Ceragon Networks Ltd (CRNT) 2005 Q4 法說會逐字稿

Good day everyone and welcome to the Ceragon Networks Ltd. Fourth Quarter 2005 Quarterly Results Conference Call. Today's call is being recorded and will be available on Ceragon's website until February 16th, 2006.

Today's call 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 risk 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.cergaon.com to read the complete forward-looking statement language.

I would now like to turn the meeting to Mr. Ira Palti, President and CEO. Please go ahead sir.

Thank you [Cindy] and I would like to thank everyone for taking the time and joining us for our Q4 2005 Conference Call. Joining me today is Tali Idan our CFO. Today, in addition to going over our fourth quarter results, we would like to discuss forecast plans, our business strategy, including new product and cost control measures and information about our target operating model.

Our Q4 results continue to reflect the positive market trends that we spoke about in our last quarter. We continued our top line growth reporting another quarter of record revenue. Our booking numbers continue to be very strong again this quarter. Higher revenues enabled us to improve our pro forma EPS before charges to $0.04.

Now based on our strong performance, let's review the relevant market trends which are supporting us. In developed countries, growth in next generation convergence networks is fueling growth in the form of demand for high capacity backhaul. In the cellular infrastructure segment, [indiscernible] continue to expand the 3G networks, like for example, the EVDO networks we have all been hearing about. Those networks are being built in order to provide new data reach applications and services that require more bandwidth per subscriber. We continue to benefit from the increase in subscribers and the building of new [Winfield] cellular networks especially in emerging markets. This plan is affected in our geographic breakdown in Q4 with a strong quarter-to-quarter increase in Latin America. In the U.S. we continue to benefit from the trend of cellular network operators moving toward using wireless backhaul as a cost effective alternative to extensive lease lines. As we mentioned in Q3, Fiber Tower, one of the first wholesale providers of high capacity backhaul services for U.S. cellular providers is deploying several million dollars worth of fiber radios as an alternative to expensive lease-line. Fiber Tower was a 10% customer again in Q4.

Those of you who attended the WCH Trade Show in San Jose a couple of weeks ago so as we did, the growing interest in wireless backhaul in place of fixed line. The market is heating up among all types of operators including wireless Internet service providers, WiMAX network operators and WiFi municipal network operators. According to one industry analyst, there are over 100 municipal broadband networks in operation around the world and 400 more cities are in the planning phases.

High capacity backhaul is our specialty and we see excellent goals in this area going forward. During Q4 we [based] the strength of our U.S. sales organization to promote Scott Strickland, a 5 year veteran of Ceragon to replace David Ackerman, President of our U.S. operation. Scott's distinguished career includes senior sales, product marketing, and engineering positions of increasing responsibility at leading equipment vendors. I believe you have the chance to meet him face to face in future exhibitions and our road shows.

As we mentioned in our last call, metal convergence is a major theme in the telecom world and continues to devise our growth. Data reach applications are being carried over both 3G and new types of data centric networks such as WiMAX. Growth in subscribers coupled with growing demand for applications such as video and online gaming is driving the trend to end IP networks. We are very strong in products optimized for IP networks and we are continuing to benefit from this trend for a variety of operators and applications.

One recent example includes Irish Broadband, a customer we are supplying to a system integrator. IBB is a WISP wireless Internet service provider and a regional broadband supplier to homes and businesses in Ireland. IBB has been aggressively expanding its networks since its first acquired licenses in 2002. IBB’s network coverage has more than tripled.

Another example is NextWeb, a customer we announced last week, which is the largest WISP in California. They provide carrier class fixed WiMAX [wide] broadband services to over 200,000 businesses locations in over 175 cities throughout California and Nevada.

Both IBB and NextWeb are using our high capacity IP radios for the backhaul solution.

Another high growth application is public safety. We are supplying the backhaul for such an application for the municipality of New York, New Jersey. That involves mobile data for police cars networks of digital security cameras. We are optimistic about the demand from operators as an all out IP networks and as you know, we are planning to introduce in Q1 additional new product aimed at this segment.

Finally, an important factor in our ability to grow rapidly is the fact that as we benefit from capacity growth in all types of convergent wireless networks, regardless of the access technology or application. As we said in our Q3 call, we have a strategy in place to expand the boundaries of our serve market by using our technologies with new applications.

In November we announced the release of our FibeAir 1500HP ultra-high power radio. The first split mount radio to be designed and built especially for long haul applications. The advantage to carriers is that they can use less equipment and smaller antennas providing substantial savings on both CapEx and OpEx. We have received several orders and began shipping this new product in December. As most of you are aware, a new segment is being developed between high capacity SBH and low capacity PDH, which we define as mid-capacity, in the range 45 to 100 megabits per second.

