Ceragon Networks Ltd (CRNT) 2009 Q4 法說會逐字稿

Good day, everyone, and thank you for holding. Welcome to the Ceragon Networks Limited Fourth Quarter and Full Year 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.

Since we have a lot of questioners on the call, we will ask you to limit yourself to one question. If we have time, we will hold one more round of questions.

With that being said, 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. We are very pleased with our Q4 results. We ended the year with an excellent quarter, and the order pattern continues to be very strong. We are looking forward to substantial growth in 2010.

To recap 2009, despite the global recession, underlying demand continued to grow based on subscriber growth and increased data usage. The most important trend in our industry was toward carriers looking to vendors like ourselves for network planning design and delivery, with an eye towards migration to LTE-ready networks.

The other side of the year was that due to the recession and weak currency, we saw customer hesitation and longer sales cycle which hurt orders and forward visibility during the first half. Orders began to improve in the second half, and we have returned to a solid growth pattern. All of this resulted in only a 15% decline in revenue for the year. And by clamping down on expenses, we achieved a net profit margin of close to 4%.

Coming out of the year, we are aiming for new records for growth and profitability. Tali will give more details about the outlook. Assuming there are people on our call who are new to our story, I will take a moment to clarify where the market is now and how we expect it to change, before I get into specific comments about the quarter.

Everyone seems to be focused on backhaul as an immediate pain point for mobile operators based on the projected growth in smart phone and other devices, all of this on top of worldwide subscriber growth. In addition, there's a lot of media coverage of the backhaul opportunity inherent in the migration of mobile networks towards LTE-ready IP architecture.

In the US mobile backhaul today is fiber and mainly leased copper T1 lines, with only about 15% of the market represented by microwave. That microwave is mostly low capacity. This is due to the widespread availability of wired copper infrastructure for backhaul. As copper becomes too costly and inefficient for the increased capacity required for high traffic of 3G and 4G network, the portion of the market served by copper will shift to either fiber or high-capacity microwave.

As carriers migrate towards LTE, this translates to a major growth ahead for high-capacity LTE-ready microwave backhaul in the US. But, the opportunity outside the US is just as exciting, because outside the US 70% of mobile backhaul is already microwave and all of it is migrating towards high-capacity LTE-ready networks, which is our sweet spot.

In emerging markets, this need for high-capacity backhaul is being driven by subscriber growth. But as the digital divide is conquered, data growth will strain networks even more on top of the growth in subscriber penetration. The carriers in emerging markets are already building the network ready for the migration.

We understand why it's interesting for investors to track the network quality wars between the large US carriers and follow the LTE and 4G announcements. Make no mistake, we see North America as a very important market with enormous potential. In fact, we are making major long-term investments in a variety of areas, such as sales and professional services capabilities in order to fully capitalize on this opportunity as it evolves.

However, it's also important to keep the opportunity in perspective and recognize that today LTE is in the planning stage. Fiber is available to address urgent bottleneck issues in the heart of major cities. And, the majority of the global market for high-capacity wireless backhaul is still outside the US. But we serve a very broad customer base of mobile operators on every continent, and our primary competitors are Ericsson, Huawei, and NEC.

With this in mind, a few words about Q4. We are now seeing improvement in most geographic markets, although Eastern Europe and Africa are coming back very slowly probably because these two regions were hurt the most by the global recession. The sequential improvement in Europe and North America reflects both more orders from ongoing customers and some new wins.

For example, as a result of our global agreement with Hutchison 3, we saw a nice contribution from Hutchison Ireland and new customers in other European countries. The large increase in North America was attributable to business from a leading US-based wireless operator.

From the geographic breakout, it may appear that the Asia-Pacific region paused in Q4. Actually, business has continued to be very strong in APAC. However, we are seeing more turnkey projects where we are responsible from design to implementation, which takes longer to convert to revenue due to acceptance milestones. This delay in recognizing revenues is also apparent in the increased inventory on the balance sheet and the deferred revenue section.

In keeping with the trend towards more turnkey projects, we are finding that more RFPs contain a requirement for local professional services capabilities. These larger projects involve planning, design, and delivery of a complete network, and they require sophisticated presale consulting as part of the process. The increase in our Q4 expenses reflects the need to add people to support growth in this type of business in the future.

Looking ahead, we expect the continued revenue growth and we will have to continue to increase expenses in R&D, as well as sales and services to accommodate large turnkey opportunities. Even with a need to substantially increase expenses, we expect to improve operating leverage and move towards our target model during the year.

Now, I'll turn the call over to Tali for a more detailed picture of Q4 and our outlook. Tali?

Thank you, Ira. Good morning, everyone. Revenues in Q3 were $53.4 million, a 19% sequential improvement from Q3. This was still less than the $56.8 million we reported in Q4 of last year, but represents a strong indication that we have resumed our growth trend.

