Ceragon Networks Ltd (CRNT) 2003 Q3 法說會逐字稿

Good day every one and welcome to the Ceragon Network Performance Third 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 for Ceragon Networks and Mr. Ran Oz, Chief Financial Officer for 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 and should cause Ceragon's actual results to materially different from those expressed from side by such statements. For additional information regarding the risk associated with Ceragon's business please refer to Ceragon's Annual Report Form on 20F 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. And we'll now turn the conference over to Mr. Ran Oz, Chief Financial Officer please go ahead.

Thank you for joining us for our Q3 2003 conference call. Shraga will update you on our current statues and ongoing strategy. Then I'll walk you through the numbers, we'll continue with Q&A and finish up with Shraga's closing remarks. Now I'll turn the meeting over to Shraga.

Thank you and good day to every one participating in today's conference call. Earlier today we released our results for the third quarter of 2003. I'm pleased to report that Ceragon has continued on the course we set two years ago showing 8 consecutive quarters of growth and just about tripling our quarterly revenues. I'm proud of our improving financial visibility. Cash band for the quarter was less than $1m and with our focus for continued growth we expect to generate cash early in 2004. I anticipate seeing this growth pattern continue as we add yet another good quarter of bookings, markets wins and successful penetration into new geographic regions.

Our strategic focus on target markets, geographic expansion and product leadership continues to prove itself with marked increases in market share and growth quarter after quarter. Q3 is Ceragon's 8th consecutive quarter of revenue growth with revenues in Q3 reaching $9.1m up from $5m in Q3, '02. And from $8.1m in Q2, '03.This growth represents an increase of more than 12% as compared to Q3. '02. Slightly better than our guidance. In addition to this revenue growth we continue to realize a decrease in net loss for the 8th consecutive quarter. Our balance sheet is healthy. We ended the quarter with over $39m in cash and cash utilization was under $1m showing a consistently improving cash flow. In Q3 we again increased our market share in our target markets, expanded our geographic foot print and extended our technology advantage. In addition to these achievements our strategy of anticipating customer needs continues to show results. The vast majority of revenues in the service providers market which includes both cellular and fixed operators is generated by existing customers in line with our growth strategy. Among those we continue to build an impressive list of operators with whom we've signed multi-year frame(ph)agreements some of which we have announced previously.

Q3 saw a growing customer base as we added new international service providers representing new geographic regions. I am pleased to announce that we have extended our reach in Asia and Africa and are seeing the growing demands in those regions. I feel quite confident that the growth we have seen will continue going forward given the growing base and pattern of procuring revenues from existing customers.

In addition to our success in the service providers market, we have seen both new wins as well as repeat business coming from first year global solutions providers in the private networks and enterprise market. The private networks and enterprise market continues to be a key contributor to our revenues. We have achieved significant wins from numerous vertical segments, including education, government, utilities, finance and elsewhere. By partnering with major system integrators Ceragon has been able to leverage the collective strength thereby enhancing our global presence. We enjoy a growing number of these partnerships which significantly increase both our sales and our opportunities in Europe, North America and South East Asia.

The private networks and enterprise market is a rapidly growing segment for us. And we anticipate it representing a greater portion of our business going forward. Our product strategy has proven itself successful and our product vision remains clear: to deliver the most comprehensive product family in the high capacity market place, to extend our intelligence networking solutions and to improve our customer product line .

We at Ceragon are proud of our leadership position and are committed to deliver to our markets the most comprehensive and well suited technologies solutions. We continue to identify developing needs by focusing on our target markets and as always our R & D team continues to work on further expanding our product line base under developing needs identified by our sales and marketing team.

Going into Q4 and 2004 we anticipate seeing continued growth in our revenues, gross margins and bottom line. Before I turn the call over to Ran, I want to let you know that I am confident that 2003 will be a record year for Ceragon and I believe that 2004 will be even better. I will now turn the call over to Ran for the financial overview.

Thank you Shraga. I will start with the PNL and move on to the balance sheet. Once again, its nice to be in the position to report consistent improvement and we certainly see that improvement resulting in top and bottom lines surpassing the previous eight quarters. Revenues continued to grow reaching $9.1m representing an increase of more than 80% as compared to $5m in Q3 '02 and of more than 12% as compared to $8.1m in Q2 '03. I say these numbers as validation of our successful strategy.

Over the past two years we have targeted and won many new customers and signed a good number of multi- year agreements which are fueling our growth. We are seeing repeat orders coming from our growing list of service providers.

