Ceragon Networks Ltd (CRNT) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the Ceragon Networks Ltd. Second Quarter 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 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 forwarding -- excuse me 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 Q2 2003 conference call. Shraga will update you on our current status and ongoing strategy, then I'll 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 the motivation of deferred stock compensation as well as non-recurring income. Now I will turn the meeting over to Shraga.

Thank you and good day to everyone participating in today conference call. Earlier today, we released our results for the second quarter of 2003. I continue to be proud of what we have achieved over the past two years. Our quarterly revenues are almost three times what they were just two years ago and our operating metrics are much healthier bringing us very close to our breakeven point. In spite of the industry environment, we anticipate seeing this impressive growth pattern continue as we had yet another good quarter of bookings and market wins. Ceragon's success has been achieved by strategically focusing 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, we are very close to breaking even.

Q2 is our seventh consecutive quarter of revenue growth with revenues reaching 8.1m, up from 4m in June 2 ’02 and from 7m in Q1’03. This growth represent an increase of more 100% as compared to Q2 ’02. In addition to this impressive performance, we continued to realize a decrease in net loss for the eighth consecutive quarter. Our balance sheet is healthy. Cash utilization was close to $1m and we ended the quarter with just over $40m in cash and liquid investments and we expect cash utilization to near zero by the end of the year.

In Q2, we again increased our market share in our target market, expanded our geographical footprint, and extended our technology advantage. In addition to these notable achievements, our strategy of anticipating customer needs is showing results. Many of our customers [are both] replacing lease lines with Ceragon's equipment and they are seen immediate improvement in their ROI. In the service provider's markets which include both fixed and cellular operators, this quarter we again show expansion in our customer base to include several new leading international operators representing new geographic regions as well. We see the growing list of the service providers generating repeat orders and recovering revenues quarter after quarter. In addition to the progress with leading service providers, Q2 also show significant gains with leading global solutions provider in the private networks and enterprise market, which currently is a key contributor to our revenues.

Now, I would like to share with you more reasons that backup our growing confidence in that market. Demands of high-capacity connectivity continues to be strong. Our customer profile is expanded and now we are seeing more and more build outs being executed by global solution provider and world class systems integrator. Ceragon is well positioned in this market given our modular product, IP, and voice capabilities. We have achieved significant wins coming from numerous vertical segments including education, defense, government, utilities, finance, and healthcare. Partnering with major system integrators and [selling through] them is part of our ongoing strategy. We enjoy growing number of these partnerships. We've significantly increased both our sales and our opportunities going forward in North America -- in Europe, North America, and most recently in South-East Asia. And we anticipate seeing this trend continue. To-date, our strategy vis-à-vis product has proven itself successfully. And going forward, our 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 customers' ROI.

We at Ceragon are proud of our leadership position and are committed to deliver to our market the most comprehensive and well-suited technology solutions. As always, we will continue to identify developing needs by focusing on our target market. Going into Q3, we continue to anticipate, as we have in the past seven quarters, goals in both our revenues and gross margins and to see an improved bottomline. In what is certainly not an easy environment, we are successfully growing the company while at the same time improving our [output] fix in our balance sheet. Our progress over the past two years sets us well on our way to making 2003 a record year for Ceragon and to meeting our goal of breaking even by the end of this year. 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. It’s nice to be in a position to report consistent improvement and we certainly see that improvement in all key financial metrics surpassing the previous eight quarters in spite of the challenging marketplace. Revenues grew impressively showing yet another quarter of growth, reaching $8.1m representing an increase of 103% as compared to $4m in Q2 ’02 and in Q1 ’03. I see these numbers as validation of our successful strategy. Over the past two years, we have targeted and won many new customers. We are seeing repeat orders coming from our growing list of service providers. While at the same time in the private networks and enterprise market, we see increased demand, which we are addressing by partnering with major global solution providers, thereby extending our cell channels. While we grow our revenues, we remain focused on keeping tight control on our expenses and cash utilization, all resulting in an improved bottom line.

