Ceragon Networks Ltd (CRNT) 2004 Q4 法說會逐字稿

Good day, everyone and welcome to the Ceragon Networks Limited fourth 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. Tali Idan, Chief Financial Officer of Ceragon Networks.

Today's presentation will include forward-looking statements that under the Private Securities Litigation Reform Act of 1995, these statements are subject to risks and uncertainties that could cause Ceragon's actual results to be materially different from those expressed or implied by such statements. For additional information regarding the risks associated with Ceragon's business, please refer to Ceragon's annual report on Form 20-F and Ceragon's reports filed with the SEC. Web users can visit Ceragon at www.ceragon.com to read the complete forward-looking statement language.

I will now turn the meeting over to Mr. Tali Idan, Chief Financial Officer. Please go ahead, sir.

Thank you. Thank you for joining us for Q4 2004 conference call. Shraga will review the quarter and the year in the whole and give you a status report. Then I'll go over the financial results. We'll continue with Q&A. And finish up with Shraga's closing remarks. Now we'll turn the call 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 first quarter and the full year of '04. I am pleased to report that '04 was a record year for Ceragon. We turned profitable this year and significantly grew our revenues by 59% and we are looking to '05 to deliver additional growth in both the top and the bottom line.

Annual revenues reached a record high of 54.8 million up from 34.4 million in -- in '03. Our quarterly revenues have grown consistently every quarter for the last 3 years reaching a record of 15.9 million in Q4. In addition to this impressive top line performance, we continue to grow our net income reaching $0.03 per share for Q4.

Our strategic focus on target markets, geographic expansion, and product leadership has certainly proven itself. We have established ourselves as one of the world's leading vendors of high capacity wireless networking solutions and have grown faster than the market by consistently gaining market share.

The momentum is there and we expect to continue growing at the strong pace into '05. The growth driver for this market is the increase in demand for network capacity derived from increasing usage of capacity rich applications such as data and video.

In the cellular market, the usage of data and multimedia is increasing and video applications are being introduced along with the introduction of 3G technology. Similarly, we see growth in traffic in the private networks, which enables those high capacity applications such as data networks, video conferencing, distance learning, and remote storage.

Wi-Fi and Wi-Max technologies in the fixed wireless market will enable an increasing demand for data and video applications.

In these various access applications, Ceragon benefits as they each contribute to the demand for high capacity backbone and consequently demand for our equipment.

For those of you who have been following us, our strategic focus on the cellular market, which marked our turn around 4 years ago, has paid off. From insignificant number a few years ago, this past quarter cellular operators announced for 45% of our revenues and for the year as a whole our revenues from these customers doubled from last year.

In Q4 we announced a new win. Cellular One, a U.S. cellular operator, chose Ceragon products to implement a cellular backbone network and to provide broadband wireless access to customers in Arizona. The cellular network is based on our innovative FibeAir 1500P product and the access connectivities provided by our recently introduced FibeAir 4858, which provides fast Internet for data and T1 lines for voice. This $1.3 million deal for the first phase of this project is a good example of Ceragon's advantage in providing integrated networks for voice and data both in license and unlicensed bins.

In the private networks market, which is a key contributor to our revenues, we are seeing repeat business as well as new wins from emerging and first tier system integrators both in the public and private sectors. In the public sector we are seeing growing installations, national security, education, and municipal facilities.

An example in the education sector is one we announced this quarter. Tulsa Technology Center in Oklahoma chose Ceragon's product to provide high capacity wireless connectivity for its 5 campuses. The school's installation included IP Internet traffic over 155-megabit transport and over 311-megabit transport thereby enhancing their education system. Tulsa Technology built its network rapidly. In just one week, it was up and running providing video, voice, and data services to its users.

Our product strategy has proven itself and our product vision remains to deliver the most comprehensive product family in the I capacity marketplace, to extend our intelligent networking solutions, and to improve our customers ROI.

We at Ceragon continue to be proud of our leadership position and are committed to delivering to our customers the most comprehensive suite of technology solutions. We made impressive progress on the technology front in '04 with the introduction of three new solutions.

Our flagship 1500P product, an innovative extension of our award winning FibeAir family of products, is making great strides and represents a growing portion of our shipments. In fact, we expect that by the end of '05 1500P will represent the majority of our quarterly revenues.

