Ceragon Networks Ltd (CRNT) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Ceragon Networks second-quarter 2005 quarterly results conference call. Today's conference 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 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 report filed with the SEC. Web users can visit Ceragon at www.ceragon.com to read the complete forward-looking statements language.

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

Thank you for joining us today for our Q2 2005 conference call. Together with me today are Shraga Katz and Ira Palti. As you know, Shraga, Ceragon's founder and CEO, will be leaving at the end of the month, and Ira will begin his tenure as CEO as of August 1st. Shraga will now review the quarter, give you the update, and then I will go over the financial results and we will close with Q&A. Now I will turn the call over to Shraga.

Thank you and good day to everyone participating in today's conference call. Q2 was yet another growth quarter for Ceragon with revenues and earnings reaching record highs. We recorded revenues of $18 million as compared to $13 million a year ago while EPS was $0.04 as compared to $0.01 a year ago.

Ceragon's main growth driver continues to be the cellular backhaul segment. We have already won over 40 cellular customers. To name just a few Tele2 in Sweden and in Russia; SONOFON in Denmark, tele.ring in Austria, Cellular One in the US, Bout (ph) India, Cellcom Israel, Telcel in Mexico, and MIK Tanzania (ph) in Africa.

I would like to share with you some new developments.

We mentioned in our last call the renewed activity we're seeing in Latin America and Mexico. Telcel, which is the largest cellular operator in Mexico, and part of the incumbent Telecom group of (indiscernible) has been a customer of Ceragon for more than three years. During this period, they upgraded their network and extended it into new regions using SDH links for the backhaul infrastructure. Telcel's network was planned and built to allow smooth and easy upgradeability, utilizing Ceragon's unique solutions as their capacities further increases in the future.

Another interesting and large customer I would like to tell you about is MIK Tanzania (ph), a leading cellular operator in Africa. If Q2 we completed this large full turnkey contract to build both backhaul and backbone across the country. We provided an end-to-end solution and supplied both wireless infrastructure equipment, as well as installation service. MIK Tanzania is part of the Mericom (ph) Group, operating in numerous countries worldwide, several of which have become customers of Ceragon.

Sales to cellular operators represented over 50% business in Q2. And we are fast approaching the milestone of $10 million of cellular business per quarter. We see this growth trend continuing as cellular operators upgrade existing networks to increase capacity, build new networks primarily in developing countries and begin to provide 3G services. About 20% of cellular operators worldwide have begun to deploy 3G networks and Ceragon will benefit greatly from these upcoming build outs.

We're also making good progress in our private network segment. This segment consists primarily of data networks based on IP. Ceragon has an added advantage in this area because of our leadership position in high-capacity IP and we will continue to capitalize on this advantage.

In line with our ongoing strategy to expand our product line we announced the FibeAir 4849, a new addition to our 4800 family of products. Recently, the 4.9 GHz band was designated in North America for public safety. Agencies including police, fire departments, municipalities and counties are beginning to use wireless equipment for security applications such as video surveillance backhaul, video streaming transmission and data and voice. Our FibeAir 4849 responds to these homeland security needs. The 4800 family of products provides carrier class IP as well as TDM for traditional voice service at maximum rate of 48 Mbps.

The FibeAir 1500P continues to gain traction in the market, meeting customer needs and reaching over 35% of revenues in Q2. We recently started shipping the 1500P systems with a new important capability, the capability to transmit 311 Mbps over a single radio carrier. Several systems have already been deployed and our customers can now use only one (indiscernible) to transmit a full 311 Mbps, thereby improving their ROI.

Now on a personal note, I would like to take this opportunity to thank the Ceragon team for their excellence over the last years and to those listening to the call for your interest in and support of Ceragon. With the support of customers and shareholders we have become one of the world's leading suppliers of high-capacity wireless solutions. As my role shifts from day-to-day management to consultant and founding shareholder of the Company, I am leaving behind an outstanding organization that is well-equipped to sustain growth and capitalize on the many opportunities. Ira is a very capable executive with an extensive relevant experience. I look forward to seeing Ceragon achieve new levels of success under his leadership. Now I would like to introduce him and ask him to say a few words. Ira?

I'm very pleased to be joining the Ceragon team. Through this transition period I have been speaking with many people both inside and outside the Company. It's clear that we have great opportunities and a very capable team. I'm looking forward to leading Ceragon for the next phase of its growth and to speaking with you at our next quarter's call. Together with Tali, I hope to meet face-to-face with as many of you as possible in the coming weeks.

