Ceragon Networks Ltd (CRNT) 2003 Q4 法說會逐字稿

Good day everyone, and welcome to the Ceragon Networks Ltd., Q4 2003 results conference call. Today's call is being recorded and it will be hosted by Mr. Shraga Katz, President and CEO of Ceragon Networks, and Mr. Ran Oz, CFO 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 differ materially 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. I'll not turn the conference over to Mr. Ran Oz, CFO of Ceragon Networks, please go ahead sir.

Thank you for joining us for our Q4 2003 conference call. Shraga will update you on our current status and ongoing strategy. Then I'll walk you through the numbers, we'll continue with Q and A and finish up with Shraga's closing remarks. 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 both the Q4 and the full year of 2003. I'm pleased to report that 2003 was a record year for Ceragon. We ended the year with close to 90% year-over-year growth and we are looking to 2004 to deliver both top line growth as well as profitability. 2003 revenues reached a record high of $34.4m up from $18.4m in '02. This past quarter we again saw remarkable achievement. Our quarterly revenues grew for the 9th consecutive quarter with revenues reaching $10.2m, even better than our guidance. Q4 2003 revenue rose from $6.1m in Q4 2002 and from $9.1m in Q3 2003. In addition to this revenue growth, we continue to realize a decrease in net loss for the 9th consecutive quarter. Given our performance we expect to be profitable for the first time as early as this quarter. Our strategic focus on target markets, geographic expansion and product leadership has certainly proved itself. We've seen significant increases in market share growth and the bottom line quarter after quarter. I specifically want to note that our booking is growing and our book-to-bill has been consistently over 1 for the past 9 quarters, resulting in a growing backlog and improving visibility.

We have successfully expanded our global footprint and have just about doubled our customer base of leading operators. At the same time we are very pleased with the substantial repeat business we have seen in the service provider's market. We expect this market, which includes both cellular and fixed operators to continue to grow going forward. In Q4 our customer base grew as we added new international service providers representing new geographic regions.

We have expanded our reach is Asia Pacific and Africa, and have seen the growing demand in those regions, in particular, with so significant revenues from leading cellular operators in India this quarter. In the private networks and enterprise market, we have seen both repeat business as well as new wins from first build global solutions providers. This market continues to be a key contributor to our revenues as we achieve significant wins from numerous vertical segments including education, government, utilities, finance and healthcare. Our product strategy has proven itself and 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 customer sell rate.

We at Ceragon continue to be proud of our leadership position and we are committed to deliver to our market the most comprehensive and well suited technology solutions as we identify developing needs by focusing on our target market. Shortly we intend to announce new additions into our expanding family of fiber products. These exciting innovations will significantly enhance our competitive position in the marketplace and enable our customers to provide even greater efficient, reliable and flexible services.

Going into 2004 we look forward to seeing continued growth in our revenues, gross margins and bottom line. And now I am pleased to turn the call over to Ran for the financial update.

Thank you Shraga. I'll start with the P&L and move onto the balance sheet. I'm pleased to report strong results for 2003 and Q4 in both top and bottom lines. Revenues for 2003 reached a record high of $34.4m, representing an increase of 87% as compared to $18.4m in 2002. Revenues grew for the 9th consecutive quarter reaching $10.2m, representing an increase of 67% as compared to $6.1m in Q4 2002, and of 12% as compared to $9.1m in Q3 2003. Over the course of the year we've significantly increased our customer base, adding 14 leading international service providers. I also want to point out that in each quarter over the past couple of years, the majority of our service provider business came from existing customers, a testimony to the quality of the product and services we provide. In the private networks and enterprise market, partnering with major global solutions providers has resulted in expansion of our sales channels and increased market share.

The service providers market contributed approximately half of Ceragon's revenues this quarter with cellular operators accounting for more than 35% of revenues. The private networks and enterprise market continues to generate the other half of our revenues. This quarter we sold to two customers each representing over 10% of our revenues, one cellular operator and one leading worldwide system integrator in the private networks and enterprise market. Europe, Middle East and Africa accounted for more than half of revenues, North America for approximately one quarter, and Latin America and Asia Pacific's portion grew and contributed approximately one quarter as well. The quarter was again strong in terms of booking. Our bookings or our backlog is growing and our book-to-bill was greater than 1, as it has been for the past 9 quarters. We entered 2004 with a comfortable backlog and good visibility.

