Ceragon Networks Ltd (CRNT) 2002 Q4 法說會逐字稿

Good day everyone and welcome to the Ceragon Networks Ltd. Q4 2002 Quarterly Results Conference Call. Today's conference is being recorded and 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 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. At this time, I would like to turn the call over to Mr. Ran Oz, Chief Financial Officer, for opening remarks and introductions. Please go ahead sir.

Thank you for joining us for our Q4 2002 Conference Call. Shraga will update you on our current status and ongoing strategy. Then, I will walk you through the numbers, we will 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 essentially excludes amortization of deferred compensation. Now, I will turn the meeting over to Shraga.

Thank you, and good day to everyone participating in today's conference call. Earlier today, we released our forth quarter and fiscal year results for 2002. This quarter’s achievements plus our successes throughout the year marked yet another step in our continued progress as a company heading towards profitability. Looking back at 2002, Ceragon has come out of a very difficult year, stronger and better positioned in the marketplace. I'm proud of Ceragon team as we show consistent improvement across the board. This is our fifth consecutive quarter of positive revenue growth with revenues in Q4 2002 reaching $6.1m, up from $3m in Q4 2001, and from $5m in the previous quarter, representing an increase of more than 85% from Q4 2001. In addition to this impressive revenue growth, we continued to realize the decrease in the net loss for the sixth consecutive quarter maintaining our goals to profitability. We ended the quarter with $43.2m in cash and [inaudible] investments, and we expect cash utilization to further decrease in the coming quarters.

In 2001, we defined our [inaudible] strategy and started on our way. 2002 was a year in which we made great progress. We increased our market shares in our target markets; we expended our geographic footprint and extended our technology advantage. In the carrier market, we have made great strides. The cellular segment represented over 40% of our revenues in 2002, up from less than 5% in 2001. We succeeded in meeting our targets of 10 cellular customers. In addition, we have made significant enrolls with major fixed operators. As a result, we now enjoy a broad and growing base of carriers, both in the cellular and fixed operative markets. We see this growing list of carriersgenerating repeat orders and recurring revenues quarter-after-quarter.

One of Ceragon’s Q4 wins was signing the front purchase agreement and receiving an initial order from Belgacom, Belgium's incumbent telecom communications service provider. We were selected by Belgacom as a supplier of high capacity wireless IP networking equipment to connect end users [inaudible]. Our innovative and flexible IT solution enables Belgacom as well as our other customers to easily scale their network as the applications become more complex. Going forward, we intend to extend our reach further increasing our market share and wins among leading fixed and cellular operators providing added value with FibeAir products family. We are further encouraged by our growing presence in the private networks markets.

We are reaching a large number of customers by selling through strong and diversified channel. This segment shows growth and positive momentum with revenues coming from several key verticals, including the utility companies, government, educational, financial, and Health Care network build outs. Our advance IP networking equipment optimize ATM performance and unique integrated encryption functionality bring added value to high-capacity private networks users, and represent the key driver for our success in this market. Geographic diversification is another important element in our business plans. By the end of 2002, we successfully increased our global reach by selling our equipment to customers and 40 companies worldwide. In Europe, we expanded our geographic reach with first-time sales in countries in both Western and Eastern Europe. And in Asia, we expanded our reach further into India and China. During Q4, we opened an office in India, and also received first order. In China, we recently announced the signing of multi-year OEM agreement with Datang Telecom, China’s leading wireless telecommunications equipment provider. Under the terms of the agreement, Datang will extend its solution portfolio using Ceragon’s FibeAir product family. This cooperation is already generating business for us. We believe the strategic agreement with Datang will risen the opportunity for Ceragon in the changes in the markets. Our successful penetration into new areas and our growing market share throughout 2002, is just the beginning of Ceragon’s expansion campaign going into 2003.