The 1500P is a breakthrough product offering new and advanced features, bringing better performance and added value to our customers. The product's unique features include - doubling the capacity of traffic within the same channel, providing multiple network configurations within one compact platform, and delivering integrated high capacity voice and data transmission.

For the unlicensed band market, we have recently introduced the FibeAir 4858, which is making very good progress. The 4858 complements our other products and enables us to both the broaden the offering to existing customers such as Cellular One, and open up new markets like the big holding of Wi-Fi and Wi-Max networks, which we expect to grow going forward.

Going into '05 we intend to grow our revenues from both continued growth in demand and additional market share gains. And now I am pleased to turn the call over to Tali for the financial update.

Thank you, Shraga.

I'm pleased to report strong results for 2004 and Q4 in revenues and net profits. Revenues for 2004 reached a record high of 54.8 million, representing an increase of 59% as compared to 34.4 million in 2003.

Quarterly revenues grew for the thirteenth consecutive quarter reaching $15.9 million. This represents an increase of 56% compared to 10.2 million in Q4 2003 and 10% over the previous quarter.

Cellular operators contributed approximately 45% of Ceragon's revenues this quarter. Private network sector, 40%, fixed operators and other service providers accounted for the remaining 15%. This quarter we sold to two customers, each representing over 10% of our revenues, one cellular operator and one first tier system integrator in the private networks market.

Geographic breakdown of revenues was as follows. North America accounted for approximately 30% of revenues, Europe, Middle East, and Africa for about 40%, and Asia Pacific and Latin America contributed another 30%. We are proud to report that our systems are now installed in over 60 countries, of which 15 we added in 2004.

Our book to bill was greater than one, as it has been in the past 10 quarters. We enter 2005 with a strong backlog and a good visibility.

For Q1 2005 we expect revenues in the range of 16 to $16.5 million. Looking ahead into 2005, we expect revenues to grow approximately 30% over 2004's revenues. According to industry analysts, our target market segment grew by 40% in the past year. And is expected to grow at the rate of 20 to 25% a year over the next several years.

Therefore, we are guiding to a growth rate higher than the industry and we expect to continue to gain market share as we have done in the past. In Q4 our gross margins were 40.1%. For 2004 as a whole, gross margin reached 41.3%, well ahead of our peers.

The small decline in gross margins we have seen in the past quarters is due to two factors. One is the mix of projects where we may see varying prices depending on bill size, geography, or type of customer. And two, in some specific cases we offer third party equipment in addition to our products, which we purchase from other equipment vendors.

While revenues have grown substantially, the operating expenses were in line with our plan and we have kept expenses under control. As the company continues to grow, we will continue to monitor our expenses. We expect operating expenses to moderately grow during 2005 but continue in decrease as percentage of revenues.

EPS has grown consistently for the last 3 years. And we recorded a profit of $0.03 per share in Q4 as compared to a loss of $0.01 in Q4 of the last year and to a profit of $0.02 in the previous quarter. For the year as a whole, we recorded net income of 1.6 million, which comes to $0.06 per share. We expect the growth in net income to continue in 2005.

Moving on to the balance sheet, cash balance at the end of the year was $37.8 million. And cash burn during the quarter was approximately $400,000. DSOs were 40 days.

Now we'll open up the call to Q&A.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll take our first question from Matt Robison with Ferris, Baker, Watts.

Hi. I guess the first question is looking at your inventory and receivables and payables, I'm curious if maybe you had a piece of business that slipped out of the quarter? Cause your inventory went up significantly. Payables went down. Your receivables were down. It looks kind of like the quarter was a little front-loaded. Is there a story there?

Well, I don't think there is a story. But I do say that we do have deals, which we delivered and have not recognized yet. Usually these are deals where we have acceptance by customer and therefore we are waiting for the acceptance. Such cases, the equipment is still recorded in revenues until the acceptance is received and then we can recognize the revenue.

But it stays in inventory? So it'd be like finished goods inventory?

Yes.

What is, how did finished goods inventory compare to the prior quarter?

As far as the component, the various components of the --?

Yes. What was work in progress versus finished goods as a portion of inventory?

Finished goods is about 40% of the total inventory.