To further extend our aggressive level market we about to introduce a new IP product specifically for this segment that extends our product reach into the mid-capacity zone.

Another important aspect of our current strategy is the concept of continuous design to cost and advanced manufacturing technologies. Some of which have already been implemented in the FibeAir 1500HP product. We have set very aggressive cost reduction goals for ourselves over the next several quarters, which are aimed at improving our gross Margins.

As part of this strategy, we have added a highly capable and experienced operation executive, Hillik Rave who joined us as an EVP of Worldwide Operations. Hillik came to Ceragon from ECI Telecom where he held a number of positions, including most recently, VP of Operations and Engineering of the Optical Network Division. We are fortunate to have an executive of Hillik caliber who leads us in foreign company initiative.

The full impact of our cost reduction measures is not expected to be reflected in our results until the second half of 2006. Before I turn this call over to Tali to discuss more of the financial details, I would like to highlight the fact that our revenue increased almost 35% from 2004 to reach $73.8 million and pro forma net income more than doubled the $3.6 million before extraordinary charges from $1.6 million.

I would like to use this opportunity to thank our excellent team for achieving these strong results.

Looking ahead, we see another year of strong growth in 2006. One reason for optimism is the formal OEM agreement we signed recently with Nokia. This is after building our mutual relationship over the past two years. Nokia will include Ceragon high-capacity FibeAir family with its microwave radio product portfolio as Nokia PowerHopper Vario to provide complete cellular transmission networking solutions. The agreement with Nokia is a major step forward toward achieving global reach of our FibeAir family of products. Nokia is counted on average for a revenue of $5 to 6 million a year, and we expect to double this during 2006.

We continue to expect revenue to grow about 25% in 2006, and even with a need to step our investment in R&D to retain our technology lead, we expect further improvement in profitability in 2006. Improvement in profits for 2006 will appear mainly during the second half of the year once our cost reduction activities have a chance to make a full impact. This will move us to our target of 10% operating profit.

Now, I would like to turn the call over to Tali to discuss our Q4 results and our expectation for 2006 in more details. Tali?

Thank you Ira. Quarterly revenues again reached a new record of $20.1 million representing an increase of 26% compared to $16 million in Q4 last year, and a 6.5% increase over Q3.

Revenue from cellular operators accounting for 46% of revenue in Q4, fixed operators accounted for 32% of revenue, and private networks accounted for the remaining 22%. The shift between fixed operators and private networks in Q3 reflect the fact that in Q3 we had a sale to a large government customer.

As Ira mentioned, we had one 10% customer in the Cellular Network Segment in Q4. Europe, Middle East, and Africa remained the strongest region accounting for 43% of revenue. North American increased to 29% and Asia-Pacific and Latin America for the remaining 28%. It was in this category that Latin America was especially strong in Q4. Our quarterly bookings were strong again in Q4, with book-to-bill again over 1. Gross margin was very slightly lower than Q3, but still above 38% of revenue. This is in line with our general expectations of gross margin in the range of 36 to 40%.

As we have said in the past, our large deals tend to be more price-competitive and we continue to witness some overall price decline in the market. As our new products gain traction and we benefit from our continued cost reduction activities, we expect to move towards the higher end of the range during the second half of 2006.

Operating expenses continue to increase slightly in Q4 on an absolute basis, but decline as a percentage of revenue. In 2006, we expect to increase our investment in R&D in order to maintain our leading technology position; however, we do expect to make progress towards our target P&L model especially during the second half of the year. Overall, long-term, we are targeting 40% gross margin and 10% operating profit based on a quarterly run rate of $30 million.

On a GAAP basis, we reported a net loss of $6.5 million or -$0.25 per share, which included $7.1 million of non-cash charges to ride down inventory. As we announced in November, we are in the process of phasing out our FibeAir 1500 products, which will be replaced by the new P series. By mid-year, the new series will cover all the frequency new capabilities of the FibeAir 1500 supporting new applications extending our addressable market and improving efficiency. As I mentioned a moment ago, we expect this to result in improved gross margin in the second half of the year.

In addition, our Q4 cost of goods sold included a charge of $390,000 reflecting the write-off of the long-term receivable. Pro forma and non-GAAP net income was $1 million or $0.04 per share in Q4 compared with $769,000 or $0.03 in Q3, and $713,000 or $0.03 per share in Q4 of 2004.

