basic chips. So I think that could definitely slow down some of the supply, but overall, demand-wise, we feel very, very strong. I hope that kind of answers your question. Great. Thank you. Thanks, Scott.
spk04: Our next question comes from the line of Eric Superger of JMP Securities. Your line is now open.
spk05: Yeah, thanks for taking the question. I wanted to just get a little more context around the decommits. What is your perspective in terms of how broadly these are affecting other networking vendors? We've seen some report. They're all struggling with constraints, but some have been able to navigate through them and post some pretty good results. Do you think Cambium has maybe... more susceptible to decommits than other larger vendors? Or how are you thinking of how you're affected by it versus others?
spk00: Yeah, Eric, good question. Let me go into that and give you more color. Every network equipment manufacturer will be impacted. The timing of the impact may be a little different. It depends upon which is your dominant chip supplier or which is your architecture. And I won't go into the e-chip manufacturer, but we know exactly who buys from whom and what their impacts are. Our partner on the chips, particularly on enterprise, we have worked very closely with. We feel very comfortable, the level of relationship we have at the senior level, that they now have the visibility. And on a weekly basis, we are evaluating the commitment. So I think the depth of the commitment, as far as we can see, I think that is over. Now the question is how much they can supply. And my sense is that the first half, as I said, there might be tad improvement, but first half will be kind of similar to where we are. But this is the second half where we will see, I think, good improvements for especially our new architectures like Wi-Fi 6 and 60 gigahertz, 28 gigahertz, and these type of products. So while this is one of those things, each company will have a little different story and a little different timing of impact based on who they're depending on. And one more point I want to make is that fixed wireless broadband uses a lot of analog to digital, a lot of those chips. And they were reasonably well placed. But in Q3, they also had the paucity of chips. So if you look at the results, we were able to weather the first few quarters because we had inventory and also we had good supply of those chips. So I think overall my key message is that I think some of these decommits, we believe the depth we have dealt with. Now we are working proactively and we have good communication, reasonably good visibility. I would like more visibility, but a lot of that visibility will come on through these weekly senior level meetings.
spk05: Do you feel like your size and volume is an advantage or disadvantage in terms of your ability to work with your dominant vendors?
spk00: You know, the size-wise, there may be other companies who may be far bigger than us, but I think the reason they value us, and I make that point in many meetings, is Cambium uses the products in the most sophisticated way, whether it's 60 gigahertz. We have, as I said, some of the best 60 gigahertz products. They value us for the feedback. We have RF Labs. and testing, which is very intense, very in-depth. They like the fact that they're able to find things. And we design software-defined radios, MU-MIMO architectures for Wi-Fi. So we are able to give them feedback, which a lot of other companies don't give them maybe as rapidly. For that, they value us. And as a result, I think those partnerships are pretty strong. Volume-wise, there may be others. And we move reasonably fast with the new designs, new products. They value that.
spk05: Very helpful. Thank you.
spk00: Thanks, Eric.
spk04: Our next question comes from the line of Chris Howey of Barrington Research. Your line is now open.
spk09: Good afternoon, everyone. Thanks for taking my questions. Thank you. I wanted to ask a question. I've gotten a lot here on the supply chain, but as we move, let's say, from the first half of calendar 22 into the second half, We want to be cautious with our stance, and I think caution is a good approach in this environment. But as things ease slightly, can you talk about the changing mix of the business, how you foresee the second half looking? My mind is centered on the CN Maestro product and software services, how those may in turn be able to offset some of the supply chain challenges. as we get to the end of the horizon, hopefully sooner rather than later?
spk00: Yeah, let me go into that a little bit. We have been working very diligently on the software front, and we all realize the more software content, the better for linearity, as well as able to deal with some of these shocks. So there are three key things we have done. Number one, we already have Wi-Fi subscription and CBRS subscription experience. and we have back-end systems which we are now scaling. So good experience, and you will see in 2022 continued focus on that. Secondly, we are also taking CN Maestro X and integrating more curated vertical ecosystem, vertical software, like hospitality. We are working with partners who have the hospitality software And then we go to manage service providers in enterprise. And we are increasing our value of CN Maestro X so that we can start to monetize CN Maestro X with those key vertical applications. That's the second very key initiative we have. The third thing we are doing is we are making it mandatory as we go into 22 that as we come up with new products, whether it's 60 gigahertz features or it's 28 gigahertz software, The CN Maestro X and our Cambium Care support will be mandatory. So we are doing a lot of very specific things to drive the software revenue in the right direction. And our stated goal has been 10% of Cambium revenue in two years will come from software. So these are the kind of things we are working on, and every quarter will give you more visibility into what we are doing to drive that revenue in the right direction.
