Cambium Networks: Rightfully Disappointing IPO – Cambium Networks Corporation (NASDAQ:CMBM)

The IPO of Cambium Networks (CMBM) has been anything but a success. The provider of wireless broadband networking infrastructure solutions has seen very low demand for the shares despite solid revenue growth and a red hot IPO market, as investors probably do not see any differentiating factors in this company, while the business is posting just very modest margins and operates with quite some debt, even after accounting for the IPO proceeds.

The Business

Cambium provides wireless broadband networking infrastructure solutions for a range of customers, including network operators, internet service providers, and companies and governmental organisations. The purpose-built wireless fabric brings solutions ranging from just a few meters, up to 100 kilometres and is based on RF technology. Benefits (according to the company) of its solutions include superior outdoor scalability, network intelligence embedded in the solutions, reliable wireless connectivity, quality economics, and ease of deployment.

The company has seen reasonable growth in recent years, although the market growth has probably been a bit more impressive. While growth still could be considered satisfactory, reality is that margins are simply very small and are declining in a good environment alongside solid revenue growth, not boding well for investors.

IPO & Valuation Talks

The company and its underwriters initial aimed to sell 5.8 million shares in a range between $13 and $15 per share to the general public. Soft demand made that pricing was set at $12, for gross proceeds of $70 million as shares have fallen to $9 and change in their first days of trading.

The 25.6 million shares were thereby valued at $307 million at the offer price, but this has fallen to about $250 million at the moment for writing. Knowing the business operates with $97 million in net debt ahead of the offering, I peg pro-forma net debt at around $40 million, for a current operating asset valuation of $290 million.

The company has seen a reasonable and growing revenue base in relation to this valuation. In 2016, the company generated over $181 million in sales on which it reported an operating profit of $12.2 million. Revenues were up more than 19% in 2017 to nearly $217 million with operating earnings improving to $14.9 million. Sales growth slowed down to 12% last year with revenues coming in at nearly $242 million, yet operating profits fell by more than half to $6.3 million amidst gross margin pressure and deleveraging in R&D and sales and marketing.

Given the current operating asset valuation, operating assets trade at little over 1 times sales yet $6 million in operating earnings leave very little actual earnings power. Assuming a 5% cost of debt on the new net debt load, for $2 million in interest expenses, and assuming a 20% tax rate, I see earnings power just above $3 million based on the 2018 results, for earnings equivalent of about $0.11-0.12 per share.

The upside has to come from recent growth. First quarter sales growth accelerated to 17% with revenues surpassing $68 million. More important is the impressive cost control with operating earnings rising from $1.7 million to $4.7 million. At this rate, full year operating profits might come in at $18-20 million a year, for net earnings power at around $13-15 million, or about $0.50 per share. Even in that case, shares were not necessarily priced cheap at $12 per share, which marked a discount from the initially targeted price range, of course.

Risks Overshadow The Investment Case

The risks in this offering are clear and plentiful, including a net debt load (with adjusted EBITDA only totalling $15 million in 2018), a still elevated valuation, a very cyclical and low margin business, potential of technology changes to disrupt the business, as well as competition from vigorous and larger peers like Cisco (CSCO) and Ubiquiti Networks (UBNT), among others.

Reliance on Flex (FLEX) for manufacturing and distribution for the company is a concern as well. On the bright side, the business still sees solid growth, some recent momentum in terms of margins and has good geographic diversification, with US making up half of sales and the company having a presence in other geographic regions across the world.

While I am inclined to the soft pricing action in relation to elevated expectations set by the underwriting syndicate, it might be clear that shares are still anything but a bargain currently as I forgot to mention the corporate governance issues as well. This includes incorporation on the Cayman Islands and not having an independent board. Following some green shoots in the first quarter, and taking into account the decline in the share price, I am happy to take a look in the future.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.