Ceragon Networks Ltd (CRNT) 2004 Q2 法說會逐字稿

Welcome to the Ceragon Networks Ltd. second-quarter 2004 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-S 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 will now turn over the meeting to Mr. Ran Oz, Chief financial Officer. Please go ahead, sir.

Thank you for joining us for our Q2 2004 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.

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 second quarter of '04. Q2 was the first quarter of operating profit for Ceragon, in addition to impressive topline growth and excellent performance in bookings and growing market share. With our bookings and visibility up, we are raising the bar for our topline growth from our initial target. Our quarterly revenues grew for the 11th consecutive quarter, with revenues reaching a record of $13 million, up from $11.4 million in Q1 '04 and from $8.1 million in Q2 '03. Once again, for the 11th consecutive quarter, our book-to-bill is greater than 1. As a result, we are re-setting our growth targets for 2004 revenues at 45 to 55 percent growth, as compared to the 30 to 40 percent we guided for up until last quarter.

We continue to successfully expand our global footprint and worldwide presence. We've further extended our reach in Asia-Pacific and Africa, and have seen a growing demand for our line of products in this region.

Our focus on the cellular market is paying off. As we reported during Q2, we continue to receive substantial orders from both new and existing customers in this market. Ceragon's innovative SDH networking solutions enable the operator to meet the demand to expand their networks and increase capacity in order to provide next-Generation services.

During Q2, we also announced that we were selected as a full turnkey supplier by a leading GSM operator in Africa. This contract is further proof that cellular operators recognize the added value of our FibeAir broadband solutions and support our successful worldwide expansion. We are encouraged by the substantial repeat business and growing customer base in the service providers market. We expect this market, which includes both cellular and fixed operators to remain strong, as we see it as having great potential going forward.

In the private network and enterprise market, which we've targeted over the past few years, we are seeing both repeat business, as well as new wins from our more than 20 system integrators, of which close to a third are first-deal (ph). This market continues to be a key contributor to our revenues.

Now, to update you on our product development efforts, as you know, FibeAir 1500P was introduced only last quarter, and I'm pleased to report that it is being received with overwhelming enthusiasm by the market. Last quarter, I spoke about a 1500P field drive (ph), which was extremely successful, and translated into substantial orders. We believe that this product will contributes significantly to our revenues going forward.

In addition to the FibeAir 1500P, last month we introduced yet another new product to the Ceragon product family. The FibeAir 10060 is our first offering in the license-exempt 60 GHz frequency band, providing ultrahigh capacity, full GigE or 1.25 Gb connectivity. Its quick and simple deployment in the plug-and-play functionality and low cost make it a highly affordable wireless connectivity solution, and the preferred option for network expansion in the enterprise and private networks market.

We at Ceragon are committed to deliver to the market the most comprehensive and web-suited (ph) technology solutions, as we continue to up identify developing needs by focusing on our target market. Before I turn the call over to Ran, I want to welcome the research analysts who have recently picked up coverage of Ceragon, doubling the number. This quarter, Ferris Baker Watts, Investec and Merriman joined CIBC, Kenny Securities and Oscar Gruss in covering Ceragon. We thank you all for your show of confidence in Ceragon, which reflects the sentiment of the investment community.

Now, I will turn the call over to Ran, who will go into greater detail about the quarter.

Thank you, Shraga. I will start with the P&L and move on to the balance sheet. Q2 was our second quarter of profitability, with first-time operating profit, following our strong topline performance. Revenues grew for the 11th consecutive quarter, reaching $13 million, a record for Ceragon and representing an increase of 60.5 percent, as compared to $8.1 million in Q2 '03 and 14.1 percent, as compared to $11.4 million in Q1 '04.

The service providers market contributed more than half of Ceragon's revenues this quarter, with cellular operators accounting for the majority. The private networks and enterprise market generated close to half of our revenues.

This quarter, we sold to three customers in different regions, representing over 10 percent of revenues -- one operator and two in the private networks and enterprise market. Europe, Middle East and Africa accounted for approximately 40 percent of revenue, North America for about 30 percent, Asia-Pacific and Latin America the other 30 percent.

Our strong performance in Q2 resulted in substantial bookings, and as a result, very clear visibility. We therefore are confident guiding further growth, both for Q3 and the year as a whole. For Q3, we are guiding to revenues of $13.5 to $14 million. For the year as a whole, we are increasing our guidance by 15 points, and expect revenues to grow by 45 to 55 over 2003.

