Ceragon Networks Ltd (CRNT) 2002 Q3 法說會逐字稿

Good day, everyone. And welcome to the Ceragon Networks, Ltd. Q3 2002 quarterly results conference call. The call will be hosted by Mr. Shraga Katz, President and Chief Executive Officer of Ceragon Networks, and Mr. Ran Oz, Chief Financial Officer of Ceragon Networks.

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 20F and Ceragon's reports filed with the SEC. Web users can visit Ceragon at www.ceragon.com to read the complete forward-looking statements language. Today's call is being recorded.

And now at this time for opening remarks and introductions, I'd like to turn the call over to Mr. Ran Oz, Chief Financial Officer. Please go ahead, sir.

Thank you for joining us for our Q3 conference call.

Shraga will update you on our current status and ongoing strategy. Then I'll walk you through the numbers, we continue with Q&A, and finish up with Shraga's closing remarks. I want to point out that all the results are pro forma and exclude amortization of deferred compensation.

Now I'll turn the meeting over to Shraga.

Thank you, and good day to everyone participating in today's conference call.

Earlier today we released our results for the third quarter of 2002. This quarter marks another step in our continued progress to us meeting our strategic objectives. All of us at Ceragon are committed to, and focused on, our objective of gaining market share and growing the company.

Once again the Ceragon team demonstrated consistent improvements across the board. Revenue set a record high for the past year, reaching $5 million, up from $3.1 million in Q3 2001, and 4 million in Q2, 2002. This represents an increase of more than 60% over last year.

This is Ceragon's fourth consecutive quarter of revenue growth. In addition, we realized a decrease in net loss for the fifth consecutive quarter, improving our bottom line significantly. We've also decreased our cash utilization and we ended the quarter with $45.5 million in cash and liquid investments.

The market environment continues to be a challenge, however, during the past quarter, Ceragon has made progress in line with our strategic plan. We saw consistent improvement in all key financial metrics, better than any previous quarter in the past year. We have made significant inroads in our target market segments, several backhaul metropolitan infrastructure and enterprise networks, we have expended our geographic footprint, and continue to see improved visibility.

Our sales and markets efforts are paying off. The company's increasing revenue is a direct result of gaining above base of established customers throughout the world. We continue to see repeat orders generating to accruing revenues, growing quarter after quarter, coming from federal operators and incumbents. Our firm agreements are important drivers for current and future revenues. These agreements are generating repeat orders, as well as several first orders in Q3. We expect revenues from these existing customers to further increase in Q4.

We continue to extend our reach to include incumbent service providers around the world. The company has reached new relationships with these service providers and we are hoping to announce more success in this sector in the near term.

Established service providers worldwide are deploying Ceragon products in different metropolitan area applications, either as backhaul to (indiscernible) and the access solution in the metropolitan area, or as the closing (indiscernible). Our fiber product family brings added value to these local change carriers. It is cost effective and time efficient to our line. This enables operators to significantly reduce their cap ex while increasing their ROI.

The enterprise market , our sales target market segment, that we serve through channels, shows continued momentum. Sales are strong and diversified with a large number of customers.

Expansion of our geographic region to new regions is a key element of our growth strategy. This quarter, for example, eastern Europe contributed to a growing portion of our revenues, reflecting this geographic diversification strategy. We have also increased our activity in Asia, and specifically India, and we expect to see further growth coming from this region.

Ceragon's product vision remains clear. To deliver the most comprehensive product family in the high capacity marketplace, to extend our intelligent networking solutions, and to improve our customer's ROI. Procurement flexibility is critical to today's service providers and cellular carriers. These are translated into a market demand for integrated solutions that offer versatile deployment alternatives.

We will continue to provide our customers with product enabling them to further improve their entire network management functionality. Our new network management system will provide seamless integration, immense control, and maintenance and operation capabilities. This system has been most successful at (indiscernible) for a cellular operator.

Ceragon's design innovation within the fiber product family continues to be a competitive advantage for the company and differentiates us in the market. We will continue to pursue our strategy of focusing on specific target markets, cellular backhaul, metropolitan infrastructure, and enterprise networks, extending our reach into new geographic regions and further extending our technology advantage.