And what was it in the September quarter?

About the same.

OK, and 1500P, what kind of a percentage of revenue is that now?

It was approximately 15% of revenue this quarter.

Was it something more like 10% last quarter, in the September quarter?

Close to 10%, yes.

OK. Is, should we expect that this decline in margins albeit at a pretty gradual slope, should we expect that to continue for a few more quarters?

Well, I would say that it maybe around the same level. This is where I expect gross margins to be.

So you think you're going to stay at a 40% level for the foreseeable future?

Around the 40% level. Correct.

Okay. Thanks.

Thank you.

Thank you.

We'll take our next question from Kevin Dede with Merriman.

Tali, would you mind going into a little bit more depth on the gross margin issue? Is this specifically related to one customer or project or is there a pricing in the market that's causing you to see gross margins slip away a little bit?

Well, I think it's a mix of more than one project, of several projects with several customers. And as we mentioned, there are probably various reasons for that. So, in projects which are larger than usual, we may have given discounted prices. And in some other project we had to also provide other people's equipment, or third-party equipment. And it may change from quarter to quarter. But these aren't the main reasons for certain changes in the gross margin.

Okay. Shraga, can you give us some details on how you're winning and why you expect to consider to gain share?

Actually, the reason that we are winning is different ones in different markets. If I'll - we say that we have 45% of our revenue coming from the cellular network and we are selling more and more to this market, it means that our product portfolio is very relevant for this market. Actually, it's for different reasons. We have a product - 1,500P that helps us to penetrate and to get more wins.

As the product is providing different features, it's a very good solution, very compact solution in one unit that gives you a networking solution. In the same time, you can double the capacity. Sometimes there are not enough channels and the customers want to have more channels and more data in the same channel. It's a product that can take them today to one and tomorrow to 2 times with different ways of doing it. So, there are many features that helps us and makes the customer very happy with our solution as well as the reliability of the product and the support of the company. So, this is, with the cellular operators.

In the private networks, we are providing for a long time, actually, from the start of selling of our products, we are providing IP solutions, Ethernet solutions. It's - we are providing the solution that can take you from fast Ethernet to many times of fast Ethernet. And to provide also voice and data whenever it's needed. So, overall, we have a product portfolio, a very flexible one, very modular one, that is very relevant with different markets.

Okay. Can you give us a view on how you see developments in Western Europe, especially related to 3G? There have been some concerns lately that CapEx on the 3G front might not be as robust in '05 as previously expected. And I was just wondering if you give us our view of that - or your view of that market.

Actually, what we see - we see introduction of 3G handsets or what is called like 3G - like Edge, EvDO and others. And that the capacity that they're using is 100 kilobits per second each. And it's actually - drives the demand for capacity and that's one of the reason that we are seeing more and more business whenever there is something that needs more capacity than we are relevant.

Particularly for Western Europe, we do see some - we see activity. We ask customers in this region - I wouldn't - I don't know to predict right now what will happen in '05. We see business in this region.

Great. Okay. Can you give us a little more insight on the Cellular One deal? I know your comments on it say that you're through the first phase - 1.3. How many phases do you think they are? Can you give us an indication of where you think that deal might go?

The deal - this is the first phase out of 3. And there will be more phases there and there will be more work for us. It's a very interesting application as it's a combination of broadband wireless access in using our unlicense solution as well as backhauling for Cellular. And we - our portfolio, we can cover all the different needs with one efficient solution. And then for that reason and we have taken the deal. And we will see more phases in this project.

Okay. Thanks a lot, Shraga, and great job on the quarter.

Thank you.

We'll take our next question from Michael Friedman (ph) with RBC Investments.

Gentlemen, good work on the continued traction. I actually have probably 3 questions for you. The first is, obviously, the revenue traction is great, but the only thing that's keeping, I think, you from getting a better reception with investors is the questions that a few people have had around gross margins. I mean, just to delve a little bit deeper, you spoke of 2 contributing factors, one of which was kind of the change in the mix of deal size, geography, customer type. Obviously, if it's a huge deal, I wholly endorse you giving good pricing.