Now I will turn the call back to Tali.

Let's go over the financials now.

I'm pleased to report continued strong results for Q2 2005 in revenues and net profit. Quarterly revenues grew for the 15th consecutive quarter, reaching $17.97 million, representing an increase of 38% compared to 13 million in Q1 2004 and 7% over the previous quarter. Cellular operators contributed just over 60% of our revenue this quarter with six operators and private networks approximately 25% each.

Over the past several quarters, in line with our strategy, cellular business has become the main area of growth, both in absolute terms, as well as a percentage of revenues. We expect this trend to continue as demand for high-capacity connectivity in cellular networks grows.

In the private network sector our business is relatively stable and we expect this pattern to continue.

We're seeing good customer diversification. In this quarter we had only one customer representing over 10% of our revenues, MIK Tanzania, which Shraga mentioned previously.

Geographic breakdown of revenues was as follows. Europe, Middle East and Africa accounted for over 50% of revenues, North America for about 25%, and Asia-Pacific and Latin America for another 25%.

Our quarterly bookings have increased as compared to Q1 and our general visibility has improved as a result of a growing pipeline of opportunity. For Q3 2005 we expect revenues to continue to grow to between 18 and $18.5 million.

Looking ahead into 2005 as a whole, given our strong performance in the first half and the outlook for the second half, we are increasingly confident in our prior guidance and we believe we will grow our revenues by at least 30% over 2004.

Gross margins were again strong with 40.1% and in line with our expectations. We believe that they will remain at about this level going forward.

Operating expenses were in line with our plan and we have kept expenses under control. We will continue to monitor our expenses and we expect them to only moderately grow in the second half of 2005 in absolute terms, but decline as a percentage of revenues.

Profitability has improved consistently for the last three years and we recorded a profit of $1 million or $0.04 per share in Q2 as compared to $0.01 in Q2 2004.

Moving on to the balance sheet, cash balance at the end of second quarter was $35.5 million. DSOs were 53 days. While we anticipate seeing negative cash flow next quarter as well, we target turning cash flow positive in Q4 through a combination of increasing operating leverage and improvement in working capital management.

And now we will open up the call for Q&A.

(OPERATOR INSTRUCTIONS) Rich Church, Unterberg, Towbin.

Thanks and nice quarter, guys. Shraga, sorry to see you go. A couple of questions on the cellular side. Can you give us an update on -- I know there was a lot of talk last quarter about larger deals. Have you seen some of those deals close? And could you talk about what new opportunities you're seeing and maybe geographies that are strongest?

Actually, what we have seen in the last quarter is that our business in dollar terms and in percentage is growing in the cellular backhaul. We have mentioned that customers, some of the customers we have more than what we've mentioned and we (indiscernible) through all the continents throughout the world. We won projects, and we won deals, and we have partners, and overall the business is growing. I don't have right now any big announcement to do that is specifically for this quarter. I would say that the booking is very good, and we're seeing good visibility from the cellular backhaul market.

Deferred revenues came down this quarter. Obviously that's not impacting your visibility. What should we read into that, completion of new projects?

Right, it's a completion of a project. As a matter of fact, it's a project that Shraga has described that was relatively longer than we usually have. And the completion of this project has reduced the deferred revenues.

Tali, can you talk about gross margin? I think in the past we've talked about as the 1500 becomes a greater portion of total revenue that would help gross margins improve. But you're saying that you expect them to be relatively flat with the current level.

Yes. As you know, there are several factors that are affecting gross margin, and the mix of product is one of them. That's the one that you mentioned. And of course there is the mix of deals. And the many times larger deals tend to have lower prices. And overall if we take internally into account all those factors, this is what we're seeing at least for the near-term around 40%.

The sales and marketing line was up a bit more than I expected, about 10-ish% sequentially. Can you just talk about what's going on there?

This is mainly a building out the selling infrastructure or adding to the selling infrastructure relating mostly to our sales offices. We added personnel, both sales and support personnel, to these offices mostly I would say in Asia and Latin America where we want to grow the business more.

Do you think that will be flat next quarter, or will it continue to grow at that level?

No, I think it will be -- I said before only moderately grow. So it's kind of flattish to moderate growth.

