Ceragon Networks Ltd (CRNT) 2009 Q1 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Ltd. first quarter 2009 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 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'll now turn the call over to Mr. Ira Palti, President and CEO of Ceragon. Please go ahead, sir.

Thank you for joining us today. With me on the call is Tali Idan, our CFO. Our financial results for Q1 were in line with the preliminary results announced on March 30. We had a call a few weeks ago and we don't have a lot of new insight to offer. We continue to experience long sales cycles, low visibility and slow collections, despite the strong underlying demand for high capacity backhaul and with the Operators intentions to move forward with the project in both expanding existing networks adding 3G and moving to IP backhaul.

During March, India added a record 16 million new subscribers and Operators are building out the GSM networks in response to continued subscriber growth. The GSM network buildout is generating demand for orders from India are coming back. Operators have already started planning the next phase of growth which will occur after 3G licenses granted probably happening later this year after the local election. We expect to see some of that pick up turning to revenue during Q3.

Another bright spot is some improvement in demand from similar Operators in North America. In addition, there's a lot of activity around the rural broadband opportunities resulting from the U.S. stimulus package. It could begin to see orders toward the end of the year. IP products accounted for a third of our revenues in Q1 reflecting the beginning of carriers integrating the network to IP backhaul to support more data over 3G, HSDPA technologies and making the backhaul LT ready today.

For this reason, potential opportunities are increasing but sales cycles continue to be long. We have seen some signs of stabilization but visibility remains low and we can't say that we're at the bottom yet. Therefore, we're staying in close contact with our customers, keeping our focus on cost control and maintaining our flexibility to react quickly. We are also confident that the underlying growth drivers for high capacity backhaul remain in place. The market will rapidly expand once we are out of the financial crisis, so in addition, we are paying particular attention to preserving our capability to respond with the right products and operations when orders pick up. Tali?

Thank you, Ira. As a result of the longer sales cycles, revenues in Q1 were $43.9 million compared to $47.2 million in Q1 of 2008. GAAP net income was $215,000 or $0.01 per diluted share. Excluding stock based compensation, non-GAAP net income in Q1 was $1 million or $0.03 per share. As we indicated during the last call, the main source of weakness in Q1 was the APAC region which accounted for only 31% of revenue in Q1. EMEA also accounted for 31% of total revenues. North America and Latin America grew sequentially and each accounted for 19% of revenues in Q1. OEMs accounted for 23% of total revenues in Q1 and we had three 10% customers during the quarter which included Nokia Siemens network, our OEM partner, plus one direct customer in North America, and another direct customer in Latin America.

The non-GAAP gross margin in Q1 was 34%. As a result of our decisive action to mitigate the impact of the lower revenues, our Q1 non-GAAP operating expenses declined to $14.2 million. We are continuing to reduce Companywide expenses in order to reach a breakeven point of about 36 million $37 million in quarterly revenue by the end of Q2 to ensure that we remain profitable if business weakens a bit more before turning around. Financial income was $340,000 was lower than the year ago as a result of very low interest rate. Total cash and cash investments was about $94 million at the end of Q1. We are pleased to report that we had close to $5 million in positive operating cash flow in Q1. We continued executing our share repurchase program and purchase about $6.4 million worth of our shares during Q1, bringing the cumulative total through the end of March to $14.3 million and we plan to continue to repurchase shares in Q2.

Within a slow collection environment overall our collection efforts have been successful and we continue to have confidence in the collectability of our receivables. Nevertheless, customers continue to delay payment in order to conserve cash and our DSO increased to 119 days in Q1.

Our inventory remained generally the same and it's probably worth repeating that about 40% of our revenue represents products already shipped but unrecognized as revenue. In Q1, our book-to-bill was below 1 and we have more than one quarter of backlog. Due to continued low visibility we are not providing forward guidance. Our assumption for planning purposes is that we will continue to see more of the same business conditions. Therefore, we will continue to focus on tight cost controls, working capital management, and being ready for the upturn whenever it comes. Now I will be happy to talk your calls. Operator?

(Operator Instructions) Our first question is from the line of Blaine Carroll with FTN Equity Capital Markets.

Yes, thank you. Hi, Ira. Hi, Tali.

Good morning Blaine.

Ira, what is the overwhelming weakness in the market right now? What is it that you need to see improve in order for that underlying demand to pick up again?