I will now turn the call over to Ran for the financial overview.

Thank you, Shraga.

I will start with the P&L and move on to the balance sheet. Revenues increased this quarter reaching a record high for the year. This record high of $5 million represents an impressive increase of 61%, as compared to $3.1 million in Q3 '01, and a 26 increase as compared to $4 million in Q2 '02. We viewed these numbers as proof of our successful strategy which we have been implementing for the past year.

The geographic breakdown of revenues is as follows: 66% Europe, the Middle East and Africa, 24% North America, and 10% Latin America and Asia Pacific.

Our three market segments continue to be strong. We see repeat orders coming from cellular operators and incumbents, creating the platform for our increasing revenues. In Q3, the cellular and (indiscernible) segment accounted for approximately two-thirds of our revenues, with cellular being the dominant sector.

We anticipate seeing the majority of growth emanate from the cellular backhaul segment in 2002. We sold to more than 30 customers this quarter, of which approximately a third are new. We had three customers this quarter, each representing more than 10% of our revenues. Two of these were repeat orders with one new customer.

Looking forward, the environment in the telecom market remains a serious challenge; however, I'm optimistic, given our consistent track record. We are seeing commercial successes in our target markets, our bookings and backlog are growing, and we are increasing our activity in new regions. All of which results in improved visibility going into the next quarter. We are building a solid customer base, the foundation for repeat orders, and given the market conditions, we feel comfortable looking ahead into Q4 where we anticipate seeing sequential growth.

On the expense side, the P&L is very much in line with the guidance. I'm pleased to report that for the fourth consecutive quarter, gross margins continue to show real improvement. Q3 gross margins were 30.5%, again an impressive showing as compared to 10.1% in Q3 '01, and 29% in Q2 '02. We anticipate our near term margins will continue this positive trend as revenues grow.

Other operating expenses were in line with our guidance and as we continue to keep tighter control, we expect to see flat expenses going forward.

EPS improved for the fifth consecutive quarter and we recorded a loss of 12 cents per share as compared to 19 cents in Q3 '01 and 14 cents in Q2 '02. We at Ceragon are committed to improving bottom line results and see this improvement as a significant step towards that end.

In line with our conservative approach, our balance sheet continues to improve. Cash utilization for the quarter was reduced to $2.5 million, in line with expectation. We continue to expect cash utilization to moderately reduce, or remain stable, in the near term. Our cash balance at the end of the third quarter was $45.5 million. We monitor our receivables carefully and can report that our DSOs were 59 days, stabilizing at that level, significantly better than our target of 75-90 days.

Now we'll open up the call to Q&A.

Thank you.

The question-and-answer session will be conducted electronically today. If you would like to ask a question, simply press the star key followed by the digit 1 on your touch tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question, press star 1at this time. And we'll pause for just a moment.

And I'll first take a question from Victor Halpert of Salomon Smith Barney.

Hey, guys. Pleased to see improvement.

Can we talk a little bit about the backlog that you are seeing, which customers, which areas do you see the backlog? And you know, on a cellular side, we'd like to see what kind of potential business you are seeing for the 3G, 2 1/2G that has been delayed in 2002? Are you going to see it in 2003? What exactly is the situation there? Thank you.

Okay. Good morning, Victor. It's Ran.

Let's start with the backlog. What we can say about the backlog is that, first of all it, it is significant and we are entering the fourth quarter with a high visibility and a good level of confidence. Backlog is -- the break down of the backlog include all three segments of our operation, we have both the cellular, we have (indiscernible) and we have enterprise in the backlog, so we see it as a healthy backlog entering the quarter.

Hi, Victor. It is Shraga.

Regarding the 3G, I would like to say that the cellular operator, the deployment that we have until now, it is with the GSM operators worldwide, with the existing GSM GPRS system, so we gain market share and we have customers that operate the existing cellular networks, while they want to extend their networks and to have more capacity have better coverage and they are using our systems for that.

The 3G is not yet there, but we do get more customers worldwide, as they are building, they are extending their networks. But I don't see 3G coming yet, even though we have customers that plan to build their network throughout 2003, we have to wait and to see whether they will do it.