And you also discussed, including more third-party equipment, as something that hurt gross margin a little bit. Could you just talk about the relative - how much each of those factors contributed? My understanding would be that the former would be more of a contribution. And also, kind of the 41, 42% gross margins that we had seen for a few quarters, is that just kind of not going to be the environment going forward and we should model for around 40?

Well, let me say this. You see, if we take the example of the third-party equipment, in those cases where, I think, it's important - in order to win the deal, it's important to buy other people's equipment. For example, PDH equipment, low capacity wireless. Our products are the high capacity. We would do it. And as you can imagine, this may change from quarter to quarter or from a deal to deal. Then, we'd go to the size of the deal and the mix of the deal.

So, it's a little bit difficult for me to try and quantify, as you suggested. And therefore, I don't think it's great in a certain trend. But nevertheless, for at least the short-term, this is where we see the gross margin, around the same level, around the current level of 40%.

Okay. And then just on 2 different lines. Obviously, Verizon has gotten more aggressive in its EvDO rollout in the United States. I was just wondering if you could give us a progress report on any traction in U.S. 3G backhaul type of applications. And also, with kind of the City of Philadelphia providing free Wi-Fi and there are all these Wi-Max forums. I think Shraga had alluded to our ability to be utilized more in backhaul for multipoint applications. I was just wondering if you could kind of speak broadly about whether there's any traction in Wi-Fi and whether there's any discussion with some of the guys who might be trying to push Wi-Max.

Actually, I will start with the multipoint. Actually, there is, in the world, for the last several years, applications of multipoints. And people do install and do build networks. Most of the time it will be alternate providers that would build networks, using their multipoint equipment. Wherever you install multipoint equipment, you need to backhaul it and to build the infrastructure. And we have deals throughout the world of building the infrastructure for the carriers that they are doing the access with multipoint. So, this is a business that we have now. Once the Wi-Max being the fixed (ph) would be introduced, then we'll well see that the multipoint, this multipoint equipment will be replace by that and we are already having this solution for backhauling as it will be based on IP and maybe sometimes U1s or T1s. So, this is a relevant market and we are there for backhauling.

And Wi-Fi is also going through a change and if it is in-building solution, as it is now, then the backhauling is - comes through DNS (ph) and it's not relevant for us. But once the Wi-Fi will go out of the building, and this something that happens, then again, it will be another market for us.

Now, regarding the 3G in the U.S. - the 3G in the U.S., it's --we are closing very - we are monitoring very closely what's going on in the U.S. market. We are finding opportunities with customers that are building the infrastructure or doing for scale jobs for the U.S. cellular providers. And we are also looking for other ways of being relevant for these cellular operators. And once there would be need for more capacity and the network would be based more on Wi-Max than it is now, then of course it's an opportunity for us.

Okay. Thank you very much. Keep up the good work.

Thank you, Mike.

We'll take our next question from Ehud Eisenstein with Oscar Gruss.

Hi, guys. I have a few questions. First, with the recent changes in the business environment among your competitors, do you see any change there or do you see any - do you see any better environment, due to the changes in your competitors?

We don't see a big change in the competition landscape. Actually, we have mentioned before the competitors and, of course, there are some others from time to time that we are finding. And overall, I don't see a big change there.

Okay. And then, on the private network side, can you please share me as how many system integrators your added in 2004. And again, what is the comparative landscape in this segment?

In the private networks, we have a very strong product. As the product, in the private networks, most of the time - it depends, of course, on the application - most of the time, if it will be education, if it will be finance organizations, if - it will be either an ATM network or an IP network. And for both cases, we have a valuable product, a lot of experience and you need experience in this area to provide the right solution. And it will be sometimes a combination of voice and data. And again, we have the solution.

Sometimes, it will be bigger systems, bigger networks - sorry - bigger networks. And then it will be a need for maybe an FDH (ph) or sonnet (ph) solution and, again, we have it. So, the fact that we have the channels, we have the distributors, we have the system integrators and we are selling direct and we are giving the support, it overall makes us very relevant to private networks and actually, it's 40% of our sales.

And I guess my question was do you see increase in your partners, channels, system integrators versus 2003, for instance?

We have seen - yes, of course. We have seen more system integrators and more - and we have actually have penetrated to new countries. And wherever you come to new country, for the private networks, you need distributors. So overall, the channels have grown for us.

