Ceragon Networks Ltd (CRNT) 2002 Q2 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Ltd. Q2 2002 quarterly results conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Leo Armaglio, Director of Business Development for opening remarks and introductions. Please go ahead, sir.

Thank you for joining us for our Q2 conference call. Shraga will update you on our current status and ongoing strategy and Ran will walk you through the numbers. We'll continue with Q and A and finish up with Shraga's closing remarks. I'll get the formalities out of the way by reading the safe harbor. Today's presentation will include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause Ceragon's actual results to be materially different from those expressed or implied by such statements. For additional information regarding the risks associated with Ceragon's business, please refer to Ceragon's annual report on Form 20-F and Ceragon's reports filed with the SEC. Web users can visit Ceragon at www.ceragon.com to read the complete forward-looking statement language. Now I'll turn the meeting over to Shraga.

Thank you, and good day to everyone participating in today's conference call. A short time ago we released our results for the second quarter of 2002. We continue to show consistent improvement, and our revenues have gone to $4 million up from $3.3 million in Q1, an increase of over 20%. Net loss continued to decrease as well for the fourth consecutive quarter with expenses and cash utilization better than expected. As I look back over the past few quarters, given the difficult climate in the telecommunications market, I'm extremely proud of my team at Ceragon. The challenge was and continues to be great. We are well-provisioned in our target market. We have consistently increased our revenues, and we are beginning to see real momentum in bookings. All of this leads us to expect the same kind of sequential goals into the next quarter. Revenues from Cellular Backhaul continued to grow this past quarter and represented the largest segment of our business for the second consecutive quarter, reaching over 50%. We are on target with our plan of bidding and expeading our broad base of leading cellular operators throughout the world. It's our desire to see repeat orders which translates into improved visibility. I am pleased with our new cellular wins this quarter. Among them is a multi-year frame agreement with Cellcom, the leading cellular carrier and a Bellsouth's affiliate. Commercial deployment of our fiber systems has already begun. In addition, we are making inroads with incumbents that goes around the world adding new names to our growing customer base. The consistent execution of our strategy is beginning to pay off as you look at our backlog, which includes substantial orders from recognized incumbents. With these successes under our belt, we plan to stay the course of our target market strategy. The second component of our goal strategy is geographic diversification. During this quarter, we have extended our reach into eastern Europe, and we look forward to maintaining a diversified global customer base. Ceragon product's vision remains clear, to deliver the most comprehensive products servicing the I capacity marketplace, to extend our intelligent networking solutions, and to improve our customer's return on investment. Last quarter, we introduced our 7 and 8 gigahertz systems, including our innovative aeroless (inaudible) switching capabilities. This quarter, we commenced commercial shipments to several customers in the Europe and Asia-Pacific region. We expect these additions to our fiber family of products to make a notable contribution to future revenues. Consistent with our goal strategy, last quarter we introduced another (inaudible) first and ATM integrated into our fiber product. This innovative ATM offering is a significant differentiator for Ceragon, and we have successfully completed field pilots with several potential customers. This is the optimal solution meeting the needs of the cellular operators. Looking back over the quarter, I believe the team was consistent improvement. We will continue to pursue our strategy of increasing our share in the Cellular Backhaul segment, expanding our geographic reach and extending our technology advantage. I am increasingly optimistic, yet watchful going forward as I look at our backlog and pipeline continue to grow. Ceragon is becoming the provider of choice for high capacity wireless connectivity to leading operators worldwide. I will now turn the call over to Ran for the financial overview.