GAAP net income was $2.1 million or $0.06 per diluted share. Excluding stock-based compensation, non-GAAP net income in Q4 was $3.4 million or $0.09 per diluted share. A geographic breakout of revenues appears in the press release. As you can see, EMEA and North America increased, Latin America was about the same and APAC was lower, reflecting the timing of revenue recognition on turnkey projects.

OEMs accounted for 15% of total revenues in Q4. And Nokia-Siemens Networks, our OEM partner, was again a 10% customer. We had two additional 10% customers in Q4, a large project in Africa through a resell partner, and a leading US-based wireless operator.

The non-GAAP gross margin in Q4 was 34.1%, reflecting a favorable geographic mix of revenues. We believe that gross margin will likely return to around 32% during the first half of 2010, as we still have substantial revenue to recognize on turnkey projects in India. Non-GAAP operating expenses increased to $14.7 million as we added to headcount to support future growth, as Ira described.

We generated about $2.5 million in operating cash flow in the quarter. And at the end of Q4, cash and cash investments totaled approximately $98 million after completing our share repurchase program during Q4.

DSO remained at 115 days, unchanged from Q3. Our inventory increased to $66 million, reflecting more turnkey projects. In Q4, about 50% of inventory represented products already shipped but unrecognized as revenue.

Our book-to-bill ratio continues to be well above 1. Backlog continues to grow as a result of more turnkey projects, which will convert to revenues gradually during the year.

For Q1, we are guiding to revenues of $54 million to $58 million. Going forward, our aim continues to be improving operating margin as revenue growth continue. For 2010, our annual revenue target is 30% to 35% revenue growth compared to 2009.

Operating margin on a non-GAAP basis in 2009 was 3.4%. For 2010, our goal is to reach 5% to 7% operating margin for the year. Our long-term operation margin target remains 10%.

Now, we'd be happy to take your calls.

(Operator Instructions) Matt Robison with Wedbush Securities. Please go ahead.

Hi. Congratulations. You hit most of my questions with your presentation. Just was curious if you could give us the shares you bought back, the headcount, and the CapEx, and when you would expect to see a few more US customers become material.

While Tali is looking for the numbers, Matt, we are working very hard to acquire and work with additional US customers. This is a slow, ongoing process, as I think I indicated, that the initial needs are being met mainly by fiber in the center of the cities. And the planning for the LTE-ready backhaul networks is an ongoing but long-term process.

We are seeing more US customers already, but most of them at this point at very low volumes. So, I expect this to pick-up probably -- maybe towards the end of the year or beginning of next year. Tali?

It looked like a lot of the strengths came from Europe. You mentioned Hutchison and a business in Ireland, Western Europe. Is that -- should we -- is that a one-quarter deal? Or you think -- or can we look for that to continue?

The work with Hutchison is a global agreement and my expectation is more than a single quarter.

And you see other customers picking up with similar dynamics?

Yes.

In Europe?

Yes.

Thanks.

I expect other customers [can come]. Tali?

Okay, Matt. Let's start with headcount. Headcount at the end of the year reached 508 employees. As far as CapEx, it was about $1.6 million in the quarter.

And share buyback, most of the share buyback we have done at the beginning of the year. We just completed in Q4. So eventually, we did spend the entire $20 million. And we bought about shy of 3.5 million shares.

And the -- so you actually increased your headcount about 50 -- about 10% -- a little more than 10% it looks like.

That's correct. This is true. Mainly, we increased the headcount around people who support our turnkey projects in large projects in the APAC region.

Expect that headcount to continue increasing at that rate for a couple quarters?

I'm not sure for that rate. But it'll continue increasing in the next few quarters.

Okay. Thanks. I'll yield the floor.

Thank you, Matt.

Bill Choi with Jefferies. Please go ahead.

Good morning. It looks like from where we see, a lot of things went right for you. Private networks came back. There was good geo-diversity; that helps margins. So, I'm curious if you could talk about where you saw the upside to your plans.

You had talked about revenues of $48 million to $52 million and gross margins around 30% to 32%, so upside on both, if you could kind of give the puts and takes of each.

And you had talked about getting to about 10% operating margin target. Can you talk about when you would expect to see that from a timing perspective? Thanks.

Okay, Bill. I'll take them one by one. I think that the strength was both North America, from one 10% customer but additional customers as well, and we saw that also in Europe.

The shift in geographic mix is the largest contributor to the gross margins, which has always been what we are seeing both ways. And that's why, for example, we are guiding towards a little bit of a lower gross margin because we will recognize other revenues from India over the next few quarters.

I see the strength is really in the markets coming back. It's not just a specific one customer or one segment; it's the market coming back and people starting in their investment cycle as they move forward. I think I answered both issues.

You asked about the 10% operating margin. I think Tali guided that we are planning during 2010 to reach a 5% to 7% operating margin for the year, which means if we move on a steady track probably sometime in 2011 we'll probably see the 10%.