For Q1 2004 we expect revenues to increase to $10.5m - $11m. Looking ahead into 2004, we expect revenues to grow by 30-40% as compared to 2003. I'm proud to report that for the 9th consecutive quarter gross margins continued to show improvement. Q4 2003 gross margins reached 41.8% up from 34.5% in Q4 2002, and 40.9% in Q3 2003. 2003 gross margins reached 40%, up from 30.5% in 2002. Our gross margins continue to lead the industry and 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 we'll continue to monitor our expenses closely. While revenues have grown substantially, we've kept expenses flat which I view as a significant achievement, all resulting in an improved bottom line. EPS improved for the 9th consecutive quarter and we recorded a loss of $(0.01) per share as compared to $(0.13) in Q4 2002 and to $(0.03) in Q3 2003. We expect 2004 to be a profitable year for Ceragon, and I believe that we will reach that profitability as early as this quarter. Going forward as I mentioned in the last call, our long-term profitability model calls for $0.30 of net income for every additional dollar of revenue.

Moving onto the balance sheet, cash balance at the end of the 4th quarter was $39m. I want to point out that the cash utilization for the quarter was less than $300,000 continuing the trend we've seen the past two years. Given Ceragon's strong outlook, we are looking forward to 2004 being our first year of positive cash flow. DSOs were 45 days, better than our target of 60-70 days. Revenues keep growing-we are seeing repeated commercial wins in our target markets and we are building a strong and diversified customer base, all adding up to a record year for Ceragon, putting us well on our way to surpassing this record in 2004 in both top and bottom lines. Now we'll open up the call to Q and A.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question today, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. And if you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll proceed in the order that you signal us, and we'll take as many questions as time permits. Once again to ask a question please press star 1. We'll pause just a moment to assemble the roster. Our first question today comes from Jeff Kvaal with Lehman Brothers.

Hi guys. I wanted to ask you a couple of questions. First of all potentially on the 4th quarter seasonality, other folks have seen, in the cellular business anyway, a decent seasonality in the 4th quarter. I was wondering if you could comment on that, and then how that plays into first quarter seasonality which it looks like you folks are going to be up again in that business.

Hi Jeff. This is Ran. As we said before in previous calls, we don't see any seasonality in our market, not between the quarters and not even within the quarters. So we see a linear stream of revenues, both between the different months within any quarter and quarter to quarter.

And what are the drivers behind that Ran?

Well, as we mentioned in the call, we have several drivers that start from cellular operators, and the penetration we had into those different cellular operators, a contribution of the system integrators and distributors in the private network and enterprise markets, and on top of all of that the geographic expansion, our ability to get into new regions and penetrate into new countries.

Okay, great. And then my second question is, it sounds like you're looking for some products upgrades in 2004, is there a chance that there would be some dislocation either on the revenue line as people wait for a next generation product, or on the gross margin line as the new products come down the cost curve?

What we are going to announce, our addition to our product family. We are not changing any business model, we are continuing the same direction we targeted two and half years ago. It means that we will keep on growing the top line, improve our gross margin and deliver the best solution to our customers.

Okay, fantastic. Thank you very much.

Thank you.

Moving on, our next question comes from Todd Allen with Kenny Securities.

Hi, congratulations on a good quarter, guys.

Thank you.

A couple of questions. I think you made the comment that there were 14 new operators added during the year 2003, is that correct?

Yes, that's correct.

Did you provide a mix between cellular or fixed, or could you?

We haven't provided the specific breakdown, but the majority is cellular.

Okay. And could you also comment on the new product, just generally without being very specific, what enhancements it might have, what features you might be adding.

The product line that we have today, the fiber product, we have a product line that gives a high capacity solution. We are providing solutions for internet, for ATM, for SDH SONET. We have the best functionality and modularity. So the idea is to enlarge the product line to add more products which will give more capacity and more functionality, and more modularity. We are covering frequency bands from 6 up to 38 in order to meet the customer needs, the cellular operators and private networks. So it will be richer and greater and a better product line that will give the best solutions for the customer.