Moving on to the balance sheet, our cash balance at the end of the fourth quarter was $33 million and DSOs were at 67 days. As expected, we reported positive cash flow in Q4. With our strong bookings and a positive outlook, during the next couple of quarters, we may again be a net user of cash for working capital to support our growth.

As Ira noted for the year 2005, we had record revenues of almost $74 million and pro forma EPS of $0.13 per share before charges of $0.28 per share. For Q1 2006, we expect revenues of $20 to 21 million. As we adopt SFAS 123R in Q1, we expect an impact of about $750,000 on our quarterly operating income from expense and stock option.

For all of 2006, we continue to expect strong growth on the order of 25%. As we move through the year and new products gain traction, we will extend the size of our addressable market, which can provide additional outside potential. Now we will be happy to take your questions.

[OPERATOR INSTRUCTIONS] We will now take our first question from Rich Church of Unterberg.

Thanks. Nice quarter guys. Tali, can you give us some color of your expectations for gross margin? Is Q1 expected to improve from the fourth quarter level?

More like I said before, we still see a range of 36-40% ahead of us for the coming year, for 2006, and we believe that we will go to the higher end of this range in the second half of 2006.

Okay, and do you think on the OpEx levels for Q1 do you expect them to be pretty similar to Q4?

On the OpEx I do see increase. We mentioned that we are going to invest more, mainly, in R&D. So overall, you will see a certain increase in operating expenses in Q4, even as a percentage of revenue slightly.

Okay, and what was the cash flow from operations in Q4?

It was a positive cash flow of $300,000.

Okay, and then Ira. In terms of the Nokia impact, so you’re expecting the revenue level to double in 2006. Do you expect that to be back half – toward the back half of the year, or do you think we can start to see that sooner than that time frame?

We will see it throughout the year, some of it is on the back end, but I think that – I quoted the call on previously; we baked in the number according to our gross numbers for the year. It is a long-term relationship and it is not something, which is [indiscernible]. So, it is a long-term relationship where we see the deals and it is part of our focus for this year in the growth.

Okay, and what percent of revenue was the 1500P in the quarter?

It was about 50% in the product revenue.

What is in the customer feedback to your transitioning and the breakdown of the inventory of the legacy stuff?

I will say it two ways – One, no, none in the sense that most of our customers did not care, because of the uptake of the 1500P and the 1500HP has been in the very smooth transition, which still by the way, we still continue to sell the 1500 until the middle of next year, which was originally set when we did the inventory write down. So, we have a smooth transition with the customers where based on the application, the need, the specific customer will simply position them.

Okay. Great. Thanks guys.

We will take our next question from Matt Robinson from Ferris, Baker, Watts.

First comes some statistics. What was the head count and CapEx and service revenue?

Head count was about 275 employees. Service revenue is a small percentage of our revenue, just few percentage points---

Less than 5%?

Even less. It is something that, until now, we didn’t generate.

That 1500P statistic was basically comparable to the 40% that it provided in the third quarter in terms of how it was measured?

The 1500P –?

Yes.

As part of the product revenue?

Yes. When you said it was 50%, I think it was 40% in the third quarter?

Yes, right.

Yes. So it is comparable. CapEx?

Very minimum.

Alright. So, --

Very minimum, $200,000. You can see that the net Property and Equipment went down, even from September to December.

Okay. Your new Mid-cap products, will they be integrated in the Nokia base station equipment like their lower cap TDH radios have been historically?

That I will let Nokia answer when they introduce their base station products.

Okay –

Originally we expect with the products, as they are today to be a part of their PowerHopper Vario.

Part of their what?

PowerHopper Vario product line. Not the PlayStation equipment.

Okay, you are still going to remain in the controller to switch link, or the ring rather than in the last link to the base station. Is that where we should look at it?

That is the way you should look at it in the near future, yes.

What have you – we are seeing, particularly, from your primary publicly traded tier that there has been some evolution in technology to move toward more traditional EMS, Electronic Manufacturing Service provider away from the more niche microwave millimeter wave of type assembly houses. What have you done to achieve some of this transition yourselves and kind of go through that process as it might relate to the breakdown that you had on this quarter and what you are going to achieve in the second half.

As I mentioned during the first part of the call, we did put efficiencies both in design to cost into the product and manufacturing efficiencies. A lot assemble those were already implemented into the 1500HP product line. The 1500HP product line is totally manufactured by classical EMS manufacturing capabilities, which is part of the trend you are talking about, which brings them to different efficiencies and different cost points and different ramp-up points for producing the products. We have done a lot of design and internal capabilities in designing the next generation radio head is built on those types of capabilities.

Okay. So, the HP takes what you did with the P one-step further then?

