Ceragon Networks Ltd (CRNT) 2005 Q1 法說會逐字稿

Good day everyone and welcome to the Ceragon Networks Ltd. first quarter 2005 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 under the Private Private Securities Litigation and 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 call over to Mr. Tali Idan, Chief Financial Officer. Please go ahead, sir.

Thank you. Thank you for joining us for our Q1 2005 conference call. Shraga will review the quarter and give you a status report then I'll go over the financial results and we'll continue with Q&A. Now I '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 the first quarter of '05. Q1 was yet another quarter of growth for Ceragon, with revenues and earnings reaching record levels. Our revenues increased 5% sequentially and 48% year-over-year to 16.8 million as compared to 11.4 million a year ago. While EPS gaining $0.03 as compared to breakeven a year ago.

Our innovative technology platform and strategic focus position Ceragon as one of the world's leading vendors of high capacity wireless networking solutions with a growing share of the market. Our customer base has expanded to over 100 mobile and fixed operators including over 35 cellular carriers covering all the continents.

To name just a few, AT&T and Cellular One in the U.S., Teleto and Sonofon in Europe, Cellcom in Israel and Bharat in India. Geographically, we are encouraged by the renewed growth in Latin America and in particular in Mexico, which today represent an attractive opportunity for network buildout.

The number of subscribers and with it the demand for capacity is growing and we are seeing rapidly developing communications infrastructure including both cellular and fixed wireless.

Another exciting development relates to the emerging WiMAX market. Ceragon was chosen by a European operator to provide the backhaul transmission for its WiMAX-ready wireless access network. We already have a number of other customers to whom we provide backhaul for their point-to-multipoint network, but this marks for the first time our providing backhaul for WiMAX, which we see as a significant opportunity for Ceragon going forward.

In the private networks segment, our advanced technology incorporating IP, ATM and network security, has made Ceragon the preferred provider. During Q1 we announce a major private network deployment to KDZ, a regional municipal service provider in Germany. This project includes installation of 140 fiber systems. KDZ operates an ATM1 wide-area network providing voice and data to more than 20 sites.

Some of you have asked me about our technology advantage and for that differentiation. Here is an example of how we maintain our edge. XPIC -- Cross-polarization interference cancellation capability which we have previously talked about, is responsible for several important wins this year. XPIC allows the simultaneous transmission of two separate data streams on two polarizations of a single channel.

Ceragon is a leader in XPIC solutions. In fact, we believe we are the only vendor who currently provides a working solution of XPIC in a street-mount configuration which we have commercially deployed in -- to numerous countries around the world. This is especially advantageous for operators who have limited spectrum and can now increase spectrum efficiency expense service and significantly improve their ROI.

This example demonstrate the strengths of our talented R&D team resulting in our ability to focus on providing customer values through unique technical breakthroughs. XPIC is an integral part of our new offering, the 1500P which continues to gain acceptance. Shipments of 1500P are growing and represented 25% of revenues for Q1.

Looking ahead, we continue to benefit from the strong market rivals. We intend to capitalize on global expansion of network capacity and the increasing deployment of 3g networks. In addition, we are committed to expanding our [search] channels and partnerships and introducing additional new and innovative products. And, now, I'd like to turn the call over to Tali for the financial update.

Thank you, Shraga.

I am pleased to report strong results for Q1 2005. Quarterly revenues grew for the fourteenth consecutive quarter, reaching $16.8 million, representing an increase of 48% compared to 11.4 million in Q1 '04 and an increase of 5% over the previous quarter.

Cellular operators contributed approximately 45% of cellular revenues again this quarter, fixed operators were close to 30% and private networks, the remaining 25%. This quarter none of our customers represented more than 10% of revenue for the first time in our history. I want to point out that our revenues continue to grow without being dependent on any large customers.

Geographic breakdown of revenues was as follows. Europe, Middle East and Africa come to approximately 45% of revenues. North America for about 25% and Asia Pacific and Latin America's portion grew, and contributed the remaining 30%.

Booking in Q1 was somewhat lower than Q4 which reflects the normal seasonal trend. Still, our backlog remained substantial and we see no change in business conditions.

Our guidance for Q2 revenues is 17 to 17.5 million. We are reiterating our 2005 guidance for approximately 30% revenue growth over 2004. In Q1, '05 gross margins for 40.3%, a generally sustainable level going forward. As revenues continue to grow we are keeping expenses under control in line with our plan.

During Q1 net R&D expenses were slightly higher than planned because we added a few key people. R&D expenses are likely to remain at a similar level to Q1 for the rest of the year. The rest of the operating expenses are expected to grow moderately over the course of the year. But will decrease as a percentage of revenues.

Earnings have improved consistently for the last three years and we recorded a profit of 834,000, or $0.03 per share in Q1 as compared to breakeven in Q1, 2004. With revenues growing faster than our expenses we expect the growth in net income to continue in 2005.