spk09: Thank you, Atul. Thank you, Atul. That's all I have.
spk00: Thank you.
spk04: Our last question comes from the line of John Lopez of Vertical. Your line is now open.
spk03: Hi. Thanks so much. I apologize because I sort of hopped on late here. So if you covered some of this stuff, we can skip it and catch it later. But I think my first question is around the cadence of what happened in Q3. And I guess my question specifically is your OPEX actually came in quite a bit below where you had guided it and where we had modeled it, which I guess would lead me to believe that you started adjusting for this, you know, at some point during the quarter. So maybe just talk through, like, when did these issues become apparent to you and how did the OPEX wind up where it wound up?
spk01: Yeah, John, I'll take this and if someone wants to add anything at the end. So, yeah, unfortunately you missed sort of that. Quite a deep discussion early on in the call, but I'll cover it at a high level. I would say, you know, from a supply chain perspective, when we gave our guidance, you know, we felt we sort of covered and comprehended, you know, de-risked a lot of the challenges. As we went through the quarter and sort of Mid to latter, I would say latter part of August, we started to see a higher level, an elevated level of decommits from our suppliers, which led us to this situation. I think we also attacked into secondary markets quite successfully in previous quarters, and that was an area that also dried up. So it really built as we went through the sort of second half of the quarter. As we started to see that elevated level of decommits, we did start to think about our OPEX. And, you know, areas where we can dial back discretionary spending, we did. You know, I would say one of the other components with the favorability on OPEX as a result of the lower top line revenue, there is a variable compensation element that helped us out in Q3 as well. So that was sort of the drivers on the OPEX. But you're right, as we started to see this sort of accelerate through the quarter, we did course correct a little bit.
spk03: Got it, understood. And then, again, I apologize. My gut is you probably covered this, so you can give me the quick version or not at all. But I guess the one product group I wonder about most is the Wi-Fi product group. And, you know, there you had a really, really big jump in Calendar Q2, which is now, you know, basically reversed in Calendar Q3. I'm assuming supply chain issues were obviously a big part of that. But I guess my question is, of your entire product stack, That kind of seems like the most transactional. I think there are other alternatives to you in those markets. And I'm wondering how much of that demand do you think is perishable and how much of whatever elevated bookings are resulting from this, do you think is reliable for that product set looking out into calendar 22?
spk00: Let me take that. So when you look at our enterprise business, there are about three key segments which drive our growth. One is hospitality. As I said, hospitality is coming back. And there we are integrating some of the very key hospitality applications with our software. So I think there is stickiness there as we work with different channel partners. The second is education. There also we have education applications integrated with our Xeris product line. And that's why you see when you look at our wins, you'll see good mid-sized universities education institutions as key wins. The third key area which is emerging, I think, as a good segment for us is multi-dwelling units. When we look at all of these architectures which are beginning to move towards Wi-Fi 6, there's a level of stickiness. I would not say that if we don't supply, of course, people can go somewhere else, but by and large, so far, we see good demand, good adoption overall. Our outdoor Wi-Fi is coming in volume shipments in early Q1. As we go into the outdoor setup, which is a very strong partner with 60 gigahertz, 60 gigahertz and Wi-Fi 6 is a hand in a glove. A lot of installations, a lot of deals we are watching or we are winning, they have that combination. What I would say, there's no bulletproofness. There is significant stickiness to the segments we are serving.
spk01: I would just add to that, John, just to quantify a few things. During Q3, we saw record bookings in our enterprise business. We entered Q4 with a record backlog in enterprise. I think from a stickiness, we've been winning bigger and bigger deals, and that makes us that much more relevant to our customers. I don't think we see this as a transactional issue. I think we think the business is gaining more and more momentum, especially as we look into 2022.
spk00: Like the Morocco deal we announced in prepared remarks, that's 20,000 access points. So I think you're beginning to see Cambium now go into that size deals, which are solution sales, not transactional sales.
spk03: Got it. Okay, that's really helpful, guys. Thanks for the thoughts.
spk00: Thanks, John.
spk04: There are no further questions at this time. I'm now turning the call back to Mr. Peter Schuman, Senior Director of Investor and Industry Analyst Relations, for closing remarks.
spk07: Thank you, Judith. During Q4, Cambium Networks will be presenting and meeting virtually with investors on November 16th at the Needham Virtual Security Networking Communications Conference, November 17th at the Roth Capital Virtual Technology Conference, on December 6th at the Raymond James Virtual Technology Investor Conference, and on December 14th at the Oppenheimer Technology 5G Summit. 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.
spk04: Ladies and gentlemen, that concludes today's quarterly earnings call. Thank you for your participation. You may now log off.
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