Going forward, I am anticipate seeing the trend to continue. The service providers market contributed more than half of Ceragon's revenues this quarter, with cellular operators accounting for over one third of the revenues. The private networks and enterprise market shows great momentum, and this quarter again generated over 40% of our revenues. We see increased demand and believe this market would continue growing going forward. This quarter, we served to more than 45 customers of which approximately 15 are new. [Email] accounted for just over 50% of revenues, North America for a third, and Latin America and Asia Pacific for the rest. 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 gives me great confidence in our growth forecast going into the next quarter. Looking ahead in to Q3, we expect revenues to continue to increase at the range of between 5-10% as compared to Q2.

On the expense side, the P&L continues to show improvement in all operating metrics and is very much in line with the guidance. I am pleased to report that for the seventh consecutive quarter, gross margins continue to show improvement which is quite an accomplishment. There are almost four times what they were two years ago. Q2 '03 gross margins reached 39.4% up from 29% in Q2 '02 and 37% in Q1 '03. Our gross margins are among the best 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 I believe we can achieve as early as next quarter. Other operating expenses were in line with our guidance and as we continue to keep tight control, I expect expenses going forward to remain essentially flat. EPS improved for the eighth consecutive quarter and we recorded a loss $0.05 per share as compared to $0.14 in Q2 '02 and to $0.08 in Q1 '03. Shraga said, at Ceragon we are committed to improving bottomline results and I believe we have proven that quite successfully. Our revenues are growing, our margins are improving and we are closer than ever to meeting our goal of breaking even, the target, which we aim to reach this year.

Cash balance at the end of the second quarter was $40.1m. I want to point out that the cash utilization for the quarter was reduced to $1.2m continuing the trend we've seen for the last 2 years. Going into Q3, I expect cash utilization to be less than $1m and we are well on our way to reaching cash breakeven by the end of the year.

DSO's were 57 days, slightly better that our target of 60-70 days. I feel very positive going forward giving our impressive track record. We see repeat successes with commercial wins in our target markets, which increases our share in the marketplace building a strong and diversified customer base, the foundation for growth. Now we will open up the call to Q&A.

Thank you very much. The question-and-answer session will be conducted electronically today. If you would like to ask a question, please do so by pressing the "*" key followed by the digit "1" on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and will take as many questions as time permits. Once again, please press "*", "1" on your touch-tone telephone to ask a question. If you find your question has been answered you may remove yourself from the phone queue by pressing the "#" key. We will pause for just a moment to assemble the roster and allow those to signal in. We’ll take our first question from Tye Colin (ph.) with CIBC.

Hi, congratulations, very [inaudible] Shraga.

Thank you.

I have some [inaudible] question, first of all is starting with your receivables, I see they are $2m up from [last quarter] anything special about that?

Hi Tye, it's Ran. Nothing special about our receivables, we are maintaining our DSO at a same level as the most of the quarters; last quarter was a case of anomaly where it went down below 40 days which is not the normal business.

Okay and any 10% customers this quarter?

No, this quarter. All of them are below 10%

And of rather fifties, give us a little bit more color about how do you see Europe versus North American markets on cellular phone, you know, being cumbersome. Where are they progressing? Where do you see budget coming in?

I'm not sure that I got all of the question. You are asking about how Europe is doing?

No, I am trying to see whether there is a slow down in Europe versus the United States speaking from the budget side.

What -- as Ron mentioned, we have lot of the business being done in the [Amer] region and [Amer] includes Middle East and Africa and Europe. So I wouldn't say that there is a lot of activity in West of Europe, but if I look into all regions we are with an even activity and we are having activity in both our -- in our free market. The private -- the telecom operators and the cellular, so overall there is business in this region. I wouldn’t say that in West Europe there is a lot of business.

Okay. And so one last question, although, your margins don’t show that, in fact you feel any price pressures there, a little bit more competition in the last quarter than first?

Well, as you said price pressure does exist, but as you can see in our gross margin we have been successfully improving it and I think that the results are quite impressive, and actually we are not powerful in reaching our beyond 40% target.

What about competition, have you seen something substantial with it?

We don't see any change in the competition marketplace, but there isn’t any big change there.

Okay, thank you very much [inaudible].

Thank you.

Thank you.

Next we will hear from Noelle Swatland with Lehman Brothers.

Hey guys, congratulations.

Hi.