Thank you, Shraga. I want to point out that all Q2 results are pro forma and exclude amortization of deferred compensation. I'll start with the P and L and move on to the balance sheet. Once again, revenue increased this quarter by 22%, reaching $4 million as compared to $3.3 million in Q1. The geographic breakdown of revenues is as follows, 57% Europe, the Middle East and Africa, 23% North America, and 20% Latin America, and Asia-Pacific. We've made great strides in penetrating into our target market. Our revenues are a testimony to our successful strategy. As compared to last year, when our revenues were minimal, this quarter, Cellular Backhaul revenues represented over 50% of our business. The enterprise market, the second largest segment for the quarter, accounted for approximately 25% of revenues in the quarter. We sold to 35 customers this quarter, of which nine are new. We had four customers this quarter each representing more than 10% of our revenues. Of these four, three are cellular carriers and one is an incumbent, and all four are repeat customers. Looking forward, the environment in the telecom market remains a serious challenge; however, I am greatly encouraged based on our recent track record. We are seeing commercial successes in the Cellular Backhaul market. Our booking and backlog are growing, all of which improves our visibility going forward. We are building a solid base of repeat orders that generate recurring revenues. This enables us to enter Q3 with a significant portion of the revenues in backlog. We anticipate continuing the sequential growth rate into Q3. On the expense side, the P and L is very much in line with the guidance. I'm pleased to report that for the third consecutive quarter, gross margins showed significant improvement due to gross margins were 29% as compared to 25% in Q1. We anticipate our near-term margins will continue with these positive trends as revenues grow. Other operating expenses were flat, in line with our guidance, and as we continue to keep tight control, we expect to see flat expenses going forward. EPS improved for the fourth consecutive quarter, and we recorded a loss of 14 cents per share, as compared to 15 cents in Q1. In line with our conservative approach, our balance sheet continues to improve. Cash burn was reduced to $2.6 million, better than the $3 million expectation. We expect cash burn to remain stable at approximately the current level in the near-term. Our cash balance at the end of the second quarter was $48 million. order that you do signal us, and we will take as many questions as time permits. Again, if you would like to ask a question, please press star one. We'll take our first question from Arindam Basu 00:10:30 from Morgan Stanley.

Hi, gentlemen. Could you go over the geographic distribution of revenues from the previous quarter and then talk about when you think this will be substantially different, driven by your commentary on your European and Asia-Pacific opportunities, Shraga?

Okay, actually, if I'm getting the question right, you would like to compare the previous quarter with this quarter.

That's the first question, right.

Regarding what we call AMAIA, we have come from 48% to 57% this quarter, and in North America, we have come from 12% to 23%. In Latin America, we have come from 34% - it's actually in Latin America and Asia-Pacific we have come from 40% to 20%.

Right, and this was very different from what you did, let's say in the fourth quarter, where half the revenues came from North America the fourth quarter of '01, but that was primarily still because of a lot of SELEC contributions in 4Q '01?

It was a contribution of SELEC and a contribution of filings from North America. We had a contribution from the NINEC (phonetic) in North America.

The follow-on question is, when do you think this geographic distribution will be different, given your opportunities you talked about in Europe, and Asia-Pacific, and if you could also talk a little bit about the composition of the business by market, composition meaning cellular mobile wireless carriers versus enterprise.

Okay, actually, I think that the breakdown that we see today represents our focus on the Cellular Backhaul and the ILECS and the enterprise. What we see, we see a lot of activity mainly in EMEA, which means Europe, the Middle East and Africa. We have spoken about eastern Europe. So overall, the main activity that we see for the cellular backlog is in the EMEA region. Now, in North America, we see activity coming from the enterprise market and from ILECS mainly, and we see the contribution of Latin America that is relatively weak with Asia-Pacific together contributing 20%. What we see is our focus and our strategy and our activity. In the future, I think that we will have the portion of Latin America and Asia-Pacific and mainly Asia-Pacific going as we do more activity in this region.

Okay, and last question is, I know we talked about this a little bit last quarter, just trying to get an update on your product road map. You know, you put the fully integrated add drop multiplex out in the marketplace. What will be next from the technology innovation perspective?

Actually, we are adding a new frequency band. We are adding more integrated solutions, and last quarter, we had seven and eight, and we had the ATM. Now, the ATM is a networking solution, and in order to meet the customer requirements, and we have said before that we have completed fill times. We are getting some inputs from the customers, and therefore, we have to add more features to this product. If we get a lot of interest, then we have to develop some new features, new versions. So it's a line of product that would give us sales in the future. We will come with a new frequency bands for the States, for the FCC market and for the FC market, and that's for now the new developments that will come.

Okay, thank you very much.

Thank you, Arindam.

Again, if you would like to ask a question, please press star one. We'll take our next question from Jeff Kaval with Lehman Brothers.

Hello, gentlemen. I have a couple questions that I'd like to toss out, if I may. The first is, I would like to know what we should be expecting for gross margin over the next couple quarters? Should we continue to expect an uptake of some sort, and secondly, when do you suppose that the cash burn will start improving from the $2.5 million burn rate?