In the private networks and enterprise market, we continue to see increased demand. Our approach has been proving itself successful. By partnering with major global solution providers, we've expanded our sales channels and gained market share. For the first time we are also seeing significant repeat business in this market, in addition to the service provider market.

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 anticipate seeing the trend continue.

The private networks and enterprise market continues to show great momentum and this quarter generated approximately half of our revenues. The service providers market contributed the other half of Ceragon's revenues this quarter, with cellular operators accounting for approximately one-third of revenues. This quarter we sold to more than 40 customers, of which approximately one-quarter are new.

India accounted for more than 50% of revenues, North America for approximately 35% and Latin America and Asia Pacific for the rest. The quarter was again strong in terms of booking and our booked to bill was greater than one, with a growing backlog, all of which gives me great confidence in our gross forecast going into the next quarter.

Looking ahead into Q4, we expect revenues to continue to increase at a range of between 5% to 10%, as compared to Q3. Going into 2004, we expect revenues to grow by 20% to 40%, as compared to 2003.

On the expense side, the P&L continues to be very much in line with guidance, resulting in a consistently improving bottom line. I am proud to report that for the eighth consecutive quarter, gross margins continued to show improvement and we passed the 40% target which we initially set for Q4. A quarter ahead of schedule.

Q3 '03 gross margins reached 40.9%, up from 30.5% in Q3 '02 and 39.4% in Q2 '03. I view this as a significant accomplishment, as our gross margins lead the industry and are more than four times what they were two years ago. We anticipate seeing continued growth in our margins as revenues grow, reaching our long-term target of mid forties.

Other operating expenses were in line with our guidance and as we continue to keep tight control, I expect expenses to remain essentially flat until we hit breakeven.

EPS improved for the eighth consecutive quarter and we recorded a loss of 3 cents per share, as compared to 15 cents in Q3 '02 and to5 cents in Q2 '03. At Ceragon, we are committed to improving bottom line results and I believe we've been improving that quite successfully.

Our revenues are growing, our gross margins are impressive and we are closer than ever to reaching profitability, which we target for early 2004.

Recently, I have been asked by many of you about profitability and I want to take this opportunity to share with you our model. According to our business plan on a quarterly basis, every dollar of revenue beyond our breakeven point will contribute 30 to 40 cents to our [Inaudible] profit.

Moving onto the balance sheet, cash balance at the end of the third quarter was $39.3m, I want to point out that the cash utilization for the quarter was reduced to approximately $800,000 inline with our guidance of less than 1m and, continuing the trend we've seen for the last two years. Going into Q4 I expect to see cash utilization nearing zero. DSO's were 52 days slightly better than our target of 60 to 70 days. We are seeing repeated commercial wins in our target markets as we penetrate into new regions building a strong and diversified customer base all heading up to increased market shares putting us well on our way to having a record year for Ceragon. 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 you may signal us by pressing the star key followed by the number one on your telephone. We'll proceed in the order that you signal us and take as many questions as time permits. Once again if you do have a question please press star one now and we'll pause for a moment. We'll now take a question from Jeff Carrol with Lehman Brothers.

Hi Shraga, hi Ran congratulations on a great Quarter.

Hi Jeff

I have a couple of questions for you particularly regarding the enterprise business. It sounds as though repeat business is improving there sounds as though visibility is improving in that business. Could you tell me what is going on inside of that market that is helping you so much?

Okay the private market and the enterprise market actually we are seeing growing demand in this market and we said in the call that we're seeing demands for utilities, for education programs, for government and finance officers so, whenever you want to build an IT network or you want to build an ATM network by connecting the different sites and by using functionalities that we have in our systems then we are providing the right solution for system integrators and sending through our channels.

I see. Why is it that repeat business has picked up for you in the last quarter?

Some of the projects are being done by system integrators they have repeat business coming in and as they are familiar with our products then we are continuing with them.

Okay great. And perhaps Ran for you, could you discuss the margin structure on the enterprise business verses the carrier business. Will the shift towards enterprise have an effect on your gross margins?

Well what we actually see is a gross in all different markets and in the last year we talked about a potentially a little bit a higher rate of gross in the private network and enterprise but all in all both markets are growing quarter after quarter in the last year. The gross margin in both market are about the same.

Okay. Perfect I'll pass along to the next one. Thanks very much.

Thanks Jeff.

And once again if you do have a question please press 1 now and we'll pause for a moment.

We'll take a question from Kevin Jedee with Mermen and Company

Guys congratulations on the quarter, nice job. Could you give me a feeling for the capacities and infrequencies that are in greatest demand by geography?