Yes.

Okay. So we will look – so basically you guys are running more or less neck-in-neck with the company I alluded to it sounds like.

Yes we are. We are - - I think that in some of the technologies we are leading. But I think that the similar past approach has been taken by many of the wireless equipment providers. It is not - yes I think we lead in some of those, especially in the high-power and the ability to generate high-energy out of those types of systems. That is partially the uniqueness about HP product line and one of its leading capabilities, but we do expect to see similar technologies being used all over the place as time moves on.

Have you started to see some HP design ends for long distance trunking?

As I said previously we released the product in December. We are in the process of completing one large project already based on the HP and we have several orders in place, which will be shipping this quarter.

Okay Tali ….

Those are those design [ins], more than design ins, they are actual networks which are being built.

Okay, Tali, one more question for you - - have you guys, are you going to, any thoughts on FAS 123R and how it might be affecting you guys?

Yes, currently we are estimating the extra expense of about $750,000. And we will see later on in any other possibility available to reduce it.

That is quarterly?

That is quarterly, what I mentioned it.

Thank you. We will take our next question from Ehud Eisenstein from Oscar Gruss.

Yes high, nice numbers. Tali could you just give us some more color on the increasing, trade receivables?

Yes. There was an increase in trade receivables. It was -- this quarter was a little bit unusual. Usually we have quite linear quarters. We sell products throughout the entire quarter. This quarter, the month, the first month, the month of October was a month of holidays in Israel. The month of activity was very low. Therefore most of the quarterly activity took place in the second, in the two months left, November and December. So we created less sales, also less purchases from suppliers during the first quarter and more activity in the last two months.

Okay, and you see again a very nice growth in the cellular segment. Do you have any thoughts on that? I mean any specific geography that can speak of that or specific customers? Thank you.

If you look at the growth in the cellular segment, we see different trends pushing our growth in different areas, depending on geographies. If you look at, for example the U.S. market, we see the move use more wireless backhaul whereas people like fiber power supply and solutions there. On the other hand if we go to some of the Latin America, Africa and Far East type of application then we have specific growth being driven by more subscribers and in some places Greenfield networks. Overall the net, we see more of an increase in Latin America this quarter as far as investment activities, if not over the last year.

Okay. And you had -- you announced a WiMAX deal a couple of weeks ago. Can you just give us some more color or what you see now happening in the WiMAX base?

We have not announced the WiMAX D product. We did announce –

The backhaul?

The backhaul for WiMAX applications.

Sure.

Now it is independent by the way if it is a WiMAX-D or WiMAX-E or a pre-WiMAX type of an application. What we do see is that WiMAX-B is being used by many wireless Internet service providers for pre-wireless applications to provide broadband connectivity to locations. We mentioned on the call before both IBB in Ireland, which is doing that in several locations throughout Ireland we mentioned NextWeb, which is the largest wireless Internet service provider in California and we see others. I think that will be the first wave of WiMAX-D pre-WiMAX type of applications. And we see an intake there of our IP product and we see a lot of projects moving from final stages to first initial deployment.

Okay. Alright, thank you very much.

Thank you. [OPERATOR’S INSTRUCTIONS] We will now take a question from Kevin Dede of Merriman.

Hi and congratulations gentlemen on the nice job this quarter.

Thank you Kevin.

Ira, did I miss your comment? Do you, are you still comfortable with 30% growth this year?

Our comment for this year was that, and I think the guidance we gave also last quarter and we’re still comfortable with and expect to be around the 25% growth for this year. And personally I always put a target to beat that and be above. But that is all guidance for now.

Okay, and would you expect Nokia to become a greater than 10% customers through the course of the year?

They will be around a 10% customer for the year.

Okay.

They are -- I would call them a 10% channel OEM because we work with them on the end-user deals.

Got it, got it.

We see where the deals are happening.

Okay so --

More than 10% channel that are customers.

Can you give us a little insight as to what you see happening in the North American markets specifically with the announcement that one of your competitors made with Alcatel? Wondering if that might change the competitive landscape for you folks?

I’ll start one step back and then we will get to that specific announcement. If we look at the market in the U.S. we see two trends which are shaping up and taking place. One is more used on the backhaul for cellular and non-cellular applications and I mean wireless backhauls and high-capacity wireless backhauls. If you have been at the conference, you have heard that a lot of people are talking that backhaul and wireless backhaul is [off] right now.

Going back to that, your specific question - - the announcement is more in the IP space, which is emerging as one of the applications both in government and private networks and starting with wireless Internet service providers. We have been supplying that market. We have been in the market for over the last 2 or 3 years and anytime someone announces a product, it changes the competitive landscape, but I am yet to see what applications. I think we have a lead in that space with products which are very, very well established with proven track record, but we will compete.