Moving on to the balance sheet. Cash balance at the end of the fourth quarter was $36.8 million. We anticipate seeing some additional negative cash flow in the next few quarters as we [found] our growing business towards becoming cash positive by year end. DSOs for 56 days.

One more note before we move to Q&A. In the future, we plan to start our conference call earlier, at 9:00 a.m. Eastern Standard Time. I trust that this will be convenient for all of you. Now we will open up the call to questions.

[OPERATOR INSTRUCTIONS]

Our first question today will come from RBC's Michael Friedman. Please go ahead, sir.

Hi, guys. Great continued work.

I have a question for you. In light of the fact that the market is not giving us tremendous credit for the progress that were making, and in light of the fact that we have 36 million in cash, and I assume that even if you draw down a little bit in the next quarter or two, it's not going to be a significant amount, but it seemed to me if we even deployed a third of the cash into share repurchases you could buy back 10% of the stock.

I was wondering if that is something that the board has given consideration to. I know cash is strategic but you haven't really done any acquisitions. I think your product line is pretty robust and I can't imagine a better value than your own stock at these levels. I was just wondering if you have any thoughts on that.

Well, the truth is that we have not considered it. Right now we are still using a little bit our cash flow, fueling the growth. But this idea has not been raised up. I don't think that -- it's unlikely that it will be raised and positive answer, our positive action will be taken.

Okay. Thank you. And then, just a second question.

Could you talk about the timing of the KDZ contract revenues? Was there much in the first quarter and can you just give a sense of how long those revenues will run in over, whether it's kind of the next quarter or two or three quarters? Thanks.

This project we really announced when it was done, almost done. They didn't let us announce it before. So most of the revenues are revenues that we have recognized in the past.

Okay. Thank you.

Thank you.

And our next question today will come from Ehud Eisenstein from Oscar Gruss. Please go ahead.

Yes, hi. Good work on the 1500.

Can you tell us again on the booking this quarter, and a little bit elaborate on the backlog, is it still more than a quarter ahead? And also if you can just repeat the names of the operators, I heard Cellular One, AT&T. If you could just repeat the list, please. Thank you.

Okay. Hi, Ehud.

Hi.

I will start with repeating the names. It's probably quicker. We mentioned in the U.S. AT&T and Cellular One. We mentioned in Europe Teleto, this is a Swedish company and Sonofon. We mentioned Cellcom in Israel and we mentioned Bharat in India.

And none of them was 10% clients in the quarter?

We did not have any 10% customers this quarter for the first time in our history.

Okay.

Regarding your question about booking-- so we said that booking was weaker than the previous quarter, weaker than in Q4. And then I said that we have seen in it in previous year as well. So the bookings of Q1 '04 were also weaker than the fourth quarter of 2003.

And we believe this is kind of a seasonality issue, usually customers or companies in the first quarter are still -- the administrative work just to prove the budget, slower in issuing purchase orders. We usually don't have seasonality in revenues but we do have some kind of seasonality in booking.

The backlog is still substantial. You asked if it's more than a more than a quarter and the answer is yes, it is more than a quarter. Even though not everything is for shipment and recognition in Q1 and some of the revenues will also come from orders which will come during the quarter which is the normal way we operate.

Okay.

You mention additional growth in Asia and Latin America. Do you see weakness in other geographies? Or what is contributing to the growth in Asia or Latin America?

We don't see weakness in other regions. We do see some good work that we did in regions that -- before we were doing less and good and we were mentioning Latin America and Mexico. So it's to be diversified is good and we don't see weakness in other regions.

Thanks. And, I kind of missed the -- what you said about WiMAX

Actually what we were -- what I was saying about WiMAX is that we were chosen and we were deploying system as a backhauler to network that are WiMAX-ready. So actually when you take WiMAX and access technology and whenever you want to build the network you need the access technology. And this can be point-to-multipoint or a WiMAX technology and then you need the IP backhauling, and we have installations -- installation in a network that has a WiMAX-ready product and we are doing the backhauling.

And I can guess that this is in Latin America?

No, we said -- I don't know if we said it, but this is in Europe.

Excellent. Thank you and good luck.

Thank you.

Thank you.

And our next question today will come from Matthew Robison from Ferris Baker and Watts. Please go ahead, sir.

On the cash were you just talking about building some more inventory and letting receivables go out a little bit, or are you going to do some -- do some investment in property in plant and so forth?

Basically we do see additional growth in inventory and additional growth in receivables. I'm happy to see that this quarter revenue -- I'm sorry, inventory grew at as much much smaller rate than in previous quarters and we are putting efforts in this. Nevertheless it will continue to grow somewhat and yes, receivables will probably also grow.

Is the inventory growth going to be a function of acceptance levels of finished goods that you're shipping into the field and been waiting for acceptance?

You're right. This is one of the factors. You're right.