Our gross margins were 41.6 percent, which is a significant achievement, and we intend to maintain our leadership position with a target of over 40 percent. While revenues have grown substantially, we've maintain expenses in line with our plan, all resulting in an improved bottom line and our first quarter of operating profit. Net income improved, and we recorded a net profit of close to $300,000, as compared to a net profit of $39,000 in Q1 '04 and to a net loss of $1.2 million in Q2 '03. Earnings per share were 1 cent, as compared to 0 in Q1 '04 and a loss of 5 cents per share in Q2 '03.

Moving on to the balance sheet, cash balance at the end of the second quarter was $38.6 million. Going forward, based on the strong demand we are generating, we dissipate growing our cash utilization in the near term to support our expected growth. DSOs were 65 days, in line with our target of 60 to 70. Summing up, revenues are consistently up, and visibility is good.

Now, we will open up the call to Q&A.

(OPERATOR INSTRUCTIONS). Matt Robison, Ferris Baker Watts.

Congratulations on a great quarter and your visibility here. I don't want to sound picky, given your margin relative to your industry, but it was down sequentially. Can you comment on what is happening there? And also, you mentioned a range in DSO that is actually higher than most of the quarters for the last couple of years. Give us a sense for how far into that range you think you are going to go in the near term, and what the backdrop for that is? Then I have a follow-up.

First of all, thank you for congratulating us. If we look on the gross margin part, in each quarter in the past, we had a mix of deals coming from different customers with different margins. Now, this quarter, we had the margin of this mix came in a little bit lower than what we had in the previous quarter. But then again, as you said, if we compare it to the industry, we still lead with a far distance from any other player in this market. Our intention, given our backlog, is to maintain this leadership position with margins that are over 40's.

When you talk about mix, what are the issues there? Do you have some products that are in the early stages of ramp, or do we see higher margins for the new products, or do we see lower margins for the new products, for the learning curve is -- or is it regional, what are the points that we should be thinking about?

It really varies according to the different parameters. It's a combination of different customers and different regions and different products. It is obvious that the new products have higher margins, and as we get the 1500P to penetrate more and more, as we expect, we are going to enjoy even higher margins then we have today. So this is what makes us confident in looking ahead and forecasting -- maintaining this achievement and getting above the 40 percent quarter after quarter, like we did in the last year.

These new geographies result in slower paying or different terms?

No. If we look on the DSO side, we basically targeted to be on the 60 to 70 days range all through the last three years. In some (ph) specific quarters, we came out a little bit lower than that, even better in the collection side, but still we are giving the same payment terms, and targeting to be between the 60 to 70 days in the future.

What was linearity like in the quarter?

What?

Linearity -- what percentage was shipped in June?

Oh, usually the linearity is kept within the quarter, and we don't have any significant difference between the months within a quarter.

Jeff Kvaal, Lehman Brothers.

Congratulations on a good quarter, once again. My question is on -- it seems the visibility has built for you again in the quarter. I'm wondering if you can provide us if you think that's more on the private networks side or that's in the carrier marketplace? And also to the extent you can comment on uptake in the new 60 GHz product, that would be fantastic.

What is the exact question about the 60 GHz?

To what extent you feel that that is gaining traction in the private network (multiple speakers).

The visibility goes through the whole market that we are reversing. We are reversing the cellular market, we are reversing the private networks, so visibility that we have comes across the different markets. Regarding the 60 GHz, this product is very high-capacity, ultra-high-capacity. It is 1 Gbps, and this is relatively short distances, and we have introduced the product to the market. We are seeing the market mainly in the U.S., and we are in the initial stage of introduction of the product. In the coming quarters, we will know more. The potential is there.

Should we look for it perhaps contributing to revenues in the third quarter or the fourth quarter?

Yes.

Todd Allen, Kenny Securities.

I'd also like to congratulate you on a strong quarter. I was hoping that you could tell us a little bit about product mix -- and I notice you've got the 1500P out and the 60 GHz product out. Could you give us an idea what the mix of sales by product was in the second quarter, and where you see that mix, say by the end of the year?