Can you give us some more details on the 1500 HP. What are the frequency ranges that you are offering now? What do you see your sales and orders in?

The 1500 HP is targeted towards long-haul applications. Long-haul applications are classically in the lower frequencies, a 6, 7, 8 up to 11 for many of the applications. Those are the frequencies that we provide because the physics at higher frequencies bring us back into shorter hold, shorter hold. So, those are the applications that are provided there. I do know because of the long-haul nature of that specific design, which need more higher power for the longer distances, and also to support for different diversities in technical applications.

And is that product being manufactured through your standard outsource manufacturing agreements?

Yes, it is.

Very good. Thank you very much gentleman for taking my questions and congratulations on the quarter.

We will now move to Rich Valera of Needham.

Thanks. Good morning. Can you comment on the expected impact of Nokia’s sales increase on your gross margin? Will that put any pressure on your gross margin?

The Nokia deal, yes, will put a pressure on our gross margin. Yes, the Nokia deal was already factored into the guidance we gave of the 36 to 40% gross margin moving forward with a target of reaching 40% gross margin by year-end on the second half. So, this has been baked in already into where -- how things are.

I think that the question also relates to the issue of -- We do sell SDH products, which have higher gross margins, which allow the whole supply value chain to bring in the strongest points across the board where Nokia has the relationship with some of the larger customers and us bringing technology, and having enough margin to profitably split it across.

Is there sufficiently lower sales and marketing expense associated with the Nokia sales that on an operating margin contribution basis they are not much different than your products sold through your own channels.

They are lower. They are lower. It is harder to -- They are lower but they are harder to judge, with the mode of operating with Nokia. I think it’s important for us is that we work with them very closely achieving the customer wins.

Okay, just one final one. In terms of what your plans to improve margins in the second half of the year, is that really a function of transitioning more frequencies to the P, from the 1500 to the 1500P? Can you just sort of elaborate on that a little bit?

As we said previously, there are two issues that have to do -- or three issues that have to do with how do we go with that improving our margins. One, is transitioning both frequencies as you said towards the P family, which includes the P product sales, the high power of the 1500 high power and other places in that family, which brings us design-to-cost and design efficiencies, which will improve the margin.

The other part of that, as we mentioned before, is changing our manufacturing technologies for some of the products and doing more towards an outside EMS manufacturing, which increases efficiencies. The third part is that we are closing down our internal manufacturing facility and gaining efficiencies from that as well.

We will take our next question from Ray Conley of Palo Alto Investors.

Could you give me a little bit of guidance on how to think about your both working capital and capital expenditures going forward. You had mentioned a target model of 10%, EBIT margins at a 30 million revenue run rate. Could you give us a sense for what your balance sheet and CapEx would look like at that point?

Yes. If you can look - - If you look at the balance sheet and the CapEx, you see that the net equipment was quite flat throughout the year. Next year, we are planning to invest in capital equipment a little bit more, but still it is not going to be more than 1 million.

Would that be 1 million for the whole year?

Yes.

And if I were to think about the amount of working capital, current assets, less current liabilities, how much do you think that will -- Will that grow at the same rate as revenue? Or is there going to be some leverage coming on that?

I believe in the second half, we will see leverage.

[OPERATOR INSTRUCTIONS] We will next hear from Richard [Dearnly] of Longport Partners.

Could you talk about the products -- What the new markets are that your new products will take you into?

We mentioned two different directions, which are expending our addressable market. The first one was the 1500 High Power product, 1500 HP product. We are going into the long distance connectivity or long distance wireless connections, which is a market which does the backhaul for different types of applications. A lot of it is you in the cellular space, but at more of the core of the network. This is one market which has been sufficiently served by what is called trunk radios, which were all indoor. And we believe we’ll go and we‘ll have part of that market space.

The second direction we are going is expanding our addressable market into the mid-capacity type of applications. We see [ELON] demand emerging. It is not there yet, but the demand which is starting to emerge for radios in the range of 45 to 100 megabits per second, mainly in the IP space but also in the traditional SDH space, to serve what I would call larger base stations. We do expect to introduce products into that space this quarter.

Gentleman, it appears we have no further questions. I would now like to turn the call back over to you for any additional remarks.

I would like to thank everyone for taking the time and being with us on this call and I hope to see all of you next quarter again. Thank you very much for participating with us.

This does conclude today’s conference call. We would like to thank you all again for your participation and we wish you a great day.