Ceragon Networks Ltd (CRNT) 2005 Q3 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Ltd. 3rd Quarter 2005 Quarterly Results Conference Call. Today’s call is being recorded, and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks, and Mr. Tali Idan, CFO of Ceragon Networks.

Today’s presentation will include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause Ceragon’s actual results to 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 20S, 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, CFO. Please go ahead, sir.

Thank you, Operator. Thank you all for joining us for our Q3 2005 conference call. Joining me today is Ira Palti. To anyone listening who may be new to Ceragon, Ira became CEO on August 1st, when Shraga Katz retired.

Today, Ira will share his vision for the Company, and discuss some of the elements of strategic plan. Then, as usual, he will review business developments in Q3. I’ll go over the financial results, and we’ll close with q-and-a.

Now, we’ll turn the call over to Ira.

Thank you, Tali. Good day to everyone participating in today’s conference call. I’m pleased to be speaking with you for the first time as CEO of Ceragon. After my 3rd month on the job, I’m pleased to tell you that I’m even more enthusiastic about our prospects than when I made my original decision to join the Company.

It has excellent products, with a strong position in the market. We see many exciting growth opportunities, and have an excellent theme to execute our strategy.

Q3, my first quarter, was a strong quarter for us, where we saw continued increase in revenue, and very strong booking numbers. We also saw an increase in price pressure on a number of large deals in our mix, which affected our gross margin.

Before we continue to talk about Q3 details, I’d like to spend a few minutes on strategy. I’ll discuss the trend that survived the wireless backhaul market, and then spend a few minutes talking about a strategy for extending our addressable market to additional applications.

In a similar infrastructer segment, worldwide demand for high-capacity backhaul continues to rise in response to growth from Fuji Converged Network – providing new data-rich applications and services that require more bandwidth per subscriber.

We are also benefiting from an increase of subscribers, and the build of new windshield [inaudible] mainly in emerging markets. Only cellular networks require high-capacity backhaul infrastructure.

In the United States, we see a trend toward similar-network operators using wireless backhaul as a cost-effective alternative to expensive leased line. Internet [inaudible] of all types, like [inaudible], are also part of the worldwide trend toward converged networks.

The demand for more capacity is also being fueled by a combination of subscriber growth, and the need for more bandwidth per subscriber. This is a result of new bandwidth-intensive IP-based multimedia applications.

[inaudible] and improvement in asset technologies and fixed broadband wireless networks are enabling lower-cost subscriber units – which, in turn, increase subscriber growth to wireless-type services.

Growth in subscribers, coupled with a growing demand for data-rich applications, plus streaming video and online gaming, also fuels demand for mid- to high-capacity IP wireless backhaul solutions.

There is also an unmistakable trend toward end-to-end IP-based wireless network. All converged networks of 3G or [inaudible] are or will eventually be IP-based. Ceragon was first to introduce products optimized for IP transmission, and we are continuing to work on more-enhanced features, to advance in the IT market.

Networks are converging. Voice and data are carried together over converged SDH IP network. Cell phones are enabling video, and laptops are shipping with Fuji wireless technology, as well as WiFi. Therefore, the distinction between fixed and mobile wireless networks is beginning to get [dirty].

With all these shifts taking place, there’s a very important point we want to emphasize. Our solutions are geared toward convergence. So we don’t have to make any big bets on active technology. The excess protocol or standard being used can be WiFi, WiMax or any of the favorites of Fuji.

We benefit from capacity growth in all types of converged wireless networks when the demand for additional capacity translates into the need for more high-capacity backhaul.

To give you a specific illustration of this point, we recently announced two deals for the same solution. Our FibeAir 1500 T – the high-capacity backhaul in two types of converged wireless broadband networks. One was a Pre-WiMax fixed wireless network, covering over 25,000 square miles in the Southwest United States, owned by AMA [Nextel]. Our FibeAir 1500 T solution was selected to upgrade and expand this operator’s existing backbone, to obtain high-capacity necessary for the WiMax side broadband-rich application.

Meanwhile, on the other side of the world – in Central Asia – an operating name [Act One] deployed the FibeAir 1500 T as the backhaul infrastructure solution for a UMTS TBB based 3G mobile internet network, then deployed to us [inaudible], in order to enable broadband connectivity anywhere including parks, cafés, and even vehicles in motion.

In addition to capitalizing on the growing demand for Converged Network, we also intend to expand our addressable market, in order to provide additional possible growth opportunities.