Our product vision remains clear, to deliver the most comprehensive products family in the high capacity marketplace, to extend our intelligent networking solutions, and to improve our customers ROI. [ph] A few weeks ago, we were awarded the “product of the year” by [Internet Telephony] magazine for our building SONET/SDH at dot multi platform. The product was singled out for its technological excellence and vision. This award solidifies our position as a leading solutions provider for high-capacity connectivity and validates our innovative design and technology. During Q4, a number of orders for the ADM were placed, and we commenced commercial shipments. Going forward into 2003, we see our revenues growing and our bottom line is improving. We would continue to identify developing needs by focusing on our target market. We will expand and extend our reach into new and existing geographic regions, and we would continue to leverage on the unique qualities of our FibeAir products family. I would 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. The marketplace continues to challenge everyone in the industry. However, I am pleased to report consistent improvement in all key financial metrics. Surpassing the previous 6 quarters, revenues continue to increase this quarter showing impressive growth reaching $6.1m, which represents yet another increase of over 85% as compared to $3.3m in Q4 2001, and of over 20% as compared to $5m in Q3 2002. I view these numbers as proof of our successful strategy, and anticipate seeing the same trend going forward. Our market segments continue to be strong. We see repeat orders coming from our growing list of carriers, both cellular and fixed operators. In 2002, two-thirds of our revenues were generated from carriers and one-third from private networks. We anticipate seeing the same ratio going forward.

The geographic breakdown of revenues is as follows: 72% Europe, Middle East, and Africa; 18% North America; and 10% Latin America and Asia-Pacific. This quarter we sold to more than 35 customers of which approximately half are new. We had three customers this quarter, each representing more than 10% of our revenues -- two cellular operators and one incumbent. Going forward, I feel very positive given our strong results and impressive track record. We saw commercial wins in our target market and were successful in building a strong and diversified customer base throughout 2002. The foundation for repeat orders this quarter was again strong in terms of booking and our book-to-bill was greater than one with a growing backlog. All of which resulted in improved visibility going into the next quarter.

Looking ahead into Q1 2003, we are anticipating yet another quarter of sequential growth and we expect revenue to be approximately 10-15% higher. On the expense side, the P&L is very much inline with the guidance. I am pleased to report that for the fifth consecutive quarter gross margins continue to show significant improvement. Q4 2002 gross margins were 34.5%, up from 20.3% in Q4 2001 and 30.5% in Q3 2002. We are anticipating continued growth in our margins as revenues grow. Long term our model is for gross margins to increase beyond 40%. Other operating expenses were inline with our guidance and as we continue to keep tight control, we expect expenses going forward to remain essentially flat. EPS improved for the sixth consecutive quarter and we recorded a loss of 10 cents per share as compared to 17 cents in Q4 2001 and 12 cents in Q3 2002.

We at Ceragon, are committed to improving bottom line results. Our revenues are growing, our gross margins are improving, and we are well on our way to reaching break-even by the end of the year. Cash utilization for the quarter was reduced to less than $2.4m inline with our plan. Our cash balance at the end of the fourth quarter was $43.2m. We expect cash utilization to decrease to $2m or less in the near term. We monitor our receivables carefully and our DSOs continued to be healthy at 64 days. Looking ahead, we hope to maintain these levels. Now we will open up the call to Q&A.

Thank you. Today's question-and-answer session will be conducted electronically. And if you would like to ask a question, you may do so by pressing the "" key followed by the digit "1" on your touchtone telephone. Again, that is "" "1" for questions and if you’re on a speakerphone today, please turn off your mute function so the signal can reach our equipment. We will pause for just a moment to allow everyone a chance to respond. Again that is "" "1" for questions today. We will take our first question from Todd Allen Kenney Securities.

Good morning. Congratulations on a good quarter guys.

Ran Oz Thank you Todd.

Just quickly, could you -- you said that book-to-bill is greater than one, can you give us a feel as to your backlog?

Hi Todd, this is Ran. Our backlog is significant and we are entering the first quarter with a high visibility and good level of confidence. Does this answer your question?

Can you provide a little bit in terms of size and timing, perhaps what backlog you expect to ship within say the next 12 months or within the next quarter?

First of all, we expect all of the backlog to be shipped in the next 12 months, mostly in the coming quarter.

Okay. Can you provide any size, 6m or 5m?