Very basic. We need to see orders coming in.

Yes, but what's stalling the orders?

Okay, what's stalling the orders as we have talked before is a long sales cycle. I think that the decision cycle and all of the Operators are now very very slow, and they are stalling on the decisions because of multiple reasons. They look around and they see the financial crisis around and they say okay, they are thinking twice about everything. There were issues in some of the places around currency fluctuation, so they are thinking how to respond to that. There's issues with some of the Operators which are replanning to see if they can raise the money. Most of them can and they do raise the money needed but it takes them longer if they need to raise the money, so everything is moving slower and that slowness in general means that if you look at the overall plans and the assumptions, it's like a piece of fiber which is stretched out and it's starting to become a little bit thinner at that point and that's what we're seeing from the orders coming in.

Okay and then you mentioned an uptick in India and I guess my question is twofold. Is your sales into that particular customer direct or are you going through your OEM partner? And if you are going through your OEM, do you expect the OEM revenue to pick up which could have an inverse impact upon your gross margin?

We saw the uptick in India or the downtick that was before in all channels. It was in our OEM channels and the direct channels and are mentioning a little bit of a pick up, it's in both channels as well.

Okay, so we don't expect to see, a couple quarters ago we had a situation where OEM revenue was a greater percentage and gross margin suffered. Is it fair to say that you don't see that occurring during the second quarter? Because your gross margins remain--?

Not during the second quarter, India will come back very large volumes we might see a little bit of decline in gross margin moving forward.

Do you think first quarter represents the bottom on the revenue?

No, I think I said on the call, we can't call the bottom yet. I'm not sure at this point.

Okay. All right, good luck. Thanks.

Thank you.

Our next question is from the line of Amir Rozwadowski with Barclays Capital. Please go ahead.

Thank you very much and good morning, Ira and Tali. Just following up on the questions on India, it seems as though with robust subscriber growth and additional licenses there seems to be at least an opportunity for ongoing strength regionally and thinking about that opportunity for you folks once it comes back should we expect it's a similar magnitude to some of the benefits that you've seen over the last couple of quarters or years?

Yes, when it picks up again I think we'll see the same level of magnitude of benefits.

And then has the competitive environment changed there or from our perspective should we think that you folks are just as well positioned to capture that upside when it comes back?

I don't think the competitive environment changed. I think because it's one of the right response right now and Telecom has been for a while and still is, I think a little bit, if we see a little bit more pressure but we're still very well positioned to take good play out of that, what's happening in India.

Thank you and then Ira, you'd mentioned that IP revenues was about a third of your sales this quarter. Where is primarily the opportunity currently and if we look a couple of quarters out, where, do you think that that regional opportunity would shift elsewhere or how should we think about the trajectory there?

Right now what we see, we see a little bit of IP and we see some of IP going into North America, we see some going into developed countries in APAC and we see, starting to see some of it in Europe as well. It's mostly as I said on networks where people are expanding rapidly on HSDPA capabilities today to provide more data and starting to build their thinking and the network support of the ready backhaul down the road and that's what's happening with people of our type. It's not if it's just 2G still subscriber growth type of networks.

Okay so it's really sort of future perfect or new network builds we should really think about as the opportunity?

On the one hand it's future proofing and on the other hand it's building the capacity on today's HSDPA networks which are rapidly expanding.

Great. Thank you very much for the additional color.

Thank you.

Our next question from the line of Ittai Kidron with Oppenheimer. Please go ahead.

Thank you and Ira, I have a question for you. I'm trying to reconcile some of your comments with some of your actions. Specifically, you're talking about the level of interest is growing, it sounds like things are happening in the U.S. the number of subscribers in India is growing so there's a time limit on how long they can withhold on deploying solutions like yours and so it seems like maybe not in the second quarter but certainly in the third and the fourth as you said you should expect a very nice ramp up again, a catch up if you'd call it, on your topline. And so I'm struggling to understand or somewhat concerned, maybe you can alleviate my concerns tying that into Tali's comments that you're trying to reduce your breakeven run rate to 36 million, $37 million which is around 20% below what you just reported, and so my concern is that in the second half things hopefully improve and the revenue starts coming in and the sales cycle starts shortening again, do you think you're going to have all the resources in place to meet that demand? Are you concerned that the cuts that you're making are going to undermine your ability to capture the upside when it comes along?