Okay, thank you.

Matthew Robison, Ferris Baker Watts.

This is actually Mark Donahue (ph) for Matthew Robison. Just a question on inventory. We saw that rise by about, I believe, 10 million sequentially. I was wondering if you could give us a little bit color on that.

Inventory has stayed flat sequentially. I'm not really sure (inaudible). Overall I think inventory is staying very flat for the last three quarters, so I think this is definitely encouraging.

Okay. Last quarter you mentioned giving some deals around terms. Is that something you guys are still doing? Do you expect to see an increase in accounts receivable because of that?

You can also look at accounts receivable and say that they're flat in spite of the growing business. And DSO are also flat (indiscernible) even improved. But there is no -- accounts receivable are not (indiscernible). Specifically to the extended payment terms that you're asking about, this is a very small portion of our business. We are very careful about it. And it has not grown compared to the previous quarter.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) Ehud Eisenstein, Oscar Gruss.

Nice numbers, guys. On the cellular side, can you break it down between new and existing customers, and also be more specific about the different geographies? Do you see more in the international market or in the US?

You're talking about cellular? Well I would say, first of all regarding new business and existing business, existing customers, probably 80% business is coming from existing and about 20% is coming from new customers.

As far as the regional distribution, for us cellular business in the US was traditionally low, but I am proud to tell you that the cellular business for us in the US is growing. And we project that it will continue to grow. So we see more wireless backhaul in the US than we have seen before. Companies are more willing to replace fiber backhaul with wireless backhaul because they see it is more economic.

Excellent. And when we obviously heading into exceeding the 30% growth target for 2005, and I remember that in the past you communicated about the next year, any thoughts on that?

I would say for next year I would use the market growth numbers that are out there.

Which are?

What we have seen, there is various researches that we have seen are targeting 20 to 25% growth.

So you believe that you can meet those numbers next year?

We believe so, yes.

Excellent. Thank you. And Shraga, if I may, lots of luck with your future plans. Thank you very much.

Greg Weaver, Kern Capital.

Nice quarter. Could you tell us what the installation revenue was in the quarter?

Sorry, what kind of revenue?

Installation revenue. I'm trying to get a sense of -- you mentioned on that large job you did the install as well. Obviously it's probably not a broken out line item, but just to give us a ballpark here.

When you do a project that you have a combination of products of your own, third-party equipment, and then you have installation. The installation is a small portion of the project, and for sure it's a small portion of the overall revenue of the quarter.

Would you say it's fair to say that your cellular business, because I guess especially now the size of the deals are getting bigger, are generally lower margin?

Overall, you can say that whenever a project is big, then it might happen that the prices would be lower. As Tali mentioned before, it's a combination -- we have the 1500P that has the lower cost, we have the mix of projects geographically, we have the size of the deal. So overall together it gives us the 40% gross margin.

Right, you had a nice sequential increase in 1500P, right, from 25 to 35% revenue?

Yes.

And your margins were down ever slight, but still a little this quarter. So I'm just trying to rectify that.

It's a combination of the price. It's also third-party equipment. With third-party equipment the markup that we're doing, you can do as a markup. But there is something that is common to do. So the third-party and the P and the big deals, so it's altogether create this number.

I'm assuming the book-to-bill in the quarter was greater than 1?

Book-to-bill in the quarter was better than the previous quarter. It was not greater than 1, but I would say during the last three weeks of July we have booked additional good business. Right now we feel very comfortable with the backlog that we have.

Okay. And could you maybe talk a little bit more about the 4.9 product in terms of is that an OEM product, kind of like the other stuff you were doing before in the lower frequencies? And also maybe talk a little bit about what's going on at 60 G.

The 4.9 GHz side is a part of the 4800 family and a part of -- the 4800 family, it's a family that we're all in. And this is a new frequency band that is operating the new market, and we hope to gain business there. For the 60 GHz, just a reminder, it is a relatively short distant high-capacity Gigabit Ethernet. We do see business there. We do see more installations. But it's only the beginning and it's not -- it doesn't have a lot of meaning in the revenue stream right now.

Okay, thank you very much.

Rich Church, Unterberg, Towbin.

Could you comment on private networks? It looks like they were down a little bit sequentially.

Yes, this is true. We have seen some decline in private networks, and I would say it's coming mainly from declining in government spending, public spending. This is what we're seeing. Our experience in the past was that government spending is fluctuating, not very stable. But this is what we've seen this quarter as the main reason for the decline.