Jeff, hi, this is Ran. I'll start with the gross margin part. We believe that we counted the level of efficiencies that will enable us to improve our gross margin. Each time we will grow our revenues. So as the revenue is growing from last quarter to this quarter and again, from this quarter we anticipate to grow into the next quarter, our gross margin will go up. As to your second question, the cash flow, here you have in a way a mix of two influences, but basically as we grow the revenue, the cash flow should go down slightly and hopefully we'll reach a lower level than what we have today.

Great, and then from a macro perspective, I would be interested to know, are your sales seeing increases primarily on share gains or to what do you attribute that to, and if they are share gains, from whom do you think that's coming from?

What we are experiencing is two elements. First, we are winning more customers, which helps us get penetration into the market, but the other thing is the repeat orders. We enjoyed over 50% of our revenues coming from repeat orders from existing customers, which enables us to build a platform for recurring revenue and encourages us when we look forward into the future.

Okay, excellent. Thank you.

Thank you, Jeff. You're welcome.

We will take our next question with Victor Halpert from Salomon Smith Barney.

Hi guys. Can I ask a question regarding the backhaul business, what new customers were added in the quarter, and maybe if you can give us some details about original and what's on deployment, and there was some discussion lately that the 3G deployment is slowing down for different reasons, so I wonder what you see in this environment? Thank you.

All the sales that we have for the Cellular Backhaul is coming from the GSM, GPRS applications. The revenue and the wins that we have, it's coming from the GSM and GPRs. The reason is there are more customers, more coverage. The capacity of the GPRS is higher than the GSM. Even though there is no application, the network is prepared for that. So overall, there is a demand for more capacity in the network, and for that reason, the cellular operators are adding the 3G, and they need more capacity and they are using our systems for that. We see the 3G, the designing of the networks, we see the network operators starting some activity, but we don't see a massive go out of 3G right now.

Can you indicate, you know, do you see more business coming in as backhaul for the rest of the year and into next year? Also, how does the backlog look this time relative to the previous quarter?

The backlog this quarter, this quarter the backlog is, has improved significantly. The GSM, GPRS market is a big market, and the demand for capacity is going, and therefore, we'll have revenue. We'll have more sales. We'll have more contacts and wins in the coming months. So overall, we are optimistic about a demand for our systems. operators, so the goal that we have defined, we will achieve it.

Thank you, guys.

Thank you, Victor.

And as a final reminder, if you would like to ask a question, press star one, and we'll take our next question from Matthew Pearson with Investec Bank.

It's Investec Bank. Hi, guys, nice quarter. A couple of my questions have already been asked. One thing I was going to ask you, what percentage of revenues were the nine new customers?

The nine new customers accounted for a little bit over 10% of our revenue.

Just over 10%, and on the competitive landscape, has that changed? Are you starting to see any pricing pressures, et cetera?

On the competitive landscape, what we see is some small companies, private companies going out of the market, and this is out of the difficulties that we are seeing in the finals market. So there is less competitors in the market. I wouldn't say that this one, these are the most important ones but we are seeing less of those, and regarding the price pressure, there is, of course, some price pressure once the market is not that big, but I would say that the vendors are trying to keep the price at the right level and not to push it too low, and I would say that the price level is okay.

Thanks. Of the seven commercial Cellular Backhaul deployments, I mean how far into those contracts are you? How far are you - do you expect them to ramp significantly over the coming quarters or is it a slow an arduous process?

Your question relates to the announcement that we made?

No, to - you know you said you targeted ten commercial deployments, ten commercial cellular deployments. You've hit seven, and I'm wondering sort of how far into implementation those seven are and what we can maybe expect in sort of projecting revenues from those going forward.

As we said, over 50% of our business in the past quarter of Q2 came from the Cellular Backhaul, all from these customers. The best thing we can say about the Cellular Backhaul markets is that they're al repeat buyers. Some of them, most of them we have multi-year agreements with, but the pattern number of orders varies and they're all repeat buyers, and we're shipping to all of them. They're all commercial-based. As we add new ones, and as Shraga said, we target to each ten by the end of the year. By the way it works, we will hopefully win those bids, sign multi-year deals and start getting the orders that will come in quarter after quarter -

Okay, thanks.

- to build next year.

That concludes the question and answer session today. At this time, I'll turn the conference back over to you.

Consistent improvement has been the key of this quarter. Our visibility is improving and we are looking at a healthy backlog. As we move into the next quarter, we are optimistic as we see the business grow. We will stay focused and continue executing our strategy, gaining significant market share in the high capacity market. Thank you, everyone, for your time today.

That does conclude today's conference 00:24:28 and you may now disconnect.