Okay. Two other questions.

Based on a environment, based on the current backlog you have now, what will be your guidance for the fourth quarter? And also, where, at this point, you are as far as, which level is, for you, the break-even point?

Okay. Our guidance into Q4 are moderately growth 10-20% over Q3, and our break-even point didn't change. Actually, we are trying to get even closer, and it is currently between $9-10 million of revenue.

What percentage of revenues for the fourth quarter are already in backlog?

If we look on the revenue we generate in the last quarter, we can break it down by several ways. One of it is to look on how much came out of existing backlog at the beginning of the quarter, where we can say that we had about half of the revenue, a little bit more. The more important parameters, as we view it, is looking on the repeat orders and recurrent revenue, and that our customer base is generating. And in Q3, we enjoyed over 50% of our revenue coming from repeat orders from our customer base. And there's cellular and the ILECS (phonetic)

And the last question is about the backhaul in the 3rd quarter. What percentage of the business came from backhaul in the 3rd quarter?

If we look on the carrier side of cellular and ILECS, both of them counted for 2/3 of the revenue, with cellular being a little bit higher than the ILECS side.

All right. Thank you, guys.

Thank you.

Our next question comes from Sheman Levy from Goldman Sachs.

Good evening.

A couple of housekeeping questions and also just one regarding the backlog. Can you just tell us how many backhaul deployments you've actually got at the moment?

Good morning.

Currently we have eight cellular operators that we are shipping and deploying, and on top of that, in the backlog, we have other segments of our market. ILECS, we have a couple of ILECS that generate recurrent revenue also, and enterprise.

Okay. And of the three 10% customers you had this quarter, were they also in the backhaul, the ILECS? What is the breakdown there? And also the same thing for the other 30 customers.

First of all, all three of them are well-diversified customers and stable financially. They are cellular and incumbent and together they are accounting for less than 40%, so they are just above 10.

Okay, but was two of them cellular and one an ILEC, or, how did that work?

We had, if we look at it, one ILEC and the rest are cellular.

Okay. Thanks.

Now in terms of -- you only actually had announced three cellular backhaul contracts. Is that correct? To date? If you can tell us which one of those, you've got the (indiscernible) phone, you've got the Cellcom in Israel, and the third one. Can you give us some sort of indication of which of those are actually (indiscernible) the 3G roll-out and which of those can actually start today, or if they all can?

Hello Sheman, it is Shraga.

Actually, as Ran said, we have about eight deployments with cellular operators, we didn't announce all of them. We have diversified numbers of cellular operators. We do ship to customers that we have signed firm agreements and Cellcom is a new announcement and a new shipment this quarter. And we do ship to the customers that signed contract with us, and with others, that some of them we have announced, and some we didn't.

Okay. Thank you.

Next we'll hear from Matthew Pearson of Investec Bank of the United Kingdom.

Hi, guys. Congratulations on the numbers. Most of my questions have been answered.

One thing. Of the eight cellular (indiscernible) that you're shipping to, did you ship to them at all in this quarter?

We shipped to five or six of them this quarter, but along the quarters we are shipping to eight cellular operators.

So the number of trials you're working on at the moment, (indiscernible) you always provided that kind of information, could you state how many trials you are working at at the moment?

If we are trying to cover the total opportunity that's represented by our pipeline, it still remain significant. We participate in several cellular bid trials or other phases of the process and altogether, it's over 15 major opportunities in various stages.

Okay.

Also, on your (indiscernible), in regards to your say, gross margin, how is the outsourcing developing? Was there any outsourced in this quarter or can we expect gross margin improvement as sales began to ramp?

First of all, this is a point that we are very proud of the improvement we had in the last year growing our gross margins from 10% to over 30. We believe that inherently we can grow this margin even further and we know that getting back to over 40% is definitely within our reach. Probably in the future we will use more for outsourcing, but right now it's more of just growing the revenue and enjoying improved gross margins.

Do you have a time frame for that gross margin target of 40% or a revenue target for that 40%?