Okay, the most of the shipment was the existing FibeAir family. That 1500P, it was the initial shipments. We already shipped some product. We will ramp up the shipment of the 1500P, but we just started shipping this quarter. Of course, in the coming quarters, we will ramp up the shipment of the 1500P. It is not very easy to say how much we will have by the year end of the 1500P, but for sure it will grow significantly. About the 60 GHz, we did not sell. We are in the process of production of the product to the market. In the coming quarters, it will grow. I wouldn't expect the 60 GHz to play a big role in the coming quarter, but I do hope it will grow in the coming two quarters.

Another question -- you said that cash utilization will increase to keep pace with the growth that you are experiencing, which make sense. Could you give us some sense of where you see cash utilization in the coming two quarters?

What we try to give a sense is that based on the growing backlog and our need to purchase raw (ph) materials and be able to ship more and more finished goods to our customers, we're going to require a higher level of working capital. Again, it's at the level between 100,000 to a couple of million in the second half of the year.

On the subject of gross margins, and I will echo what the previous caller said, I know that 41.6 is very strong. But north of 40 percent, do you think it's possible, with the higher margins of the new products as those ramp, that you could approach 45 percent, or is 40 percent a better number with which to model?

First of all, what we can say about the new product is that it is definitely going to contribute and help us grow the gross margins going forward. The issue is whether the penetration of the new product is going to come fast enough to take it up to the 45 percent. Previously, we have stated that we look at the 45 percent as being the long-term target. We don't expect to get to the 45 percent within 2004, but we look forward and hope to get there next year.

One final question -- there has obviously been a lot of talk about your competitor's new Eclipse product offering. Have you seen that in competition with your products, and if so, in what markets and what type of applications?

The Eclipse product is a product that covers PDH, trying to get many, many (indiscernible) in one product, providing what is called super PDH, or maybe rings of (ph) PDH, and also there is an SDH product within the product line. What we've seen for the last month and quarters is that we are gaining marketshare, and we are selling more and more, and of course, we can see the introduction of the Eclipse. But on the business side, we are gaining momentum and we are selling more and more.

Ehud Eisenstein, Oscar Gruss.

In terms of the new product, the 60G and the 500P, where do you see -- let's say the first quarter of 2005, the breakdown between the new and the old products?

If I look at the first quarter of 2005, still, this is a long way from today, and it's

Not too long.

Well, it's long enough to be able to say that the mix is not that clear looking three quarters ahead. We believe that the 1500P is starting to penetrate already. We already started shipment, and we see growing demand and growing bookings already for the 1500P. So we can quite confidently look at a mix that is somewhere in the range of at least 10 to 20 percent on the 1500P side. Now, the 60 GHz is something that is new to the market. We are the first in the world to introduce this kind of product and this kind of solution, so it's a matter of the market demand buildup, so it's really too early to say how much it's going to make out of the mix, but we hope to build on this new product and have it as part of our revenue growth through next year.

So it's 10 to 20 percent only on the 500P.

This is what we can see from here. This is the minimum that we look at. We hope to get more than that.

Another question on the private network side of the business -- what were the strongest verticals during the quarter, and where do you see this trend (ph) going forward?

I would say that like the previous quarter, on the private network and enterprise, the main drivers or the main verticals that generate revenue for us were the government and education side, although we do have some other verticals on top of that enterprise market. We believe it's going to remain this way, going forward.

So it's mainly government and education.

Yes.

Robert Tango (ph), Lazard.

Shraga, I have two questions. The first -- I know you've emphasized and have made it clear -- in prior calls you've made clear that the visibility is very, very good and demand is there and guidance and things of that nature. The two segments that you're selling into -- enterprise and service providers -- it's basically 50/50, for the most part. This is somewhat of new technology that is just starting to emerge, and just starting to get into the marketplace, what Ceragon is selling. Can you characterize the level of interest among prospects -- not existing customers, but among prospects just looking at the type of technology in this segment, and how viable they think it is, their level of interest and their plans, both -- again, the enterprise and the service provider segments, how quickly they want to go about implementing this type of technology and utilize it in the future. I am just trying to get a handle on how both of your key segments view this just from a technology standpoint?

Okay, you say that you have two questions. I got one.

