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Operator
Good afternoon. My name is Steven, and I'll be your conference operator today. At this time, I would like to welcome everyone to the CAMUM Network's second quarter 2024 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. As a reminder, this call is being recorded. To ask a question during the session, you will need to press Star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Star 1-1 again. Please limit yourself to one question and one follow-up question. Thank you. Mr. Peter Schuman, Vice President of Investor, Industry Analyst, and Public Relations, you may begin your conference.
Peter Schuman
Thank you, Stephen. Welcome and thank you for joining us today for Cambium Network's second quarter 2024 financial results conference call, and welcome to all those joining by webcast. Morgan Kirk, our president and CEO, and Jacob Sayre, 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 website, and the press release has been submitted on a 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 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 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, 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 2024, and we'll 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.
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 ups 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 continued to control expenses to lower our break-even point. Free cash flow was negative $1.8 million during to 24, and our cash balance stood at $42.6 million as of June 30. 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 and Cambium's reported revenues, and we saw corresponding declines in channel inventories. We continue to make progress in cleaning channel inventories, and 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, CalNet, a provider of high-speed wireless broadband and digital services in the Central Valley and rural Northern California, has deployed EPMP4600 to serve residential and commercial users with improved service levels of 400 megabits per second downlink and 200 megabits per second uplink. They're providing high-speed internet service to agricultural operation, 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 CalNet to provide faster broadband speeds at a lower cost to their customers than the incumbent service providers. In England, Bonaeus, a rural broadband provider, is leveraging Cambium Network's CN-Wave 60 gigahertz mesh technology to bring improved connectivity to Walney Island. Bonaeus 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, a premier public technical university located in Dunbat, 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 previous quarterly update. In June, we announced the release of a new PTP product for our commercial customers in the 80 gigahertz EVAM, the PTP850EX. The product delivers 10 gigabit capacity and features a smaller form factor than prior product versions at a very compelling price. The EVAM 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 Wi-Fi and video surveillance. For channel partners, we have introduced a new concierge program called Elite. Managed Wi-Fi 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 in 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 CM Maestro 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.
Jacob
Thank you, Morgan. Q2 24 top land 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 E&O been 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 continued 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 remained slow, as service providers are still working to understand the nuances of a six 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 PMP 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 P2P revenues, and Latin America improved by 8% quarter-over-quarter. 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 managed expenses lower and due to certain one-time benefits. Our non-GAAP net loss for Q2 24 was $7.1 million, or a loss of 25 cents per share. and compared to a non-GAAP net loss of $12.7 million or a loss of 46 cents for 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 break-even 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 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 19 and 14 cents. Adjusted EBITDA is expected to be between a negative 4.4 to a negative $2.4 million. And adjusted EBITDA margin between a negative 10.2 to a negative 4.9%. Our updated full-year 2024 financial outlook is expected to be as follows. Revenues between $180 and $190 million. Non-GAAP gross margins of approximately 37%. Non-GAAP net loss between 29.4 and a net loss of $24.6 million. Or a loss of between $1.04 to $0.87 per colluded 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.
Morgan
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 have 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 platforming 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 at 6 gigahertz offer 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 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 Wi-Fi 7. Channel inventories have been reduced and are switching software businesses of our competitive product lineups. 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 will 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
Thank you. We will now open the call for your questions. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Scott Searle of Roth Capital. Your line is now open.
Scott Searle
Hey, good afternoon. Thanks for taking my questions. Maybe, Morgan, Jacob, just a couple of quick clarifications. You know, 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 that guidance for the third quarter. And also, you talked about, you know, sell through being higher than sell in, I think, on the Wi-Fi product line or enterprise. The last couple of quarters, I think that's been in the 15 to 20 million range. I'm wondering 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.
Jacob
Thanks, Scott. I'll deal with the first half of that question and I'll pass it. 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 ANO, is just a placeholder at the moment. But we do expect it to reduce substantially from where we've been the last couple of quarters.
Morgan
Great. Thank you.
Jacob
Sorry. Go ahead, Scott.
Scott Searle
Oh, no, no, no. Please continue. Thank you.
Morgan
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 of, call it the $10 million range, it's the stocking on a quarterly basis. I think it was POS also.
Scott Searle
I'm sorry, Morgan, just to clarify. So the delta in the sell-in versus sell-through is $10 million. Is that roughly the range that we're talking about for the second quarter?
Morgan
Approximately. Those are the types of numbers, yes.
Scott Searle
Okay. Gotcha.
Morgan
Remember, those numbers come from our distributors, so they're not accurate, so I can only give you a range, but around that range, that number.
Scott Searle
Okay, fair enough. And if I could, on the point-to-multipoint front, it's been a couple years of headwinds due to multiple product cycles, spending patterns, et cetera, but I'm starting to hear it sounds like you're becoming more optimistic about this 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, Um, and maybe wrap that into the B conversation in terms of the dialogue 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 multi-point, you know, 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, you know, in terms of revenue run rate that we should be thinking about? Thanks.
Morgan
Okay. Um, I feel like Rodney Dangerfield. I have 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 Bede will have a measurable impact in 25, probably will happen late 25 or 26 before that really has an opportunity, as we speak to customers, they're putting their plans in, they're trying to get state governments, 26 of which now have been 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 a late 25, early 26. There's still a lot of questions around it because today it requires license 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. we're starting to have a better appreciation for what it will take to roll out six gigahertz services we thought this would happen faster but uh i 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 uh deploy these systems and get the higher data rates and returns they want with their customers
Scott Searle
Well, Morgan, I don't know if you'd be willing to go this far, but I'll call it a quote-unquote normalized or more normalized environment. What do you think point-to-multipoint revenues look like on a quarterly basis?
Morgan
I'm not prepared to answer that at this point, but I will take that for future reference to you.
Scott Searle
Thanks, Scott. Fair enough. Thanks so much.
Morgan
Thank you.
Operator
Thank you. Our next question comes from the line of Simon Leopold for Raymond James. Your line is now open.
Simon Leopold
Thanks for taking the question. I want to see if maybe you could unpack your thoughts about the full year forecast because basically you've given us September or 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 average $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 you're concerned about. Just help us unpack what's applied for the fourth quarter. Thank you.
Jacob
Yeah. So if you unpack the guidance at the midpoint of that 185, 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. It'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 six gigahertz space for PMP. But we are expecting sequential improvement, especially as we go into the fourth quarter.
Morgan
And what's driving that, I guess, is what I'm looking for. So what's driving the lower forecast than prior? Or what's driving it off sequentially?
Simon Leopold
What's driving the sequential improvement? So sort of where is the recovery coming from?
Morgan
Yeah, it's coming from sequential enterprise growth and then some growth in PMP.
Peter Schuman
Thank you.
Morgan
You're welcome.
Operator
Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. We'll give it one, two, three seconds here. All right, I am showing no further questions at this time. I would now like to turn it back to Peter Schumann for closing remarks.
Peter Schuman
Thank you, Stephen. During Q3 24, Cambium Network will be meeting with investors in Chicago on Tuesday, August 27th at the Jeffries 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.
Operator
All right, ladies and gentlemen, this does conclude today's quarterly earnings call. Thank you for your participation. You may now log off.
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