Okay, great. Thank you.

Thank you.

Our next question comes from Sean Slayton [ph] with Ferris Baker Watts [ph].

Hi gentlemen, nice quarter. In your guidance for the current year, obviously it assumes some-assuming the market's not going to grow as fast as your are forecasting your revenue growth for this year, it assumes some market share gains. Can you tell us how-what's driving that?

Hi Sean [ph], this is Ran. I think it's very simple if you look backwards. In the last couple of years we've been growing our revenue quarter after quarter, and as everyone knows, the market hasn't been growing at that pace in the last two years.

Right.

We're going to keep on using our position in the market, delivering the best solution to our customers and penetrating into more and more customers, and keep on growing both the revenue and our market share.

I would add another point, is that the growing demand for capacity drives for solutions that in the cellular [back world] that needs more SDH, we have an integrated solution that suits the customer needs. On the private networks we are working with system integrators. So these two drivers and the demand that is coming from the market helps us to grow our market share.

Okay. There's been several new product introductions over the past 6 months or so for so-called greater degrees of integration from some of your competitors-can you discuss how your products compare relative to the trends in the industry?

Yes, you might speak specifically about two products that have been introduced and mainly, maybe they're products of the Eclipse [ph] of the Stratex. Actually these products-we are being focused on the high capacity, and once you go grow the network capacity and you need SDH functionality, we have an integrated ABM, we have the solution. They are more focused on the PDH side of the network giving functionality on this side, and so, I wouldn't see this as something that changed dramatically our position in the market.

Okay, how about Harris's [ph] announced, recently announced some network wins with its new nextgen integrated product. Are you guys seeing them in the marketplace and how do your products compare?

We have seen the announcement-it's a product line that actually gives you-to go from PDH to SDH-we don't see this need as a crucial one, as going from PDH to SDH, it's changing many parameters that I don't see this need in the market. So, this is another product line that is in the market we don't see that much, and again, I don't see this product line as something that is changing our position.

Okay. Last question. Separate from your business, what is your estimation of digital microwave radio market growth for this year relative to last?

I would comment on what we are seeing with our product line, otherwise I would take the jobs from the analyst. And we are seeing the growing demand, we are seeing more capacity in the marketplace, we are seeing more users, we are seeing some starting of 3G operators. We are seeing some signs and for us it's a growing demand and therefore we have said that we would grow our revenue in 2004.

Okay, what's driving-is it your focus that's kind if driving your industry leading gross margins right now? Your focus on the high end?

It starts with the design of the product. It starts with the product that is well designed to have functionality and at the same time to make it not very expensive. We are very focused and very efficient in the way that we work and we are gaining from growing revenue.

Right, okay, thanks very much. I appreciate it.

Thank you.

Our next question will come from Brian Bice [ph] with US Bancorp.

Hello everyone. Sort of tagging on the last question. We've seen a lot of-at least in the North American markets, seen a lot of interest lately with regards to a wireless infrastructure spend, or cellular spend, particularly focused on high capacity data networks. Have you seen any interest or heightened interest there, and do you expect that your product would fit into that kind of strategy from someone like a Verizon, willing to spend a billion dollars, etcetera.

In the US the market is a little bit different than in the world. In the world we see GSM [ph] networks that have double hierarchy the BTS [ph] BC [ph] and the switches, and the architecture and the geographic spread is a little bit different. So we see more demand for high capacity in the international world than in the US. But, still, we see growing demand and we are seeing the growing demand in the cellular [back world] and this year we will have more sales from this side. We have more success in the North American market in the private networks, in the enterprise. We have the IP functionality for internet, ATM and we have business in this side.

Does it make sense that a more robust broadband requirements for a wireless network would require denser cell spacing, and therefore could that be a driver to your [inaudible].

Yes, of course. Once it's going you have more installations and more coverage, more capacity, that calls for solutions that we are providing.

Okay. There is a lot of talk about consolidation over here. Have you disclosed any of your North American cellular operators that are current customers to determine if they'll be impacted by potential mergers?

This is not something that would affect our business, and I wouldn't see this as a factor on our activities.

Great. And just remind me if you would. You talked about a long-term goal of $0.30 on every dollar coming to the bottom line. What's the timing or what's the revenue level where you can achieve that type of mile?