The second one, for Ran, I am wondering if there is just -- from a P&L standpoint, is there any difference in profitability in pricing pressure and enterprise, relative to the service provider segment, because obviously you're selling to two completely different sort of entities here. And I am just wondering if the P&L or the profitability and pricing and contract structures are very different in those two segments.

Let's start with the prospects in the cellular and the enterprise market. Actually, what we see in the cellular market is growing demand for capacity. We are seeing more and more customers, users. We're seeing more and more data applications. The coverage is becoming better. Therefore, the cellular operator needs more capacity. The evolution in growing capacity of cellular networks is by introducing SDH to the networks. In order to make the SDH in the networks, they are buying solutions. And the solution -- you have in the solution the radios (ph), the high-capacity radios and the ADMs (ph). They are multitexturing the node. We are providing both. We are providing the ATMs that we have integrated in the inter (ph) unit, and we are providing the whole solution for the cellular operators. That is an advantage in technology, and the fact that we are willing to take projects and the fact that we have the best product line in the high-capacity marketplace makes our technology very relevant for the cellular operators. For the enterprise market, we have different solutions. We have -- in the enterprise market, the applications are many times IT applications. It's a connectivity of Ethernet or maybe productivity of ATM. We are providing both -- we have technology solutions for both networks, and as Ran mentioned before, the government, education enterprise needs this technology. The technology is relevant for today, and the customers are deploying and using the technology, and improving their return on investment, so this is the prospect that we are seeing, and the technology is very relevant, and we are deploying and helping our customers.

Which segment, Shraga, would you say has a greater interest, just in general, whether it be the wireless service providers or the enterprise -- does either one have a greater interest in the technology at this point?

We are seeing interest from cellular operators. It's a growing segment for us, and we are seeing it from the private network. These are the two drivers for our growth in the sales.

You are seeing equal -- strength is equal (multiple speakers) there isn't one that's beating the other (ph).

We are seeing from both.

Just the question on the --

The second question.

If we go to the pricing side, as I said before, each customer in each region in each market has a slight variation on the market and the way the deal is struck (ph). We can't really say that all the customers in a certain market, geographic or so on, has higher or lower prices. It is really a matter of what's the best deal we can come out with. So on average, we usually see the same level of pricing going into the two different markets.

So really, the profitability -- I understand it is all on a one-by-one basis with each customer, and the level of interest and volumes and things of that nature, but the general level in either segment -- the P&L in either segment is relatively consistent, then?

Yes.

Okay. So there's no significant differences in profitability one way or the other?

Exactly.

Matt Robison, Ferris Baker Watts.

I am working these segment revenues and margins and this super PDH versus SDH issue a little bit more. Is your enterprise and private business -- if it heavier in North America or any particular region?

Our solution for the private networks, I would say that it is more in developed countries, and it goes to North America, it goes to Western Europe, it goes also to other regions in the world. But the main market is in the Western world.

Do you have a distribution channel there that affects the margin on the sales of those products?

It's two different questions. We do have a distribution channel, and we have distributors in about 50 countries throughout the world. In the private networks, you need system integrators. You need distributors. Sometimes you're selling direct. I would not say that that affects directly the margins. It says we need to have the right channels to sell to different customers.

Then on this other point the other caller made on the super PDS versus SDH, do you find a meaningful percentage of your sales in the applications where there is a gap in the users' needs between say DS3 and OC3, such that you come there with the minimum round number of SDH bandwidth, and it's really more than they need, and so they make the jump-up from -- but they make the jump-up from DS3 anyway, because they need more capacity. Is that --?

Whenever we are selling to cellular operators, we are selling SDH solutions. What is common with the SDH -- with the cellular operators, is that they are expanding the network transmission from the 241's (ph), going up to 1601 (ph). Once they are reach the 1601, the next is introduction of SDH, and then using the SDH, then they can do better management, they can do data applications. It is the evolution for the cellular network. That's where it goes, from 1601's up to SDH.

Do you see most of your business with the trunking lakes (ph) that go from BSD to the MTSO, or do you see also quite a bit of business in the BSD to base station links?

The BSD to the base station links is backhauling the base station, and the base station does not need capacity of 165 for SDH. So the application will -- cellular operators are using our equipment, is building an SDH link that will connect the base station controllers to the MC (ph). This is where we are.

So it's really almost like an aftermarket upgrade path, rather than a greenfield type --?

