Editor’s Note: This article is part of Joanna Makris’s Behind the Wall series, where she provides retail investors with the insider scoop on the hottest technologies and trends from today’s business leaders, industry experts and money managers.
Our latest Fireside Chat is a play on one of the most important technology trends of the decade: 5G and wireless broadband. I recently had an opportunity to chat with Atul Bhatnagar, CEO of Cambium Networks (NASDAQ:CMBM).
For InvestorPlace techies, Cambium is the wireless business formerly known as Motorola Canopy, which was spun out of Motorola (NYSE:MSI) in 2011. The company has grown into an almost $1 billion business providing fixed wireless and Wi-Fi to broadband service providers and enterprises for Internet access.
Cambium’s mission is two-fold. First, extending wireless connectivity globally where a wired connection isn’t available. Second, proving that the performance of wireless broadband can match that of fiber optic — at a fraction of the cost.
Cambium specializes in wireless communications for businesses and public networks worldwide. Cambium’s radios create a unified wireless fabric that spans multiple standards and frequencies of fixed wireless and Wi-Fi, all managed centrally via the cloud. Cambium’s technology includes “MU-MIMO” (multi-user, multiple input, multiple output), an essential technology for high-speed broadband wireless.
In a post-pandemic world where more people are working from home and seeking connection, the need for speed is obvious. Wireless mobile data traffic is expected to explode over the next few years.
According to networking giant Cisco (NASDAQ:CSCO), the total number of global mobile subscribers will grow from 5.1 billion (66 percent of population) in 2018 to 5.7 billion (71 percent of population) by 2023. By 2023, there will be 8.7 billion handheld or personal mobile-ready devices and 4.4 billion M2M (machine-to-machine) connections. All of this growth plays right into Cambium’s wheelhouse.
Cambium was formed through the 2011 acquisition of the broadband wireless business unit of Motorola Solutions by private equity firm Vector Capital. The business included Motorola’s Point-to-Point (PTP) Orthogon and Point-to-Multipoint (PMP) Canopy wireless lines. In June 2019, Cambium completed its IPO (Initial Public Offering), raising almost $70 million at $12 per share.
Since its IPO, Cambium has grown revenue steadily. More importantly, the company’s $278 million in 2020 revenue is only a fraction of its estimated $22 billion total addressable market. 2021 looks to be a breakout year for revenue growth, with guidance calling for between 28% and 31%revenue growth this year.
Despite global supply constraints, Cambium posted an impressive 49% year over-year-growth in its recently-reported Q2, with record demand for its enterprise WiFi solutions, which grew 139% year-over-year. At the same time, the stock trades at a very reasonable 15x forward EBITDA, making this an attractive way to play the 5G revolution.
Here’s what Atul had to say about how digitization is driving the need for more connectivity, what’s happening in the supply chain, and the challenges of bridging the digital divide for the 23-million-plus American homes that are under-connected right now.
Talk to us about Cambium’s heritage. You were originally spun out of Motorola, correct?
Atul Bhatnagar: So in October 2011, we were spun out of Motorola. Basically two divisions of Motorola came together. One was a point-to-point fixed wireless broadband [business] — basically connecting buildings, connecting campuses, for bulk bandwidth. And the second division was point-to- multipoint, which is distributing bandwidth, say, in a campus or in a subdivision. And those two divisions formed Cambium networks.
Motorola always had just fantastic RF expertise, wireless expertise, high quality products [optimized for] very tough terrains, tough conditions. Good, good, solid quality. But at that time, competition was getting pretty intense and the innovation in the fixed wireless broadband there was probably not as aggressive as it should be.
So we started as Cambium Networks, [and] in the almost 10 years since we came out of Motorola, we really focused on innovation… as we have this conversation, I’ll share how we spurred the innovation, how we spurred the pace of new products. And that’s our story, the innovation and the pace of new products and disruptive products.
Cambium serves three primary target markets: Point-to-multipoint, Point-to-Point and enterprise WiFi. For the generalists among us, can you explain the technologies and how they link together and how it works?