As most of you know, our current business is focused on the [inaudible] portion of the high-capacity SCH market. There has been market share over the past several years. We have a strong position in this segment.

In order to continue our strong growth, we plan to expand the boundaries of our current market by using our technologies for new applications. As a first step in the near future, we plan to introduce a new high-powered radio, designed and built for longhaul application.

In addition, we’ve been looking closely at certain mid-capacity applications. The border between high-capacity SDH and low-capacity TDH is more like a zone. In need of a specific solution for new, large-demand applications. Those are starting to appear as part of the requirements for backhaul of data and converged network.

Over the next few months, we plan to introduce a new IP product specifically for this segment, that extends our product reach into the mid-capacity zone. The products I have mentioned already is in trial with selected customers, and are results of extensive work over the last 2 years. So we will be able to handle this extension with a modest increase in operating expenses.

The final impact of this new product for new application will be to considerably increase our addressable market over the next 18 months. In terms of competition, we expect to see the same vendors as we meet in the high-capacity SDH segment.

Another important aspect of our strategy is the concept of continual design [inaudible] for existing as well as new products. We have set very aggressive cost-reduction goals for ourselves over the next several quarters, which are aimed at maintaining our current gross margin range. We look forward to providing additional details of the strategy, and the new applications I just outlined, as we move forward.

Meanwhile, before I turn the call over to Tali, I’d like to mention a few highlights of our major customers in Q3. One was Fiber Tower in the United States. They are one of the first wholesale providers of high-capacity backhaul services that US Cellular provided. The wireless carrier carrier.

Fiber Tower is in the process of deploying $5.3 million worth of our products. Part of this deal was delivered and recognized in Q3 – making them a 10 percent customer for the quarter. This extension of Fiber Tower’s network illustrates the trend I mentioned a moment ago – of using wireless transmission to backhaul application. Applications that have traditionally been served by expensive lease line.

This also demonstrates the re-emergence of wireless carriers, backhaul carriers, and carriers carriers in the United States market.

Our second 10 percent customer in Q3 was a government. Specifically, the Israeli government. This customer contributed to the strength of our private network segment. The application was for a military wireless network.

To summarize – our quarterly growth continues, and we are on-track to grow more than our original plan of 30 percent for the whole year. We expect to sustain a high rate of growth in 2006 and beyond – with improving profitability as the result of several factors.

Growing demand for bandwidth and converged wireless network application, a larger addressable market for us – both in capacity range and long-hold reach, innovative new products for new and existing applications, and continuous product cost reduction.

Now, I would like to turn the call over to Tali, to give a more detailed summary of Q3.

Thank you, Ira. Let’s go over the financials, now.

Quarterly revenues, again, reached a new record of $18.9 million – representing an increase of 30 percent compared to $14.5 million in Q3 last year, and a 5 percent increase over the previous quarter.

Revenue for [inaudible] operators accounted for 45 percent of revenue in Q3. Private networks accounted for approximately 75 percent of revenue. And fixed operators accounted for the remaining 20 percent.

As Ira mentioned, we have two 10 percent customers this quarter. One in the cellular network segment, and the other from the private networks segment.

Geographic breakdown of revenue remained unchanged, with Europe, Middle East and Africa accounting for over 50 percent of revenue – North America for about 25 percent – and Asia-Pacific and Latin America for the remaining 25 percent.

Our quarterly bookings have been strong, and increased for the second quarter in a row. Our book-to-bill this quarter is over 1 on higher revenue. We have good visibility, with more than one quarter’s worth of backlog.

Demand for our FibeAir 1500 P continues to grow – reaching about 40 percent of total revenue in Q3. For Q4 2005, we expect revenues to continue to increase – reaching $19 to $20 million, which puts us on track to exceed our goal of 30 percent growth for 2005 versus 2004.

Gross margin was 38 percent. This is lower than previous quarters, primarily due to lower pricing on large deals. As we have said in the past, our large deals tend to be more price-competitive.

Extending on the price mix of large deals during this particular quarter, we project gross margins will range between 36 and 40 percent during the next several quarters. Q3 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 continue to grow moderately in absolute terms – [product lines as a] percentage of revenue.

As a result of the lower gross margin, our profit for the quarter was $769,000, or $0.03 per share. As compared to $0.02 per share in Q3 2004, and $0.04 in the previous quarter.