We are not giving a specific size of the backlog.

Okay. And I just want to clarify. I couldn’t quite sure of the numbers for day sales outstanding, just say 54 or 64?

64.

64?

64, yes.

And also, you guys did a great job on delivering on the goal of the 10 new cellular customers in the year. Could you talk a little bit about the number of new customers, in particular, I mean, in particular I’m interested in cellular customers, but more broadly new customers that are in the pipeline and do you have similar goal for 2003?

If you look on the opportunity and the potential, we see from the past, we already in more than 15 different cellular fixed operators, all of them in various stages, and if we talk during the 2002 on specific numbers of the cellular, they illustrate a change from 0-10. Actually today, we are building the platform of carriers. We are now trying to grow it and grow it both in terms of cellular and fixed operators. So, both of them at the end of the day generating a repeat orders and the current revenues quarter-after-quarter.

Okay. Could you give me a feel as to how many [RFPs] or how many bidding processes you are currently involved in?

As I have said, we have 15 that we feel good about them and in various stages all in all much more than that, but we are focusing on the ones that are closer to the closing point.

Okay, and you believe that EPS breakeven can occur as early as the end of this year?

Yes.

Great. I appreciate your comments. Thank you.

Thank you.

Thank you.

And we will take our next question from Itai Cohen at CIBC World Markets.

Hi, guys. Congratulations.

Thank you.

I’ve one question about receivables; there is a jump in receivables for the last two quarters. Any specific reason for that?

Actually our normal range was 60-75. In the last two quarters it was around 60 went a little bit higher to 64. We have no specific issues with our receivables and actually doing January we already collected more than half of it. So, it is a going as normal as we had a [inaudible].

Okay. And the other question was about the competitive landscape. Any change there, any pricing issues, or companies coming in stronger or leaving the area?

We -- I tried to struggle. We don’t see big change in competitive landscape. As our main competitor that we see is Stratex Networks and Nera, mainly, and so overall we don’t see a big change in that competitive landscape.

How about pricing issues?

There is of course some price pressures in the market, but as you can see, we have improved our gross margin. So, overall, we are doing quite well.

The improvement in gross margins. Is it due to new applications that you are selling or it just a growth that you are having?

It is maintaining diverse sale price. It is controlling that cost and of course taking the advantage of growing sales.

Okay. Thank you.

Thank you.

Thank you.

We go next to Jeff Kvaal of Lehman Brothers.

Hi Shraga and Ran. Thank you very much. I would love to get some more color on the Datang relationship, actually. Do you have a sense of who Datang is selling to and, you know, whether it is cellular versus wire line carriers? And also I would love an update on the enterprise market for you folks?

Okay. Regarding Datang. Datang, we’ve already worked with Datang for some time. We have announced the agreement, but we have worked for them for the last year. And Datang is trying to sell. They’ve presence all over China and they are selling their product to different customers in the country. And they have cellular operators as customers. They have telecom operators. And we have shift equipments with them to several of these operators. And of course we would like -- we are sure that the work that we’re doing with them would grow the revenue and will add it more significant to what we have now, but up until now. We have sales to several operators though.

Regarding the enterprise market, it is a growing market, it is an interesting market. You have applications of ATM networks within the private networks. You have IP networks and you have some times voice with data. As we have the best access solutions, varieties of interfaces, and performance of ATM and other advantages. We are very relevant with our sales channels to this market. And we are -- we have done small projects as well as bigger projects. And it is a very good segment for us to sell them.

Great. I’m sorry could you provide a rough sense of your percentage of sales through the enterprise versus the carrier markets?

Ran was saying that it's about – it’s a third of the sales.

Okay. Thanks very much.

Again that is "" "1" if you do have a question today. We will go next to Michael Freedman of [inaudible] Capital.

Good afternoon guys. 17 new customers is great execution. I actually just have a few questions. I think they are all pretty easy though. Can you tell me what is your total number of customers is currently? And then next, were there any greater than 10% customers for the year or do they tend to vary by quarter? And then third, Ran mentioned that -- I thought overall that operating expenses will be flattish going forward. I was just curious if there is any increase in selling and marketing expenses to be looked for, as sales continue to increase at a pretty good clip.