Okay, this is what we said, and we are talking about this for a couple of quarters. Once we cross the breakeven point this is the model we are going to grow according to. It means that any additional dollar beyond the breakeven point will translate to $0.30 on the bottom line.

And that breakeven point is this first quarter.

Yes.

Great, thank you very much.

Our next question is from Justin Martos [ph] with Wisepeck Greer [ph].

Hi. First of all, I was a little late. Did you guys actually put out explicit revenue guidance for the next calendar year?

No, what we gave is specific revenue guidance for Q1, which is $10.5m to $11m, and a range for the full year which is 30-40% growth over 2003.

Okay. And within that growth, can you guys talk about some of the, I guess the different segments that you participate in, if you know, one is going to be growing a little bit faster than the other?

We've been talking for the last quarter about the two major markets for us, the service providers and the private network and the enterprise, stabilizing about half of our revenue each. And we believe both of them are going to maintain about the same contribution going forward in the near term.

And how is pricing during the quarter?

There was no specific change in the pricing environment. We have seen about the same level of pricing and it can be evidenced by our gross margin that it has been growing in the last 9 quarters.

Thank you.

You're welcome.

The next question is from Greg Weaver [ph] with Kern Capital [ph].

Hi. Is it fair to assume if we see, finally see an acceleration of 3G activity in Europe that you should be accelerating your growth.

Yes, of course. Again, growing demand in the 3G calls for products that we are providing. I would separate it to two situations. One is that the reason cellular operators that has the 2G and the 2.5G, and then he is installing the best stations for 3G, and he is using his network, and then he has to expand the network, and he might choose to [inaudible] the existing one, and then it will grow. All these new operators that they have license just for 3G, and they have to build their network and to expand it, and we are seeing some sure signs in the starting of operators regarding the 3G.

What if the network's carrying more traffic, I mean is that more business for you as just a function of cell subdivision maybe, or you have to upgrade the stuff that they put in already a while back?

It's all. Because the 3G handset provides more capacity, so for sure the [backlog] is growing if you have more coverage, and the existing networks, or even the ones that have been installed, sometimes it will start using low capacity radios. Once you grow the network you want to be able to manage it better, to have more capacity, you are moving into SDH rings, and then we are relevant and we are providing and we have a very good solution for that.

So, would they typically shuffle around your older equipment and then buy the new stuff, or they just get rid of the old stuff?

It depends. In some cases they will remove the existing products and they will build a new ring, they can use the systems to other sites. It's a system that you can use for other sites.

So how much of your repeat business that you're seeing would you say is more, kind of, new fill in versus upgrade?

The majority is existing networks and not yet from 3G.

Okay. And could you share with us what percent of your revenue is represented by your top 5 customers?

Beyond the 2 that are just about more than the 10%, everyone else are in the low single digit. So, not going to be much more than the 30%.

Okay, so the two greater than 10% guys aren't much greater than 10%.

Yes.

Okay. And I'm assuming on your new products that you alluded to that it's the same architecture where you're reusing the same platform, and so forth, and same componentry?

We are adding more product lines to the existing product line, and so we'll be able to provide a large product line, so the customer will have a better and a more efficient solution to different possibilities.

Right, but you're getting more leverage, right? In terms of what you've got, in terms of buying various components.

Yes, of course.

Great. And I guess just lastly, what's the lead times on your products, if I wanted to order one today?

We commit for 60 days from the point of order.

Has that changed much?

This has not changed much. In some cases that the deal is specifically calling for less than that, we will do it. But this would be the average.

Okay, thanks. Nice quarter.

Thank you.

And we'll go back to Sean Slayton [ph] with Ferris Baker Watts [ph].

A quick question guys. You mentioned that you're not necessarily seeing Stratex and Harris [ph]. Who are you seeing?

I didn't say that I'm noting seeing Stratex and Harris [ph]. I say that I'm seeing less Harris [ph] and I do see Stratex they are our competitor, one of them.

Okay. Who are the few principal competitors that are competing for the same business that you're going after right now?

We are seeing, as our main competitors, Stratex and Nara [ph].

Sean Slayton. And Nara [ph]. Okay, thanks.