Do you think this can grow going forward, or is it just lumpy type business?

It's lumpy, and so we feel that it can grow and it can decline. Right now in the last quarter it was declining. So the pipeline shows that we have business in the private network. We have a very good product. And we have, you know, many distributors that help us in this market. We have also system integrators that we work with. So overall the potential is there.

With regards to the third-party resale, could you tell us what percent of revenue that was?

The percentage of revenue was about 10%.

Do you expect that to increase going forward, or --?

No.

And then just lastly, in terms of the metrics on the expense side and given your revenue guidance, it looks like the EPS is likely to be flat sequentially. And I just -- I hate to bring this up because you haven't given guidance on that, but I just wanted to make sure I wasn't off base with that.

Overall, the target, and it is still the target, that we have given the guidance of the revenue, and the target of the Company to improve the bottom line.

Okay, thank you.

Kevin Dede, Merriman.

Congrats on the quarter. Shraga, it's going to be a wee different story I guess without you, but thanks for your great contribution. Tali, did I understand you correctly; did you say that your cellular customers are replacing fiber backhaul with wireless?

I said that there is -- we see a trend in the US that seemed (ph) more wireless. Some of it is really switching or replacing from fiber to wireless.

Okay. Can you give us an indication on how you see 3G affecting your cellular business? Is any of that related to Verizon's roll out or the 3G implementations in Europe?

We're seeing -- when we say 3G we mean applications like EDGE, EVDO and the installation of wide band CDMA and so. And we are seeing it in about 20% of -- actually it’s happened in 20% of the cellular operators. This is also the percentage that we're seeing with our customers that we're installing the equipment. So I would -- whenever we have a customer that is using this technology of 3G, it increases the capacity needs, and therefore they are increasing their capacity in the network. It mainly happens outside of the US and it is less related right now to the US.

Do you see some of these customers replacing existing radios and upgrading to the 1500P?

Actually what happens is that most of the installations are with existing customers. It's actually adding SDH rings to an existing network. Sometimes it's also a part of course it's a new network. So they're starting with SDH. So it's actually adding SDH links to their connectivity to the base station. It's other times PDH. So actually building backbone that is based on SDH, and than connecting with the PDH radios to the base stations.

Do you still feel you're on track for 50% of sales from the 1500P at the end of the year?

Yes. Actually, the 1500P percentage is growing. We're adding more and more capabilities to the product, and it's a successful -- it's a product that has success. Just a reminder, we have the XP (ph) technology, we have other technologies with this same product, many advantages. And cellular operators like the product very much and this is a driver for ourselves to the cellular operators.

Was there any change in the geographic breakdown? I for some reason lost my notes from March quarter. You had 50% in EMEA. Was that any different than what you saw in March?

Not really a big difference between the quarters. Sometimes you have a project here and there. I wouldn't say that there is a big change from the different regions.

So if you are expecting your third-party retail business to maintain relative 10% of sales, you're not expecting a lot of sales in the 4.9 or 60 G product lines then for the balance of the year (multiple speakers)

I didn't say the third-party is the 4.9 and the 60 because I was more relating to the projects that we did, having such projects here and building a turnkey, a network you are using new radios for the high capacity. And you have other needs in this building (ph) network -- in the network that you build. And then this is the third party. The third party, we don't have 10% of revenue coming from the 4.9 or from the 60 G.

And it includes PDH as well, is what you're saying?

Yes.

Okay. What would your outlook be for 4.9? Do you have an indication on how you see things --?

It's a new frequency band that is being designated in the US, and it's homeland security market. And it looks like there is a potential there to say how much is it, I don't know. But we have a good product. It's actually giving the connectivity for voice and data IP and TDM working in this specific frequency band. We have a very good distribution channel in the US, and I hope to have more business coming from this frequency band.

Thanks very much, gentlemen, and nice job in the quarter.

That appears to be all the time we have for questions. Mr. Idan, I will turn the conference back over to you for any additional or closing remarks.

Thank you. Shraga, I would like to take this opportunity on behalf of all of us at Ceragon to thank you for leading the Company to where it is today. We all wish you much luck in your future endeavors.

Thank you, everyone, for your time today.

This does conclude our teleconference for today. We would like to thank you all for your participation. You may now all disconnect.