And just lastly, if you could give me an overview of any product improvements or introductions at Stratex and Nera that will make them more competitive. I thought I heard something about higher thru-puts or better interfaces there. That's it. Thanks.

Could -- I will start with the product question. And did your question was related to the new product that they have or you asked about a new product that we have?

New products that your competitors that would help them close the gap with you.

Okay. We have joined the call, we spoke about the ADM. Actually, is away to built a complete ring of [FDH] using our one unit, indoor unit, and including the -- and you have build ADM, the management, and the radio. And this is a big advantage and we are actually the first to sell among our -- among the three of us, the three companies. We are the first to sell such product and this is a big advantage for the cellular operators and its development also for telecom operators. Now we are shipping today 155 and 311. I don't see the need and the demand for higher capacities and of course higher capacities product platforms is going from 155 to 311 going up to 622 and that the need is in the range in 155 and 311 and this all solutions that we are providing.

Again that is "" "1" if we do have a question today.

No, no we didn't answer yet.

I apologize.

…all the questions.

Okay Mike its Ran. As to the expense question we said before we are committed to continue the improvement of our bottom line and we are still watching very carefully our expenses, making sure none of them is going up or actually making sure as much as we can, that they will keep on going down. Now to the 10% customers there are differences from quarter-to-quarter, these are not the same ones each time, but if we look on the total year there are two cellular operators that accounted for little bit over 10% for the total year.

Again please press"" "1" for questions. And it appears -- I apologize. We will be going to Todd Allen at Kenney Securities.

Hi I just had a quick follow up question. Obviously sales went up sequentially about 20% this period. I think your guidance was in the 10-15% quarter-over-quarter increase for the March quarter. I guess the first question is did I hear that correctly and my second question is do you anticipate sequential gains of a similar magnitude going forward after the March quarter?

Hi Todd this Ran. First the 10-15% this is an estimate that we believe we are going to meet in the first quarter but if we look on the full 2003 we all know the current market and you know it’s hard to give you guidance for several quarters ahead. But we know that we have good visibility quarter-to-quarter we are continuing to build a platform that generates revenue and growth for us and we believe we will keep on growing, but we cannot really give guidance for more than a quarter ahead.

Okay. And in terms of gross margins there are obviously very good and you’re seeing the long-term ranges in the 40% maybe 40% plus range. Do you have a feel when that level might be reached?

First we do believe that our gross margin that we are very proud of going to improve even further as revenue grows in just a matter of what level of revenue? If it will continue to grow our revenue there 40% is definitely within our reach.

Okay. Do you have a goal set as to when you might get to 40% or is it too early to make that call?

I think it’s pretty too early to set the specific [inaudible].

Okay. What about cash burn rate going forward? Do you have a feel for what the cash burn will be either both in the first quarter and perhaps when you anticipate turning cash positive or break even?

Okay. First of all we believe that is the same as it goes for the break even towards the end for the year, which should be cash positive and or the near term we see cash utilization and going down to $2m and less.

Great. Thank you very much.

You are welcome.

And we will take the follow up from Michael Freedman [inaudible] Capital.

Just want to follow up guys. Just want to ask what your total number of current customers is and then just secondly can you get us a sense of what the quarterly top line revenue number is that would be necessary to our break even on profits? Thanks.

Hi Michael. Sorry for not answering your last question.

No problem.

We have over 100 customers currently and the business plan calls for a $10m of revenues for break-even.

Thank you.

Welcome.

Again, please press “” “1” if you do have any further questions. And we are having no further questions at this time. I would like to turn the call back over to Mr. Oz for any additional or closing remarks.

Thank you. Over the past year, I spoke about consistent improvement as being our central theme. We are very proud of this improvement and the impact it has made to our bottom line. As I look back at Q4 and look ahead, I feel confident adding new teams. Carrier customer base, market share, breakeven, and optimistically profitability. Thank you everyone for your time today.

And thank your participation in today’s conference and you may disconnect at this time.