Thank you.

This is from Todd Allen with Kenny Securities.

Hi, I had just a couple of quick follow-up questions for you. Did you comment on distribution mix, direct, indirect, the amount going through OEMs, you mentioned that a lot of the private networks is going through solution providers.

What we talked usually, is the private network and enterprise is mainly indirect going both through distributors and system integrators. So, it represents about 50% of our revenue.

Okay. And the service provider piece of the business is largely direct?

Yes.

90% direct, or?

All of it, I think.

Everything? Okay. Also you mentioned that there was particular strength in Europe, Middle East and Africa. Could you put a finer point on that? What particular geographic areas are you seeing notable strength in, and what types of customers there are taking up the Ceragon product?

We have a mix in the different regions. We have cellular operators throughout Africa and Europe, and Middle East, as our customers. I would say that their marriage in Europe, Middle East and Africa is actually where you see our business, the way that it's being done, is that half of it goes to cellular operators and to service providers, half goes to private networks. So this mix we can see it throughout Africa, Europe, East and West, and the Middle East.

Okay. And then, finally, on the Asian business. You mentioned that you're seeing some strength there. Are you seeing, well I guess a similar question, particularly what areas of Asia are you seeing increasing business in, and do you have any forecasts for that area as to what you anticipate in the way of growth? Is it a lot of new orders? Is it repeat business? What do you see going forward?

We specifically were speaking about India, and that is the driver for the growing sales in Asia Pacific. And we do sell in Asia Pacific and we see a growing demand there, and we hope to sell more.

Do you have any current presence in China?

We have announced some time ago that we have a partner in China, it's Datung [ph]. And it's a business, and we have channels into China, and we have installations with service providers there, with cellular operators and with private networks. So we have installations in China, and partners.

Okay. And I guess another way to pose the question, do you see growth in Asia increasing more rapidly than the rest of your markets?

I see growth in China, I wouldn't say that I see there growth that is greater than other areas.

Okay, so if we're saying that overall revenues might increase 30-40% for the overall business, a similar rate might apply to sales in Asia.

Yes.

Okay. Thank you.

Thank you.

As a final reminder, if you'd like to ask a question today, please press star 1. You have a follow-up question from Justin Martos [ph] with Wisepeck Greer.

A couple of questions. Just on the incremental comment. It's $0.30 for every dollar, that's on the gross profit line or on the operating profit line?

It's the bottom line.

On the bottom line, and by the bottom, you mean operating profit before-

Yes, it's the same, but yes.

Okay, for the taxes, okay. Also, with the 3G, how much, I think earlier, to just clarify, that your 3G sort of deployment stuff that's in your deployed 3G was not really that much this quarter? Is that correct?

The 3G was not-we see signs, but I wouldn't say that it's-there is a lot of impact in the revenue this quarter.

And just on a dollar amount, if some operators start to upgrade capacity are we talking just normal sized contracts for you, where, as you said, they upgrade maybe a ring or something like that, or will it be a little bit-do you have any idea what the dollar size could be for that type of contract?

It's really a matter of what the pace of the deployment is going to be, because it's very clear that 3G networks require much higher capacity than a 2G or 2.5G. So, through the deployment the 3G is going to generate much more revenue for us. Now it's up to them how fast and when they are going to start deploying the 3G networks.

All right. And then on a shares outstanding, how's the creep going to be going forward, is it going to be-how do you-as you manage to hit breakeven, and possibility continues to be [unclear], how do you see the shares going, share count?

How do we see what?

The share count. You had 24 million shares out, is it like maybe another 50,000-100,000 every quarter?

Well, they only change when you move from the red to the black, you add a fully diluted calculation to the EPS. That's all.

Okay.

Mr. Martos [ph] did you have any further questions?

That's it, thank you.

At this time there are no further questions, I'll now turn the call back over to Mr. Katz for any additional or closing remarks.

Ceragon has just reported record year results. This is quite an accomplishment and I would like to thank our team at Ceragon for a job very well done. We have made impressive gains, increased market share and are looking forward to our first profitable year. I hope to update you on Ceragon's continued success in our next call. Thank you everyone for your time today.

That does conclude today's conference call. Thank you all for your participation, you may now disconnect from the line.