So, it's really going to be kind of a deliberate move to get customers engaged and execute on those -- those -- your business funnel.

This is one of the factors. I'm not saying it's the only factor but it is one of the factors. Also the growth is the business is growing --

You're not seeing any scarcity, are you?

No, we don't.

Now in the -- why -- are you expecting receivables DSO to increase? You're going to have to give new different kinds of terms to your customers do you think?

I think somewhat an additional increase in receivable and somewhat increase in DSO in the near future.

Those correlate with the business down south of the border?

I'm sorry?

Will those correlate with the Latin American business?

No, not necessarily, but we see some larger deals with somewhat larger or extended payment terms, longer extended payment terms. But nevertheless, let's not -- I would like to point out that the level of DSO currently and the level of receivables currently in this quarter is the same as in Q3 and in Q2.

Oh, yes, yes. It's in your range, no doubt.

Right.

But I think that for the near future, for the next two quarters, we may see some increase which is related to the [inaudible].

Do have any scenarios where you've taken terms rather than reduce price? In a competitive situation?

It's usually a competitive situation.

I understand that, but have you gone that route?

It depends on the needs of the customers sometimes. The solution to get the deal, yes.

Okay. And then can you talk a little bit about the U.S. market? It's always -- it's never been a particularly exciting market on the public side, but there's some signs it seems like that may be changing on the carrier side. Is there -- are you seeing that all?

We are having business in different segments, the private networks in the U.S., it's private networks that can come from different segments.

We have -- we are standing very nice in the private network. We have announced Cellular One and we have also other customers that are providing infrastructure to [inaudible] carriers to cellular operators and we have such customers as well.

Okay. Tali, just to not flavor it too much but just to go back a little bit on this -- on -- on the commercial terms. Are you -- do you expect to be using longer payment schedules as a -- as a negotiating point more than you have in the past?

I do see -- yes, I do see the need to give longer terms to get deals. Right, So it may be more than in the past, yes.

Okay. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

At this time will turn to Unterberg Towbin's , Rich Church. Please go ahead, sir.

Thanks. Tali, just to follow on the -- with regards to the payment schedules, can you indicate if it's certain vertical markets or is certain geographies where it's more necessary to do that than other areas?

I would say it's more relevant or we see it more in larger projects. And larger projects can be in various geographies. I wouldn't say particular geography, I can see it in different places from time to time.

Larger projects with well-funded customers, presumably?

Yes.

Okay. And Shraga, could you talk about the -- whether or not you're seeing an increased interest level for the higher mebagit capacity systems, are we starting to see a takeup of the 622, and what is the trend there driving that?

I was speaking about the XPIC technology and the XPIC technology actually enables the cellular operator to have two times 165 megabit. So actually takes it to 311. A year ago all the installations were 155.

What we see is that customers, cellular operators mainly, that were installing 155 megabit a year ago, today want to expand it to two times. And we are seeing more and more installations of two times [50 and one] actually, 311 megabit per second. I'm not yet seeing 622, but I do see more and more 311 megabit per second.

Moreover, and this is for the cellular operators, for the private networks, what we have for a long time a solution for two times fast ethernet, and two more times [inaudible] and this is solution that we have and we do see demand there as well. So actually I would say that the capacity demand is growing and I wouldn't say that it's on the 622 level.

Okay. Great.

And then you had mentioned that there are some new products that you'd been working on. I'm just wondering, can you give us any color on that and also would you contemplate entering the super PDH market what's your feeling in that?

Actually we have come with additional platform to the existing platform that we have, the 1500P, and it's a wonderful product, a wonderful platform. It's -- it's of the functionality that we have in this -- with this product helps us a lot. We have to -- to add more -- more functionalities to this platform and this is our main task.

I would say at that point that we have other developments in place that will -- will [inaudible] new products that grow our [inaudible] market and we will have some of -- we will keep it for the future.

Great. So you did a nice job on the gross margin side. Could you comment on how the pricing environment is holding up? I think we've talked in the past about sort of price erosion in the 10 to 12% range on the year-over-year basis. If you can indicate if there's been any change here recently?

I would say that we belive we are living in such an environment of 10 to 12% erosion a year, and we have not seen any changes in this trend.

Okay. Great. All right. Thank you very much.

Thank you.

Thank you.

And at this time we will take the final question in our queue with Lawrence [Ford ]with [Reborn]. Please go ahead.

Yes. Good afternoon.

Just wanted to -- to know if your quart-- your quarter was more backend loaded than last year our how linear the revenues to quarter was? Thank you.

Usually our quarters are linear and this quarter was the same as usual.

Thank you.

You're welcome

And at this time there are no further questions. I would like to turn the call back over to Mr. Katz for any additional remarks.

I would -- I want to thank everyone for your time today. Goodbye, thank you.

Thank you everyone for your participation that does conclude today's conference.