The target for crossing the 40% is quite close to reaching the break-even point, being over the $8 million range of revenues.

Over $8 million in revenues. And do you believe that is attainable by the end of, say 2003?

Well, you know, in the current market, it's hard to give guidance for five quarters ahead. We have good visibility and we are continuing to build a platform that generates revenue, and we do believe we can get there..

Okay, That's all my questions. Thats a lot, guys.

Thank you.

As a reminder, if you would like to ask a question, press star 1.

And we'll now hear from Arindam Basu of Morgan Stanley.

Hi guys, this is Judson Copeland for Arindam. How are you doing?

I had a couple questions for you. I know in the past you talked about your product road map and upcoming product introductions. I wonder if you could touch on that a bit and talk about anything in the next few quarters you'll be releasing.

Okay. Actually, regarding the products, we have, I would say, three (indiscernible) directions in the way that we are developing our products.

One direction is adding new frequency bands and in the first quarter of 2003, we will announce a new product, a new frequency band, in order to enter to new customers in new geographic regions where they need large frequency bands than the lowest one that we have to date, the 7 gig. This is one direction of development.

Another direction is the integrated solutions. We have the ADM and the ADM we are hedging futures to our ADM solution. We have completed trials with customers that are very happy with this product. So this is another direction.

The third direction is rebuilding platform, which will be well advanced for higher capacity, more modularity and this is also another platform that we are developing and we will announce it when it will be relevant.

Okay. Great. Thanks for that.

I was also wondering if you could talk a little bit about the pricing environment and if that's differing by geography, whether you've seen more SD compression or if it held up fairly well?

Basically, if we look on the pricing environment, we don't see any material difference between the three different segments we are operating in. Both the cellular, the ILEC and the enterprise are purchasing our product, on average, at the same price.

We also managing to maintain our prices and we don't see price erosion, due to the fact that we are able to address a real customer problem and give a total solution, that give us the added value when comparing to our competitors. This is the way we maintain our gross margin and even grow them quarter to quarter.

Okay. And just one more question for you guys.

In the past couple quarters, there's been a trend of increasing revenues from Europe to the Middle East and Asia, and, kind of, a falling revenue contribution from the Latin America segment. I was wondering if you see this trend continuing or leveling out in the fourth quarter and into 2003?

We have seen that the (indiscernible) region is a growing and a very strong region, and definitely we are getting more orders from the (indiscernible) region than the Latin America and Asian Pacific.

We do have our activity in Latin America, and Latin America was weaker in the last quarters, relatively, but I do assume that in the coming quarters, we will grow our revenue from Latin America.

Okay, great. Thanks a lot, guys.

Thank you.

As a reminder, if you would like to ask a question or make a comment, press star 1 at this time.

And we'll now hear from Jeff Proul of Lehman Brothers.

Hello, guys. I have a couple of questions for you.

First, would you mind characterizing the linearity in the past quarter, and what your view is then, on the fourth quarter?

Jeff, if we start with this. What do you mean by linearity?

The percentage of shipments in the -- towards the end of the quarter.

Along the quarters, we are shipping, it's very linear along the quarters, the shipment. Not that we are shipping what we have to ship in the last quarter, it's once you have your backlog, you are building your shipping plans, so it will be linear.

Great. That's wonderful. Thank you.

Also, would you be willing to characterize your outlook for 2003, in any way, particularly on the topline? That would be helpful. Thank you.

Well, again, this is the part that is a little bit harder for us, given the market condition. We can talk very strongly about Q4. We have good visibility, quarter to quarter, and what we know is that we are continuing to build the customer base that will generate the recurrent revenue and generate the growth into '03. Giving specific numbers for '03 right now, seems to be out of reach.

Okay. Thank you both much.

You're welcome.

And Mr. Oz, it appears there are no further questions at this time. I'll turn the conference back over to you for any additional or closing remarks.

Consistent improvement has, again, been the theme this quarter. We are proud of this improvement and the impact it has made to our bottom line. Our visibility is improving, as well, and we are looking at a healthy backlog. As we move into the next quarter, I remain 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 concludes today's conference call. We thank you all for your participation.