Capacities and frequencies by geography - mainly I will focus mainly on geography. Whenever you speak geography it means that when you're going to places where the rain rate is higher than in other places, then you are going to lower frequency band. So places you have the map and you can know whenever the rain rate is high, then you would go to lower frequencies. Moreover as we are sending to the cellular backhaul, the cellular backhaul needs longer distances than it will bring again the lower frequency bends.

We are sending actually from 6 gigahertz up to 38 gigahertz I'm seeing more demand in the range of 6 to 18 gigahertz but of course there is 23 and 26 are being used as well. Capacity is mainly 100 base T and 165 mega bit and sometimes 311.

Okay you didn't want to really give us more details regarding Middle East and Africa and Europe versus the Americas or Asia, in terms of capacity demand?

The capacity demand is that, let me explain a little bit about applications, when we are coming to cellular backhaul applications its actually building an SVH range. Whenever you build an SVH range then you know that we have an ADM that is integrated, so we're building a complete range and then if the capacity is 155. So it's not important where it is in the world if you are building this application then you will use 155 mega bit Whenever you build a private network and you are building an IP network then you will be using 100 base T and then again it's not relevant in what region of the world it's in.

So you're not selling any PDH radios?

We're not selling PDH radios we don't have in our portfolio PDH radio. Whenever there is a turn key project we might partner with others but we don't have in our portfolio PDH radios.

Great okay I was also wondering if you were familiar with Harris's True Point product?

Yes of course.

And obviously Stratic network's eclipse product and whether or not you thought you might try to incorporate a flexible capacity addition capability and your radios?

So the question is-what is the exact question here?

I am wondering what you have going forwards in terms of your product development.

Going forward in our product development is what we-- let me say in a few words what we did up to now as a you know it's - we've come with some new ideas to the market, of integrating - having more functionality in our system like say in providing --- giving an ADM as I explained before. So we are providing a complete ring of SVH coming for many years we'd cross the internet with IT applications and covering all frequency bands. So we are focused on high capacity and we are gaining more market share and we're doing more and more businesses in the high capacity marketplace. Whenever there is a turn key project we are partnering and we're taking projects and we are partnering with others that have the project. So we're finding the way to grow our business. Of course in the future we may take on different directions relative to - if they are relevant we'll announce it.

Thank you very much for taking my questions.

Okay thank you.

We'll now move to Itai Cohen with CIBC World Markets.

Hi thank you congratulations, Ran, Shraga nice job.

Thank you.

I have two questions first of all are there any customers above 10% this quarter?

We have two customers that are above the 10%, one a cellular operator and the -one a leading worldwide system integrator in the private networks and enterprise market.

Okay and my second question is a little bit general but you have certain - several same agreements mainly with cellular operators. Is it possible for you guys to tell us what's the extent of this agreement and what percentage did you already do from that?

Well the way we look at it is what kind of recurring revenue repeat orders we get out of the carriers and this is the basics of that. And in the last 8 quarters the vast majority of our revenue in any given quarter it was coming from the carriers was from existing customers. The same ones that you've been asking about. So this is the basis for our back log and visibility going forward.

Okay how is your visibility? How good is your visibility? Can - do you know 6 months ahead, 3 months ahead?

As we said in the call we have very good visibility. Our booked to bill was greater than one and our backlog is growing and usually we have between quarter to two ahead of visibility. Of a solid one.

Okay thanks. Thank you very much good work.

Thank you.

We'll now move to a follow up question from Jeff Carrol.

Hi guys, thanks a lot. My follow up question was regard to the break even point. Could you clarify for us at what level of revenues you're now anticipating in break even? It sounds like that you know you were just showing that in the first quarter.

Okay what we gave as a guidance for the coming quarter was to improve both top line and bottom line and near zeroing the cash flow and revenue of 9.5 to $10m. Our break even point as it was for the last year runs around the $10m.

Okay perfect and so we should anticipate then first quarter is likely to be sequentially higher for you?

Hopefully yes.

Than the fourth quarter. Okay wonderful. Great thanks very much.

You're welcome.

Thank you at this time that does conclude the question and answer session. I'll turn the conference back over to Mr. Katz for any closing remarks.

Ceragon as Jack reported is in its 8th consecutive quarter of improving top and bottom lines. This is quite an accomplishment and I would like to thank our team at Ceragon for a job well done. We've made impressive gains, increased market share, almost tripled our revenues and anticipate breaking even and becoming profitable early in the coming years. We intend to maintain our leadership position and I look forward to updating you on Ceragon's continued success in our next call. Thank you every one for your time today.

That does conclude today's conference. We thank you for your participation.