Okay. And last question, I guess that I think that you did a great job on the 1500. Can you give us some kind of a target for 2005?

We have mentioned that the target for the 1500P will be - to be the majority of the revenue by the end of '05.

Great. Thank you.

Thank you, Ehud.

We will take our next question from David Elan (ph) with Progress Financial.

Yes, Shraga, I have 2 questions for you. The first is the big wins you alluded to, were they both were cellular operators and were they both at that 1 million plus area? And the second question has to do in terms of your biggest competitors. Someone mentioned - alluded to one of your competitors - Stratex - and some of the price pressures they were having. Could you give us some more color on that? And you facing them ...

I just want one by one because I want to - can you go to repeat - what is the question?

The first question had to do with the big - you had 2 customers at 10% or higher for the quarter. Could you tell us some more about them?

It's - one customer is a cellular operator and it's for the cellular market. And the other one is for the private networks. It's been - both more than 10% customers.

Are they both in North America?

No.

And the second question had to do more with your competitors now. You said that you're gaining market share and that's because your product is a stronger product?

It's, overall. If we have grown in the last year in 60% of sales, the market didn't grow 60%. And therefore, it - and the market has grown. So, it's a combination of growth of the market and us gaining market share. And this is, in order to be successful, you need to have the product, the ability, the production, the support, it's overall.

Right. Just a follow-up question in terms of consolidation. Given the fact that AT&T was acquired and now the rumors of MCI being acquired, does that affect you at all?

No. Because our sales in the U.S. is mainly to private networks and also to other - but it is not affecting us.

Okay. Thanks for the help.

Thank you.

We'll now take a follow-up question from Matt Robison with Ferris, Baker, Watts.

I realize that when your expenses are as low as they are that they can - it doesn't take much to move them big on a percentage basis, but maybe you could give us a little bit of backdrop on the 15% sequential increase in R&D. And I also notice sales and marketing is actually down a little bit. And what we should look forward - how we should regard our expense expectations going forward.

Yes. On the R&D side, I would say that the amount of this quarter is a more representative amount than the previous quarter. In the previous quarter, mainly, we had a relatively larger amount of government participation in R&D. But - and therefore, this one - this quarter is more representative. Going forward, I think that R&D as well as the other expenses will continue to grow gradually. Maybe even lesser in a smaller rate than this year. But, of course, they will grow and we believe it will be a declining percentage of revenues.

Okay. So, we would expect to see a continued increase in R&D in the current quarter?

Yes. Moderate increase in R&D.

And on the sales and marketing side?

I would say the same - moderate increases in expenses.

Are you going to be opening up any new offices or anything of that nature?

Actually, opening new offices - it something that helps us to have more business. And overall, we have, this year, have more 15 countries that we are selling in. And I would say that this year we have 11 new offices in the world.

You would like us to expect that you get a pretty quick return in terms of revenue growth on those openings.

Yes, of course.

Yes, okay.

It's - most of the time, we are realizing that we have a market somewhere and we are seeing business coming in and then we are opening an office and we have a local presence. And then, we will have business from there.

How much of your revenue is in unlicensed products?

In unlicensed, not that much. As a matter of fact, the 4858 is our first product in - of the unlicensed. We did have nice sale. But altogether, when I translate them into dollar terms, not the large amount.

Less than the 1500P?

Yes, substantially less.

Yes, of course.

And your high millimeter wave products, have they - have you started to see anything happening there?

We do see activity there. We are going through trials. We are going through - we do have some sales. But it's going step by step. It's a new product. It's a new concept. And it's taking more time. And I'm sure - but I'm sure that in '05 we'll have more sales than what we have up to now.

Thank you. That does conclude 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 remarks.

Ceragon has just reported record year results, with revenue growth of almost 60% over last year. This is quite an accomplishment. I want to thank our team for a job well done over the past few years, establishing Ceragon as a leader in its market. We are well positioned and consistently gain market share as a result of our superior product. In addition, we are benefiting from the growth in network capacity. Our advance technology solutions and geographic diversification will continue to enable us to grow and add wins.

I hope to update you on Ceragon's continued success in our next call. Thank you, everyone, for your time today.

Thank you. That does conclude today's presentation. Thank you for your participation and have a great day. You may now disconnect.