You are right in the management dilemma right now I think in a a lot of Company and also from Ceragon and I'll explain from both sides. I would really be happy if I could be as confident as you are that Q3 and Q4 would be better and there will be shortening of sales cycles. That has to do with the macro economy and it's very very hard for me to read the macro economy Q3 to Q4. Our belief is yes, the underlying demand exists. We are working very extensively with customers, but the lengthening and the low visibility, we still see action hesitations within the customers on a lot of things which might stretch out towards the end of the year. It might be beyond that and it might come back in Q3, something I can not at this point predict.

So very carefully, we are taking two steps inside the Company. One, we are looking at what's unnecessary at this point and we reducing expenses while trying to build some kind of a more plan which gave us a little bit more wriggle room which we hope we won't need to use it, but we are building room for us while very carefully maintaining and I said on my call, all the capabilities that once the demand picks up, we're in place to serve that demand and we take all sorts of actions, and by the way we're reducing some places and expanding in other places and the capabilities of building that infrastructure both in the right product sets and we are building the (inaudible) aggressively and coming out with new products and operation and sales are part which will be able to respond very quickly for the uptick starts in Q3 and Q4 or whenever it takes.

Okay, Tali, with regards to your operating expenses, when does some of the hedging that you've had kind of rolls over and you start benefiting a little bit more from the move in the exchange rate?

Well, I hedged, this year I hedged the full year in advance, but you already know what the exchange rates for each and every quarter are going to be.

And what exchange rate have you locked into this year?

Close to four, just shy under 4 per shekel dollar.

Lastly with regards to the two 10% customer, are these new customers, old customers of yours? Is there anything in the pattern that you can tell me about that?

One of the customers is the North American customer we announced recently, so it's a relatively new one and the other one is a long time customer which is now in a very rapidly expanding cycle of deploying HSDPA networks.

And so your comments on, or your hesitance to provide guidance next quarter, is it related to the fact that the spending by these two customers is not likely to be as strong next quarter and so it's a little bit hard to see how you fill in that gap right now? Well, not necessarily. It is in cycles within those customers and others, and sometimes if we knew where the order, when the orders are coming in and sometimes people can push them out by six, eight weeks, some other things and that worked really longer sales cycle, lower visibility mix. Very good. Good luck guys.

Thank you.

Thank you.

Our next question from the line of Daniel Meron with RBC Capital Markets.

Thank you, hi, Ira and Tali.

Hi.

So my first question is relating, Tali, to your comment about 40% of your business or inventory to be more specific is related to product already deployed with customers. What is holding up them from signing up and what was the normal level, if you will, that is typical for this line and then last one in this respect, do we have, when you analyze the quality of those customers and the balance sheet, what is the risk for any writedowns of those products? Thank you.

When we delay recognition of revenue it's related to installation. Sometimes we sell equipment only, sometimes we sell equipment as well as install it and it's recognized after we get an acceptance to the full installation. This is when we defer the revenue recognition and inventory remains on our books. These projects can take time from three months up to maybe 9 & 12 months so it really depends on the situation in the customer sites and so forth, but they do come over time. As far as credibility of these customers, they are in good shape. I think that all of them, most of them are in good shape. Of course, it's all relative in these days but we feel very comfortable that we will be able to collect the money from all of them.

Okay, would you say that this is typical having 40% of your inventory levels being at customer sites or this is higher than normal?

No, it is typical.

Okay, and maybe you can provide us with a little bit more of an insight, just as a follow-up on the question on competition. Can you characterize the dynamics in the market? Have you seen any impact from Harris Stratex acquisition of Telsima or anything else that's in the food chain strategically that's changing things along the way?

In general, I think I commented a while back I've not seen anything from Harris Stratex, so no significant change from their side. The only significant change I've seen over the last year in the market dynamics is Huawei instead of OEM'ing their microwave radios for their projects have started building their own or buying larger pieces throughout the food chain which makes them, we see them a little bit more than we used to see them in the past.

Okay, that's fair, and then Clearwire, if you can just talk a little bit about that opportunity and if there's any update on that front from your perspective?

At this point, no update on that front.

And then last one for me, on the pricing side, to what extent do you see any continued pricing pressures in this industry, would you characterize as normal level right now or are you seeing more pressures say in the last three to six months than you've seen compared to 12 months ago?

