Ceragon Networks Ltd (CRNT) 2003 Q1 法說會逐字稿

Good day everyone and welcome to the Ceragon Networks Limited Q1 2003 quarterly results conference call. Today's call 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 introduction. Please go ahead Sir.

Thank you for joining us for our Q1 2003 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 the net loss and EPS results are pro forma as they exclude amortization of deferred stock 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 results for the first quarter of 2003. I'm very proud of what we have achieved in the past year and a half. Our revenues have more than doubled and our operating metrics and balance sheet show improvement. We are gaining momentum and anticipating continued growth in spite of the industry environment. This success has been achieved through our strategic focus on target market, geographic expansion, and product leadership. All of which enable us to take increased market share and show growth, and I believe at the rate we are going Ceragon is on course to profitability.

Q1 2003 is our sixth consecutive quarter of revenue growth. With revenues in Q1 2003 reaching $7m, up from $3.3m from Q1 2002 and from $6.1m in Q4 2002. These growths represent a three-digit increase of more than 110% from Q1 2002. In addition to these impressive revenue growths, we continued to realize a decrease in net loss for the seventh consecutive quarter. Our balance sheet, you have seen, and we ended the quarter with $41.3m in cash and liquid investments and we expect cash utilization to continue the positive trend going down, as it has in the last two years.

In Q1, we again increased our market share in our target market, expanded our geographic footprint, and extended our technology advantage. In the carrier market this quarter, we again added new cellular and fixed operator customers to our expanding customer base, among which is a first tier well-known cellular operator. For Ceragon, these important successes represent a significant opportunities going forward. We received orders, commenced shipments, and recognized revenues coming from our build-in ADM in the cellular [Inaudible] market. Our ADM with its unique capability is now being deployed with several leading cellular operators and as a result we are gaining wins. The ADM increases the carrier ability to integrate network functionality into a single-book solution, and on top of cost savings the benefits include improved network management capabilities and reliability.

Going forward, we intend to extend our reach, further increasing our market share and wins, among leading cellular and fixed operators providing added value with our FibeAir product family. We see the growing list of carriers, generating repeat orders and the recurring revenues quarter after quarter. I want to highlight the fact that we are gaining significant momentum in the private networks market. This market is strong and we are winning more and more projects in numerous vertical segments including education, government, utilities, finance, and healthcare.

Ceragon is participating in many important build-outs and our success in this market comes from both the modular and intelligent abilities of the FibeAir systems as well as from our increasingly strong sales channel. Partnering with major system integrators and selling through them is part of our ongoing strategy and to date we enjoy a number of these partnerships, significantly increasing our opportunities in the private network markets mainly in Europe and North America and we anticipate seeing this trend continue throughout the year. 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 customer sell [Inaudible]. In March at CeBIT in Europe and CTIA in the US, we introduced FibeAir 3128, the latest edition to our growing family of high capacity system.

This new system delivers 311 Mega bits per second of the single 28 Mhz channel using dual carriers with a cross-polar interference constant mechanism. This advanced mechanism enables better spectrum utilization for the growing capacity demands of the carrier. We are commencing trials shortly and we are already seeing interest from worldwide carriers. Once again, we at Ceragon have confirmed our leadership and our commitment to deliver the telecom and the private networks market with comprehensive and well suited technology solutions.

As always, we will continue to identify developing needs by focusing on our target market. We will aim to expand and extend our reach into new and existing geographic regions and we will continue to leverage on the unique qualities of our fiber product family. This focused strategy translates directly into market share gains and top line goals. Going into Q2, we continue to build on the momentum of the past seven quarters and see both our revenues and gross margins growing in our bottom line improving. We are successfully growing the company while at the same time improving our operating metrics and our balance sheet. Our progress over the past seven quarters sets us well on our way to breaking even this year. I will now turn the call to Ran for the financial overview.

Thank you Shraga. I will start with the P&L and move on to the balance sheet. I am once again pleased to report consistent improvement in our key financial metrics. Surpassing the previous seven quarters, we continue to build positive momentum in spite of the challenging marketplace. Revenues grew impressively showing yet another quarter of growth reaching $7m, representing an increase of over 114% as compared to $3.3m in Q1 '02 and of approximately 16% as compared to $6.1m in Q4 '02. I view these numbers as proof of our successful strategy. Over the past two years we've targeted and won many new customers and we are seeing repeat orders coming from this growing list of carriers.

We've invested in building and expanding our sales channel and are seeing the fruits of our labor in the numerous project wins in the private networks market. At the same time, we are successfully keeping tight control on our expenses and cash utilization, all resulting in an improved bottom line. Going forward, I anticipate seeing the same trend. The leading market for Ceragon this quarter, once again was the carriers market, with the cellular market growing and contributing over one-third of revenue. The Private Networks market shows great promise and generated approximately 40% of our revenues. We see increased demand and believe this market will continue growing going forward.