I always use a plumbing example, because that’s understandable. So when you do plumbing in your house, you’re doing half-inch pipe or quarter inch pipes [for] distributing water in your house. So that’s kind of like the WiFi, you know, the last 100 meters or 300 meters.
The last distance of the real edge [is] point-to-multipoint. That is, from your house to maybe the nearest water tower or reservoir in the city. And that reservoir is distributing to multiple subdivisions, that’s point to multipoint, then you have big reservoirs interconnected, right? That’s point-to-point where you really move the bulk, large volumes of data.
So Point-to-Point connects those buildings or campuses, [and] point-to-multipoint distributes within a campus — the last, you know, 10 kilometers, 15 kilometers. And then the WiFi that distributes the bandwidth in the last, say, hundreds of meters. [That is] what we call wireless fabric
So the wireless fabric goes from hundreds of meters to tens of kilometers to, in many cases, 100 kilometers point-to-point. All [this is] wireless, not digging trenches, very easy to deploy. And this why we say, “if it can be wireless, it will be wireless.”
You’re sitting in a $22 billion total addressable market (TAM) for your wireless solutions. There are also lots of trends that appear to be working in 5G’s favor right now. So tell us about some of the trends that are shaping demand for Cambium’s products.
I think the first driver [is that] worldwide, broadband is a lifeline for every community, every home, every place in the world, post-Covid. So that’s the first key driver. So service providers are increasing speeds and feeds, and networks have to scale… they have to have more capacity.
I think the second driver is, enterprises also are beefing up now, for more bandwidth, more video. Just look at the amount of video everybody’s doing. The networks in enterprises have to be more secure, more scalable, more cloud-savvy, all those things are driving the need for an overhaul of the enterprise networks.
And what that means is that, WiFi, every four to five years, goes through a new standard, from which comes new performance, new scalability. So WiFi 6 is now doing that in the enterprise…
The third driver is the standards are now maturing, like 5G is arriving. And 5G is legitimizing the use of fixed wireless broadband [in] licensed [and] unlicensed frequencies. What that basically means is that fixed wireless broadband enters mainstream. So for next few years, as 5G gets traction, we will get more opportunity to really lead the fixed 5G arena.
A very long term driver is industrial places…oil and gas, mining, in trains …. all the transportation stuff, they all have to digitize. So you measure efficiency, you automate more, you provide more security, more video surveillance. That means more bandwidth needed, more glue to hold things together. That’s really a long term driver, we call it industrial IoT.
You’re competing in a space where you’ve got lots of big tech companies in your backyard. So tell us about how Cambium is winning and how you differentiate.
We are very focused on mid-tier [enterprises], because I think, while there are large enterprises, very large service providers… It takes [a] very long [time] to close the deal.
We believe that a lot of innovation, a lot of growth right now is happening in the mid sector, because [the] mid sector is catering to developing communities all over the world. And these developing communities were the ones who were left behind, who didn’t have the connectivity.
So we find that our focus, both in enterprise and service providers … the mid-level [enterprise] has given us the growth. Like we publicly announced this year, we will be growing 28 to 31% year-over-year.
So that kind of gives you an idea that the mid-tier is expanding worldwide. SMEs and mid-tier enterprises and service providers are really delivering the needed bandwidth for so many communities and so many enterprises.
You mentioned a key area of focus being the ISP [Internet Service Provider] space. Can you tell us why the market for broadband wireless is so important and why it’s underserved right now?
When you look at the [situation] worldwide, out of 7 billion people, roughly, I would say half are either unconnected or under-connected, right?
Look at every home or every situation where you need broadband. Where you [once] had one user, say in a home, now you have three or four users. Where you used to only peak in your data, maybe [between] five to ten in the evening, now you’re peaking from 7 AM to probably 11 PM. So patterns have changed.
What it means is that the networks have to scale. So the wireless Internet Service Providers and in general, the Internet Service Providers — they are the ones who are scaling up the network. They’re delivering.