I think the pricing pressures went a little bit up over the last three to six months, mostly having to do with places where they had large currency fluctuations and their revenues are in local currencies and where the U.S. dollar became relatively much stronger in those currencies so all of the vendors became much more expensive in local currency so we saw some pricing pressures in those markets, a little bit higher than before but I think that based on our continual cost reduction activities, I would love to be not in that position but I think we are in a very good position to be in.

Okay, thank you. Good luck.

Thank you.

Our next question from the line of Matt Robison with Wedbush Morgan.

Hi. Nice to see the cash flow and deferred revenue, guys.

Good morning.

If you were to sort of weight the effects, which is a bigger issue with your customers, exchange rates or credit?

I would say exchange rates, mainly because it's forced them over most of Q1 to replan and redo the yearly budgets, it's delayed a lot of the activity.

Yes, sure. Now, Ericsson yesterday commented particularly on Ukraine and Russia in that context, and also indicated demand had slowed quite a bit in Bangladesh and Pakistan. Don't imagine you saw a lot in Pakistan, but how would you associate the regional flavor for those issues?

If I associate the regional flavors, first I think we saw similar things to what Ericsson is seeing in Russia and the Ukraine but our level of sales has been low traditionally, it was one of the major effects. What we saw in Q1, we saw a slowdown in APAC, mainly in India which is coming back and we saw a little bit of slowdown in the rest of the EMEA region, where North America, Latin America were I think relatively strong.

And we just put that all in the currency bucket for the most part?

Yes.

What was the headcount?

437 employees.

And in terms of your cost reduction, where should we see the most percentage change in terms of the expense categories?

Sales and marketing and as well as R&D.

And missed the OEM mix. Can you repeat that, please?

23%.

Thanks. That's all for me.

Thank you.

Our next question from the line of Ilya Grozovsky with Morgan Joseph. Please go ahead.

Hi, guys, thanks. Can you expand a little bit on what you're seeing in North America? Is it, obviously you have a 10% customer there. Is it broad based or is it just one customer that's picking up? How do you see that playing out? Thank you.

At this point from the order perspective, it's one customer picking up. We have other customers which has not picked up and continue to order at, I would say customer levels but in addition what we see is widening activity. Growth with the fellow Operators was much more intense planning towards upgrading the backhaul networks, and we started seeing a lot of activities from small and medium sized worldwide Operators or Operators to be around the stimulus plan for providing broadband access in rural areas. Hello?

Yes, Ilya, your line is still open, sir.

Oh, thank you.

All right, thank you. Our next question from the line of Larry Harris with C.L. King.

Yes, thank you.

Good morning, Larry.

I was wondering if you could provide an update in terms of where we stand percentage of sales say that are on the new platform?

New platform is about 35% of the revenues in this quarter.

And what was it last quarter approximately?

25.

So that should be having a positive impact on gross margins I would assume is the percentage increases, right?

This is correct, yes.

Is there a point say where we might have 50% or more on the new platform, could we see that happening in the next quarter or two?

Yes, yes, I do expect to reach 50% in Q2.

In terms of, I assume there are a variety of IP trials and tests and qualifications and bake-offs and other things going on. When could that start to translate into higher levels of revenue?

At this point, it's slow, we don't see a major, it's not turning into major orders yet. My expectation, and again that's depending on a lot of movement within the Operator, when will they decide to operate the networks and towards the end of the year probably.

Towards the end of the year. Okay, great. Thank you.

Our next question is from the line of [Steve Feranzi] for Stephens.

Hi, guys, this is Neil for Steve. Given the challenges we're seeing in the developing economies how are you managing your bad debt to reflect these market challenges and is there any risk we see a pick up in bad get expense going forward?

Well, first of all, we are ensuring the vast majority of our receivables so along the years I always pay a premium for the insurance company and it's part of my vehicle against bad debt. In addition to the premiums that I'm paying I'm also providing for bad debt and provisions of bad debt, it has been increasing already in the second half of 2008 as well as in this quarter, but it's part of the G&A expenses. I don't think you see any major increase. It has been increasing already, so I think I'm pretty good covered between the provision and the insurance company.