Moving on to the balance sheet – our cash balance at the end of the 3rd quarter was $32.7 million. As we mentioned in previous quarters, we are on track to turn [test tube] positive by next quarter.

DSOs were 55 days.

Looking ahead to next year, our current market is expected to grow in the range of 20-25 percent, according to analysts’ market research. We believe that we can maintain our market share, and grow at the high end of this range.

In addition, as some of the new products expand the size of our addressable market, and begin to gain some traction, this will provide additional upside potential to this growth rate.

Now, we will open up the call for q-and-a.

[operator instructions]

Rich Church, Unterberg

Could you talk a little bit more about the gross margin decline here? I think we’ve been talking about competing for larger deals for a while, but we thought last quarter that we could keep the gross margins flat. Do you think this level is sustainable in Q4? Or does it come down further with these large deals?

We’ve been discussing it, I think, in prior quarters. I think we gave the guidance, although we see the gross margin moving forward. And we believe we’re staying at the same range.

I don’t think that the pressures are something that is new. But it depends on specific deals, and their mix. For the quarter and, we expect, moving forward to be within the range I indicated.

And are you saying this as the result of competition? Or as the product resale?

We see this as cost of competition. We see that more as an over-rule, where the largest [inaudible] get as far as the demand growth is largely due for [inaudible] to get more price pressures. And that’s too [inaudible] competitive, as well.

And Ira, you talked about investing to extend your product lines, and having some impact on Opex. Should we expect for Opex to go up from these levels? Or do you think you could offset that with some of the cost-cutting measure that you talked about?

First of all, let’s talk about the Opex. I think we mentioned that we expect to maintain with very moderate growth, the current level of the operating expenses. In addition, as I mentioned, most of the new products that we’ll be introducing over the next few months are already in customer trials. That means that most of the development work has been done over the last two year. It’s not something which is [inaudible] invest as an addition, right now. It’s an introduction phase into the market. So we don’t expect the operating expenses to increase significantly.

Could you give us any color on what the new product… Is this focused more at the lower end? Or is it a totally new-product category?

As we mentioned on the call, we are going in two directions. One is focusing on the mid-capacity. We find that the zone between our products, which are [SBH] and the low-capacity [TBH], there’s a mid-capacity zone.

Mainly in the IP market, where the demand is somewhere in that range, which simply means [inaudible] some products into that specific range, which are partially based on products we have today.

The other side – we’ll be introducing a high-power radio for longhaul applications, which allow us to compete in another segment of the market – in which we are less-active, today – which is longhaul types of wireless transmission.

Will these new products have higher or lower gross margins than your current corporate value?

We expect both to fall within the same range we indicated. And again, I think the major factor there will not be the products, themselves – although we do a continual cost and design costs. We’re very sensitive to that when we design a product. But as to the other side, it’s the pricing which depends then mainly on the deal side.

Kevin Dede, Merriman.

Congrats on the revenue growth.

Thank you.

Thank you.

Tali, could you just give me that little comment that you made on EPS? I missed that. For next quarter?

On revenue growth, I believe… Right?

No, I got revenue growth for next quarter. I just missed EPS and your discussion on operating expenses with regard to what Rich had said.

As far as operating expenses, I said that operating expenses are expected to grow moderately, in absolute terms – but continue and decline as a percentage of revenue. And then we spoke about guidance for our revenue range for next quarter. I’m not speaking about EPS guidance for next quarter.

Did you folks see any change in business activity, with regard to the telecom builds in the Gulf coast?

[inaudible] [crossing]

Mr. Dede, was there anything else you needed to ask?

Yes. I was curious as to whether or not they’d seen a change in business activity, with regard to the Gulf coast of the United States.

I think we lost the connection. Then I’ll say it again. We have seen – but not significant – changes in business. What we see is some of our customers, and specifically the one I mentioned, being involved in some of the projects of the rebuild in the Gulf coast.

Any change with regard to where you see carriers going on backhaul requirements with the changes to HSDPA and 3G networks?

Right now, from a backhaul perspective, it does increase the requirement for larger capacity. We see some of the people talking about larger capacity in some [rural areas], but more network. Right now, we don’t see that, yet – a shift toward IP backhaul, and the federal air carriers feel FPH, but there’s going to also become more and more converged.

The people who’ve spoken about it are shifting to IP backhaul. So that’s not expected in the short-range.

During the quarter, you put out a release regarding a WiMax work. I think it was in Texas. Can you elaborate on that deployment and the integration work that you might be doing there?