And a lot of these communities where people are unconnected or under connected are remote. They are tough terrains. They’re farmlands, they are tier two, tier three, [tier] four cities across the world. Right in America, there’re probably 23 million plus homes that are either unconnected or under-connected.
So that’s why… I don’t say ‘developing country.’ I say ‘developing community,’ because these developing communities are all over the world. And these Internet Service Providers are playing a very key role in bringing digital inclusion.
You hit on enterprise as being an important growth area for your company. And last quarter was really a breakout quarter for your WiFi business. I think it grew over 50% sequentially. So talk to us about what’s happening and why you’re seeing this growth.
2019, we grew, I think 81% or so year-over-year. And 2020 was a Covid year… Our main enterprise segments are education, hospitality, retail, [and] some healthcare, but those segments are hit hard in Covid…
In 2021, we see markets coming back. People are traveling again, in some regions. Education is figuring out a way to open the schools. So that’s what we’re seeing.
We grew very well in Q2. I think year-over-year, we grew 139%, something like that. So we see markets coming back for us. And we also see that the technological transition in WiFi to WiFi 6 is happening.
People are going for more secure communications in the enterprise. Because when you have a chance to bring the right infrastructure, you don’t bring legacy. You bring forward-looking infrastructure, which can give you [the] next four to five years.
In addition to Covid, almost every company making a physical product has been impacted by some sort of global supply chain shortage. And you yourself have mentioned that this could play an impact for you as well. Tell us about what you’re seeing and any potential easing that could take place over the next few quarters.
You know, the way I see [it] is that everyone is impacted, I think that we have seen the costs in the supply chain going up, from freight to parts, now for many, many months. Number one.
Number two, the chip paucity is happening because you have demand coming from automotive. Remember, all tied to digitization.
That digitalization is happening in every industry. So that means they use more memory chips, more processors and a whole lot of analog to digital devices or chips. That’s creating the paucity for everybody.
Now, we have been very proactive. We started working on the supply chain [and] as early as last November, December, we increased our forecast. But net-net [for] Q3, definitely there’s tightness in [the] supply chain. We see that.
But my anticipation is, as we talk to different chip industry executives, there will be improvement in Q4. And then it’ll continuously go in the right direction [in] Q1 and Q2 next year. And by maybe mid next year, we can have some semblance of normalcy.
Now that’s kind of as far as we can see. But we’re dealing with that by prioritizing things and by working very closely with our partners and making sure we keep delivering on the growth.
And what about 5G? Have we truly hit an inflection point for mass adoption of 5G? And where and how ubiquitous can 5G truly be?
If you look at telecommunication standards, every 10 years, maybe 12 years, there is a shift. It’s a little longer range than the enterprise networks. So I think 5G is bringing significant advantages.
Needless to say, speed: you will have blazingly fast networks. And it’s a killer app. You’re moving 80 miles an hour, and you have blazingly fast connections for HD video and things like that. So I think that’s the number one benefit, the next generation speeds and feeds.
But it is also bringing low latency. So you can have networks which are more real-time. It is enhancing standards with those types of enhancements or features. It has millimeter wave. What that means is very high frequencies, which gives you multi-gigabit speeds and feeds. And then lastly, 5G in lots of ways has backwards-compatibility into certain things. So your systems will evolve towards 5G.
… In general, these things take time. These are very high capex items. So you will see the mobility part definitely get going, maybe in more advanced communities, more dense cities, where people can afford higher ARPU. And then we’ll percolate down to tier two, tier three cities. But there’s another part which is happening with 5G.
Since it has adopted fixed wireless as well, you’ll see the fixed 5G applications also proliferate, which is where Cambium is participating. So we’re using the standards. And wherever there are standards, that means there are more cost effective chips. Where there are more cost-effective chips, there is Cambium: designing with those chips, that affordable multi-gigabit wireless and yet bringing mission-critical quality.
Your comments and feedback are always welcome. Let’s continue the discussion. Email me at email@example.com.
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.
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