Hi. Congratulations on a good quarter. Couple of question. First, just wanted to see if you could give us an update around some of the order trends in the quarter and any acceleration you may have seen towards the end of the quarter and then going into the third quarter? Secondly, we wanted to see if you could give us an update on your carrier customers and is that between your wireless and wireline, and then finally just if you could give us an update in terms of breakeven, if you continue to target a run rate of about $10m. Thanks.

Okay. I will try to go over all the questions if I missed any of those feel free to get it back on. First question was related to revenue in the RIT, actually we said before if [inaudible]. Our revenue is split evenly between all the different amounts. We don’t any difference between the opening amounts or the closing amounts of the quarter and the trend continue quarter-after-quarter. As it related to the carriers, we said the carriers are responsible for just over 50% to follow a revenue out of the majority cellular dollar, want to say to follow revenue and the rest is the fixed operators and the one was the breakeven. And we are still targeting getting breakeven at around $10m of revenue.

Great and then just one final question. Can you will provide any sense around the repeat order business versus the new order -- new revenue versus in the quarter?

Yes. We usually give the sense which is the majority of the carriers business is a repeat business and when we talk about the cellular operators or the fixed operators the vast majority of the revenue is their repeat order, the recurring revenue and this the [inaudible].

And pretty much in line sequentially, Ran.

Yes.

Okay. Great. Thanks.

Thank you.

As a reminder, if you would like to ask a question or if you have a follow-up question. Next we’ll move to Todd Allen with Kenny Securities.

Congratulations on a good quarter.

Thank you.

I just have a clarification question. I think I missed a part of your discussion of the geographic mix of business, could you go over those subjects again?

Todd hi. This is Ran.

Hi Ran

Out of [ME], we generated a slightly over 50% of revenue. One third of the revenue came from North America and the rest came from Latin America and Asia Pacific.

Okay. And you had also said that you’ve got some new partnerships with, I guess, OEMs. Can you talk about the types of OEMs -- where they are located that you are targeting? Are they going after [inaudible] private network, all the above -- could you just color that a little more for us?

Okay. We -- just a clarification, we have several different channels that we are using. In certain territories, we are using OEM in the case of China where we announced Datang relationship. We are doing so also in the Eastern side of Europe. Another channel that we are using quite heavily in the private network market is the system integrators where we see a great momentum using the -- or partnering with more and more system integrators that get us to more and more projects and deals.

And, so I'll also ask you where -- the types of customers you are currently attracting by way of mix -- is it largely -- of the new customer -- is it predominantly private network or is it predominantly cellular?

If we look at the model in the carriers market, it was always the case that the old customer contributed the majority or the vast majority of the revenue. We still had a good quarter and we found a core new operator this quarter, which is quite a success. The private networks won. This is the market where each quarter -- most of the revenue is coming from new customers. So obviously more new customers are coming at set volumes.

Okay, great. Thank you very much.

Thank you.

As a final reminder, if you would like to ask a question. At this time, we will move on to Sure Capital (ph.), Arnin Rubinstein (ph.).

Hi. Good afternoon. Just again it's a clarification of things that you have already discussed. You said you had 45 new customers, 15 were new, and basically just to summarize that means that [FibeAir has consented] to 20 existing clients accounted for about 50% of revenues? Am I correct in these assumptions?

It's about that number. It means that the carrier one are accounting for most of the revenue on the carrier side and some of the customers in the [inaudible] are also generated revenue for us.

Okay. But out of those 11 new private network clients of course if some of them will continue into the third quarter?

Yes.

Okay. Thank you very much.

Thank you.

At this time, we would like to give another offer to those of you who would like to ask a question to signal with "*" "1." Again "*" "1" to ask a question. We will pause for just another moment.

And gentlemen, it appears we have no more questions at this time. I will turn it back over to you Mr. Oz for any closing or additional remarks.

Okay. Thank you. The market these past two years has certainly been challenging and it is clear that Ceragon was up to the challenge. We have met impressive gains, taken market share, almost tripled our revenues, and anticipate breaking even by the end of this year. I am very proud of Ceragon team and as we keep showing consistent improvement across the board maintaining our leadership position. I look forward to updating you on Ceragon's continued success. Thank you everyone for your time today.

That does conclude today's conference call. We thank you very much for you participation and have a very nice day.