This quarter we sold to more than 30 customers of which approximately one-third are new. [Unintelligible] accounted for three-quarters of revenues, North America for close to 20% and the rest came from Latin America and Asia Pacific. We had two customers this quarter, each representing more than 10% of our revenues, one cellular operator and one private networks customer. The quarter was again strong in terms of booking and our book-to-bill was greater than one with a growing backlog, all of which results in improved visibility going into the next quarter.

Looking ahead into Q2, we anticipate seeing another quarter of sequential growth and we expect revenues to reach $7.5m to $8m. On the expense side, the P&L continued to show an improvement in all operating matrix and is very much in line with the guidance. I'm pleased to report that for the sixth consecutive quarter gross margins continue to show improvement. We are just about back to our peak with Q1 '03 gross margins reaching 37%, up from 24.6% in Q1 '02 and 34.5% in Q4 '02. These gross margins are among the leading in the industry and we anticipate seeing continued growth in our margins as revenues grow. We are closing in on our long-term model, with margins targeted to increase to beyond 40%, a goal that we believe we can achieve this year.

Other operating expenses were in line with our guidance and as we continue to keep tight control, we expect expenses going forward to remain essentially flat. EPS improved for the seventh consecutive quarter, and we recorded a loss of $0.08 per share as compared to $0.15 in Q1 '02, and to $0.10 in Q4 '02. We at Ceragon are committed to improving bottom line results. Our revenues are growing, our gross margins are improving, and I'm very comfortable reporting that we're well on our way to reaching break-even.

I want to point out that the cash utilization for the quarter was reduced to $1.8m, continuing the trend we've seen for the last two years. Going forward, I expect to see further sequential improvement over the next few quarters. Our cash balance at the end of the first quarter was $41.3m and the DSOs were 39, well ahead of our target of 60-70. I feel very positive going forward, given our strong results this quarter and impressive track record. We see repeat successes with commercial wins in our target markets, which increases our share in the market place, building a strong and diversified customer base, the foundation for growth. Now we'll open up the call to Q&A.

Thank you Sir. Today's question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you're using a speakerphone, please make sure you're mute function is turned off to allow you to signal to reach our equipment. Once again, to ask a question, please press star, one, on your touch-tone telephone. And we'll pause for just one moment to assemble our roster. And we'll take our first question from Jeff Kvaal with Lehman Brothers.

Hi Shraga, and hi Ron. Very nice quarter. I was wondering if you could give us an update on what you think your break-even revenue run rate would look like and also when you think you would reach cash-flow break-even?

Okay Jeff. This is a subject that we feel good about as we progress through the years and we gave a target of around $10m of breaking even and if we maintain the same growth going forward, I envision breaking even in the later part of the 2003 is a [feeling].

And should you be cash neutral at that stage as well?

We either will be cash neutral at that point or quite near to that.

Terrific. Thank you.

You are welcome.

And we will take our next question from Arnon Rubenstein with Shore Capital.

Hi good afternoon. And my question is about repeat orders. I wanted to know, if you can reveal what was the percentage of repeat order amount of your total?

Hi Arnon, this is Ran.

Hi.

We are very optimistic with both the amount and quality of our repeat orders from a leading cellular and fixed operators and we actually feel that the repeat orders, it represent a significant portion of our business, gives us an excellent platform on which we build our continued growth going forward. As always, it has been a big part on our portfolio revenue in the last several quarters.

I understand, so can you also maybe, tell us a little bit more about the cellular clients that you have? I think in the past you talked about five or seven and, is there an update on that?

The last time we mentioned this count was last quarter and this time we had 10 cellular operators and five fixed operators.

Yes.

This quarter, we added several new, both cellular and fixed. It actually is starting to get to the point that it's useless to count them any further. Just getting more and more wins, growing the customer base and generating again more revenue going forward.

But still, you are saying most of the income is coming from repeat orders, on the other hand you are saying that you keep on growing the number of clients that you have. Has the clients that you have gained have not put in orders yet?

Okay. They are putting orders, but usually there is a ramp up period, it means that in the first quarter their orders are fairly lower than the catch up. So usually, when they start to contribute more and more revenue they are already far from the customer base and the repeat orders.

Okay. And the enterprise network is a 40% of revenues at the moment?

Yes.

Okay. Thank you very much.

You are welcome.

We'll our next question from Itai Cohen with CIBC World Market.

Hi Shraga, hi Ran, congratulations. Actually my question was already asked and answered and so keep on the good work. Thanks.