It’s a wireless carrier in Texas. It covers a very large area. In Texas, you have thousands of square miles. It’s not a pure WiMax, but a WiMax “kind” of network. They are extending this network, it’s been successful, and we were providing the IP backhaul for this method.

Is that work done in conjunction with the systems integrator? Or how is that whole network coming together?

The operator itself is building the network. Maybe using top contractors [inaudible] dealing with the operators.

Tali, could you just give us – I mean, you gave us a rough guide on where you think sales will fall out next year. Can you give us a little more insight on how you think expenses might fall out next year?

Well, I think in the same guidelines as I said. We are containing our expenses. We believe that the infrastructure of personnel that we have here is sufficient to continue and grow. Of course, we will have to grow the expenses, but only in a moderate way. So I believe that the overall… Although there will be a growth in dollar terms, we will be able to contain it as a percentage of revenue, as we will [inaudible]

Nice job.

Thank you.

[operator instructions]

Matt Robinson, Ferris Baker Watts.

Actually, it’s [inaudible] What was the headcount for this quarter?

Headcount was around 270 employees.

Sir, was there anything else you needed to ask?

No, thank you.

[Tony Trisani, Asheville Capital].

Could you maybe expand on the new products in the mid-range? How much… Could you give us a rough idea on how much it expands your adjustable market? Does it increase it by 50 percent? 100 percent? Thank you.

I’m not sure I can give you the exact number of the extension of the makeup of that. But our plan and the feeling is that the addressable market over an 18-month period… This is a product that [inaudible] introduced over time.

So probably double by the end of that period.

When do you expect the first revenue? Did you say second quarter?

First quarter of next year.

First quarter. Okay.

Products [inaudible] this quarter and we expect to have first revenues first quarter next year.

In the introductory remarks, you commented about a strong book-to-bill, et cetera. Do you feel you have better visibility going into Q4 than you had going into Q3?

Yes. This is true. We [inaudible] much better, with the visibility, as compared to the previous quarter. And even the one before.

I guess looking at the breakout of your numbers, it looked like the cellular dropped in the quarter, sequentially, from the June quarter. But your non-cellular, which included mostly, I guess, the private networks… I think that increased. Is that correct?

Correct. Yes. Right.

Is that just because you had some large deployments in the second quarter in the cellular area? Some of those bigger projects winded down? And do you expect, moving forward sequentially, do you think both areas have the potential to grow sequentially into 4th quarter?

I think that the cellular segment – which is a major segment – was growing steadily quarter-after-quarter. Probably, the previous quarter, was a little bit higher than usual. I’m not sure if there is a very specific explanation for the change. But I think the share of the cellular is quite normal. About 45 percent. It’s definite a segment that is growing very nicely.

Fixed operators were probably higher than usual this time. A few large deals that we had.

I guess final question is, “Longer term…” Like 3 or 4 years out or whatever timeframe you want to state. Is your long… Can you talk about your long-term operating model? Do you think you can get operating margins in double-digits?

Yes. We definitely plan to get our operating margins into double-digits. I think that when we pass $100 million in revenues, we can do that.

Congratulations on your progress.

Thank you.

[operator instructions]

Rich Church, Unterberg

Could you give us the specific percentages for the two 10-percent customers? Or if not, can you tell us what the two added to, as a total percent of revenue?

I’m not sure I have the numbers here. They were not significantly about 10 percent. If you’re thinking about the high tens or the twenties – no. They were in the low 10s. I don’t remember, exactly.

And those two projects – do you expect them to remain 10-percent customers in the Q4?

I believe there’s one of them that’s a good candidate to be a 10-percent customer again.

Is that on the cellular side?

Yes.

Then with regards to the trials with the new products. Can you tell us how many trials are going on? And which… Is it both the mid-range and the high-power radio/ Or is it just the mid-range product?

We’ve been trying both products out. For the mid-range, we have a few customers. But there’s no installation for the high-power. We have a [inaudible] going with a customer. And we do plan to expand at least one additional customer this quarter.

Do you expect first revenues in the first quarter for both of those products?

Yes. We expect revenues for both of those products in the first quarter.

Gentlemen, it appears we have no further questions at this call. I’ll turn the call back over to you.

I’d like to thank everyone for participating with us on the call. I look forward to speaking with you both on a 1-to-1 basis over the next few weeks, and then again in the fall, next quarter. Thank you very much.