No, it's sometimes greenfield when a customer is getting to a new area. It's sometimes upgrading an existing network and overlying SDH over PDH. You have them both.

(OPERATOR INSTRUCTIONS). Kevin Dede, Merriman.

Nice job on the quarter, guys. Shraga, just to take Matt's question a little further, can you tell us about how you see your architecture for the 3G rollouts developing? Do you think maybe there might be more base station support on an SDH platform versus just the inner ring on SDH?

The 3G -- actually the idea of the 3G is having more capacity to the customer. Once you need more capacity to the customer, it can be 10 times -- or I don't know what would be the exact speed, but let's assume it will be 10 times the capacity -- then you need more more capacity to the base station. It will be called node B and RMC (ph). The names will be there (ph) for 3G (ph). Now it is actually the architecture of having the rings of SDH, whenever you will have a 3G network, that for sure you will have it. And then you will have also maybe ATM in the network to provide data, voice and such. So growing capacity is a clear outcome of 3G introduction. Of course, if you will have more capacity to the base station, you'll have the possibility of more rings of SDH coming also close to the base stations, and sometimes it will be also to the base stations, but then it will depend on the coverage that you'll need. We will see more and more SDH coming close to the base stations when we will have the 3G and massive rollout, when you'll have many many base stations of 3G in the field. We are not yet there.

Are you see an increase in bid and proposal activity, though, that would suggest that that might be coming soon?

The 3G?

Yes.

What we are seeing is more a test, and technology test, but we are not seeing a rollout of base stations of 3G, but we do see more and more signs of 3G.

Last question for me -- can you quantify your backlog, in just a vague range, so I have a general idea where it stands, and whether or not -- obviously, you see it improving, but just give us a feel for where it stands?

We don't give the exact figure of the backlog, but you can figure out that in the last 10 quarters, we had book-to-bill of over 1, and our visibility has grown and now we can look ahead, two quarters ahead, which gives us very good confidence looking into the second half of 2004.

Okay. Well, thanks for handling that, Ran, and congratulations again on the quarter.

Ehud Eisenstein, Oscar Gruss.

Just on the geographical breakdown, it seems like Asia and Latin America did better this quarter. Could you give us some sense which region and what countries, etc.?

This is something that we started to talk about a couple of quarters ago. We talked about having a lot of activity and potential coming out of Asia-Pacific and Latin America. This quarter, it translated into revenue. We do believe this kind of a breakdown is going to continue going forward, given the booking and the backlog we have in place. I think that's covered (ph) what you are looking for.

I see. Ran, if you'll just allow me, on a personal note, if I'm not mistaken, this is our 10th or 12th conference call together, so I just want to wish you luck on your next position at NICE.

Thank you.

James Capello (ph), Kern Capital.

I may have missed this. I am multitasking here today. 10 percent customers - were there any new 10 percent customers, and where were they in the quarter?

We had three 10 percent customers, one cellular operator and two in the private network and enterprise.

And where were they?

We didn't give their names. Actually, they are all around in three different regions.

Can you tell me those regions?

It's between North America, EMEA and Asia-Pacific, Latin America.

So not India? Where does India fall into?

Usually in Asia-Pacific.

Asia-Pacific? Okay. That was not there. Okay, thanks. Were there any new 10 percent customers? Are those three new?

The 10 percent customers are usually changing, and we don't have one of them continue quarter over quarter. I would say that none of them is a new customer to us. All of them are longtime customers of Ceragon. They happen to have a larger ordering or larger deals this quarter.

Were all three of those previously 10 percent customers?

I will have to look into it, but definitely not in the near past, but it might be that one of them was somewhere last year.

That concludes the question-and-answer session today. At this time, I would like to turn the conference back over to Mr. Shraga Katz for any additional or closing comments.

We're very pleased with the strong topline and booking performance of Q2, allowing us to raise the bar of our annual growth target. Ceragon conduce to achieve new wins and expand its product platform. These are indeed significant accomplishments of the Ceragon team, and I would like to knowledge everyone's work in our success. I would like to take this opportunity to thank Ran for his contribution to Ceragon over the past three years. We appreciate what he has done for the Company, and wish him good luck in his future endeavors. I look forward to updating you on Ceragon's continued success in our next call. Thank you for your time today.

This does conclude today's conference call. We thank you for your participation. You may disconnect at this time.