Thank you Itai.

We’ll go next to Ehud Eisenstein with Oscar Gruss.

Hi good evening. If I understand it correct, the channels is the key factor for the growth in the private network. Can you elaborate a little bit more about the numbers of the relations that you have there and what we should expect going forward?

The channels for the private networks, it depends, it can be either direct or using distributors. We have [multiple] distributors worldwide and we do work direct with system integrators. So, I would say that about two-thirds is direct and about one-third is using the distributors and it's very -- helping a lot to have these both channels. We are using our peoples for direct sales and we are using distributors.

Yeah, I asked about the distributors. Do you expect to increase this number dramatically this year?

We are having more and more distributors as we are getting into new countries. We have distributors in this country. So, we are adding more and more distributors. I won't say that the number will change dramatically, but we will have more.

Okay, thank you.

We take our next question from Todd Allen with Kenny Securities.

Congratulations on the good quarter guys.

Thank you Tom.

You had mentioned that book-to-bill is greater than one. Can you give us some feel for the quantity of orders into a backlog?

Okay. You know that we do not reveal the backlog, but we can say that quarter-after-quarter we are getting into the quarter with more and more visibility and actually we see a good part of becoming the coming quarter already now.

Okay. By the way the gross margins were extremely strong, you had said that your goal would be to get north of 40% gross margin. Do you have a feel what might that be for the June quarter?

First of all, as we grow the revenue, we see the gross margins growing and June gross margins are going to be higher than the current one. Our target is to getting closer to the 40% by the end of the year.

Okay. So, for June, if I were to model gross margins would 38 be reasonable 39, do you have a feel?

I think this the correct range.

Okay. One other question on a competitive front. As you probably know one of your competitors has been discussing moving to kind of a software-defined radio-model, that should end up costing less at the end-customer level and it sounds like it’s a probably a year out in the future before that it will be commercially available. Do you have any development projects along this line?

Actually, the basic idea here is to have a product that is very flexible and have the ability to go into capacities and modulation schemes and so on. Now, we at Ceragon are developing products along the [Inaudible] that are very flexible. They have solutions for different network. So, the basic idea of having a flexible product that is relevant for different markets is not far away from us.

Now, of course, once you have the different applications and the different solutions, you need the software that can do it. Now, doing the product that would be based on the hardware and having software. It's the basic product that we have, we have to remember that's going from one frequency then to another and so you need to replace hardware, it won't be just software. So, it's a basic idea of adding more flexibility and it makes sense and we are familiar with such solutions.

Okay. And then I want to come back to a question that was asked previously. At the end of the year you would have hit the target of ten cellular customers. Can you comment on how many new wins that you received in the March quarter and separately do you have any target for number of new customers in that category this year?

Okay. We haven't targeted a specific number for this year. We ended last year with 10 cellular and five fixed operators and actually Q1 was a successful one with adding several of those cellular and fixed and our ongoing target is to try and add each quarter a couple of operators to our list of customers.

Okay, great. Thank you very much.

You're welcome.

As a reminder, if you would signal to ask a question, please press star one on your touch-tone phone. And we do have a question from Michael Friedman of Sawgrass Capital.

Good evening gentlemen. Just wanted to thank you for the strong performance which is really notable in this economy, it's one of the best performances on my radar screen more than just in my portfolio. Two questions for you. The private network business, I think you said 40% of the mix, that seems a little bit higher than I was expecting. Is that the kind of the range you expect going forward or is that just something this quarter from the one more than 10% customer that you mentioned. If you could just give me a little guidance on that going forward? And then secondly, I was just curious how the China partner uptake is going?

Okay, hi Michael this is Ran. If we start with a revenue mix going forward, in the near term we expect market segment to remain about the same percentage and Private Networks does grow in the last several quarters and we see a big promise in this market going forward. And the second question was about the Chinese market. In the Chinese market we are selling across the board in all our different segments. Last quarter we announced our OEM relationship with the Datang Telecom, China's leading wireless telecommunication. And this corporation is already generating business for us and we are making progress according to the plan. All in all, we see great potential in the Chinese market.

Thank you.

You're welcome.

Due to time constraints, that will conclude today's question and answer session. At this time I would like to turn the call back over to Mr. Katz for any additional or closing remarks.

Thank you. These past two years have been very exciting for Ceragon. We've made great progress and the momentum continues. The impact to both our top and bottom line is significant and we are looking ahead to profitability based on the remarkable improvement in our operating metrics. I'm very proud of the Ceragon team as we keep showing consistent improvement across the board maintaining our leadership position. I look forward to talking to you more and more good news. Thank you everyone for your time today.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.