Okay. And then could you guys just give us a little bit more color on the process for participating in the rural broadband stimulus initiative in North America? You mentioned that you could potentially start seeing some revenue in the next couple of quarters. How meaningful an opportunity could that become, do you think?

I think it's a lot of mid size opportunities and none of them are very very large. The process is usually we work with the Operators, we help them design the networks, we're participating in all sorts of I would say groups which provide a complete solution and then help or work with them on applying for government grants so for them it's mostly their work in getting the licenses out.

Okay, thanks, guys.

And it's a lot of small opportunities, midsized to small opportunities.

Okay, appreciate it.

Thank you.

Our next question from the line of James Faucette with Pacific Crest. Please go ahead.

Thanks very much.

Good morning, James.

Good morning. I just had a couple of questions as it relates to kind of the pace of business and how you've seen things ebb and flow. Obviously, things have been moving very quickly so I'm just wondering if you could go maybe geography by geography what you've seen over the last month or six weeks and how that compares to what you saw in the first quarter of the year?

I think I'll mention two things that we saw and changes in the last four weeks. One, we started seeing India coming back both in, I think I responded on that, both in the direct and in the OEM channel and a lot of things which were being delayed tend to come back and we saw a little bit of a continued pick up in North America which started in Q1. In the other regions, it's business as usual but the remaining business as usual in the current environment that we're in.

So in terms of the pick up you've seen, obviously that's been in the last few weeks and the other geographies have been about the same as you would have thought, am I understanding that correctly?

Yes.

Okay, and then in North America, have you seen movement at all on the private network side or is everything that you're seeing right now related to carriers?

It's mostly carriers. Private networks stay at about the same levels.

Okay, great. And then finally, as we think forward and you talk about the competitive dynamics, et cetera, Huawei has been doing a bit more with their own designed equipment. Is that something that you'd expect for, and anticipate coming from ZTE as well and what's your feeling as to what the likely response is going to be from your primary OEM partners?

I think the move from Huawei is not as much as in our markets. It's mainly in the overall market of providing end-to-end networks and it's part of that so it's really a move in the way as being competitive with Ericsson, the NSNs of the world, with the Alcatel Lucents and we see some of that effect, but very little of that and specifically to the dynamics of the market we are in. And my expectation is it will be tough competition out there. You mentioned ZTE, we do expect, we think that ZTE will continue the way they're purchasing right now which is their OEM and most of the micro (inaudible).

That's great. Thank you very much.

Thank you.

Our next question is from the line of Jonathan Kreizman with Oscar Gruss. Please go ahead.

Hi, Ira and Tali. Would you mind giving us a little more insight on what is going on in India, maybe going back to the currency aspect, for instance? I'm just wondering how you see some of these Operators adapting their budget to previously planned deployment and just keeping in mind on the demand side subscriber growth per month seems to be holding up there.

What we see is people have been rebudgeting, relooking at the budgets but continuing to expand on their original plans and I think what's happening in some of the places is a slowdown as they were planning on, for example, pushing out seven circles all in parallel, they will push five circles in parallel, and do the other two towards 2010. This is usually what we see with most of the customers.

So how do you feel they're attaching to the demand which doesn't seem to be slowing down?

Demand, if you look at it from an India perspective is really the aftereffect of building the networks three quarters ago or two quarters ago because what happens if you see a lot of that demand is the ne network going to new geographies and the Operators coming up with new marketing plans in new geographies and pulling in more subscribers. So you first build the networks and then you get the more subscribers in. So this is on the other hand fueling their capability to continue the expansions into additional geographies. It's like a chicken and an egg cycle, the longer the cycle is strong means you'll get new geographies and new subscribers and in a way funding additional geographies.

Okay great. And if you could detail a little bit regarding the opportunity in Latin America, what percentage of the account there you've been able to accomplish up to this point?

In Latin America, we had one large customer which is generating most of our revenue from that region. It's a multi-national Operator in the region, and we have additional accounts in most of the geographies. Most of them are midsized to small range.

Okay, great. Thanks a lot and good luck.

Thank you.

Mr. Palti, we have no further questions so please continue.

I would like to thank everyone for joining us today, a little bit earlier than usual and on Friday and we'll hope to talk with all of you over the next few coming weeks both face to face, in road shows and through concepts that we are planning to participate during Q2 and the beginning of Q3. Thank you for being with us and have a good day.

Thank you and ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.