Okay. How many 10% customers did you have in the quarter? Sounds like at least two if not three, right? You typically count Nokia.

We had three 10% customers; one was Nokia-Siemens Networks; one was a large project in Africa through a resale partner; and, one was a large wireless operator in the US.

And where was the strength from the private networks coming from?

Private networks were about 10% of revenues, which is why it's normal of our business.

Was there any one single project? Or, was it pretty well diversified there?

Pretty well diversified.

Okay. All right, thanks.

Thank you, Bill.

Amir Rozwadowski with Barclays Capital. Please go ahead.

Thank you very much, and good morning, Tali, and Ira.

Good morning, Amir.

Ira, it seems as though bookings trends are favorable for you folks. Book-to-bill was well above 1. And you've come back to -- now decide to give sort of full-year guidance. You spoke on sort of the improving business environment.

But what gives you the comfort at this juncture to give us sort of a full-year top line guidance? Is it more turnkey projects where your visibility has improved, general pick-up in business? Or how should we think about that?

I think it's both of the things that you mentioned. A, we have better visibility. We had now three sequential quarters of book-to-bill above 1, which means we have started to build a backlog, which I think Tali indicated, as you can see in our inventories and others of turnkey projects, which will be converted to revenue during the year; and our feeling that with the discussions with a lot of our customers in most of the regions we are moving ahead.

The hesitation and the issues that they had at the beginning of '09 for most of them are over.

Okay. That's helpful, Ira. And then if we look at sort of the Asia-Pacific region, you qualified sort of the spending environment there and that we shouldn't necessarily read into the fourth quarter. But if we look at India, certainly it seems as though we're probably a little bit closer towards 3G licenses than we have been in the past.

Of course, that has to be put into context of consistent delays in the region. How should we think about the opportunity once 3G licenses are issued there? Is that a significant build opportunity? Or have the carriers been prepping their backhaul networks in anticipation for 3G in some of the build?

I think that's the second part of your question. Operators have been prepping up the networks, networks for the 3G. From my point -- from our point -- from our perspective, the 3G licenses were already given out in a way because the people are prepping up for the 3G licenses and building the networks.

More than that, everything that they do today, they think of data and think of a very large increase in backhaul capacity. So even in India, where it's mainly 2G, voice, conversation is LTE ready, data, data-rich networks as of today.

Great. Thank you very much for the incremental color.

Thank you, Amir.

Steve Ferranti with Stephens Inc. Please go ahead.

Hi. Good morning. Congratulations. Great results, guys.

Morning.

Just a follow up to the prior question, Ira, you mentioned that carriers in India although traffic today is predominantly 2G and predominantly voice, they've all got sort of data on their minds. To what extent are they looking at IP and Ethernet as a means of backhaul versus -- it seems like most of the sales into that region have been SDH thus far?

I will be more -- really surprising over the last two quarters if I look at sales into that region, we saw more IP than SDH. We saw less and less SDH. And a lot of it is high-capacity IP with TDM capabilities, where they're using mainly the TDM capabilities, but the specs are full IP.

Let's remember on that from -- that for full IP, you don't need to wait for LTE. Any new 3G deployments in India -- we're talking about 3G -- most of the base stations are already built to transfer the data traffic from the 3G into IP. So, new base stations for 3G will also use the IP extensively.

Okay. Very helpful. Just one quick follow up from me -- just interested in some of the drivers and the demand you see from someone just as a Hutchison -- like a Hutchison, for example. Is it pent-up demand from them underspending over the last three or four quarters?

Is it driven by network expansion or capacity adds? Just any sort of color you can provide in terms of what's spurring these customers to now spend. And, is Hutchison sort of characteristic of a lot of customers that you're seeing out there?

Hutchison is and usually is the leading customer and the leading indicator in a lot of the markets. And they are -- mainly it's capacity adds. It's rebuilding the network. It's not in our incremental adds, but it's rebuilding the network to support much larger capacity, mainly for data.

Okay. Very helpful. Thanks.

Thank you.

Daniel Meron with RBC Capital Markets. Please go ahead.

Thanks, Ira, and Tali. Congrats, on the good execution on your part.

Thank you, good afternoon, Daniel.

Question on -- sure. The question on the extent of where you see fiber going right now versus microwave deployment in various regions in the world. And how do you see that evolving as we get closer to 4G? And what's the time frame that you expect on those related 4G deployments?

I think I'll mention the fiber mainly in the US market perspective. I think that one of the questions we have been getting and a lot of people have been getting is, okay, what are the US operators doing right now with the data pressures that they have? Most of the data pressure that they have in the backhaul is in the inner cities, where they have a lot of fiber.

So what they're getting their backhaul networks using a lot of fiber in those regions. Where the data pressure exists, but not as strong in the more suburban area, where the microwave is used or will replace copper in the future.

I think what we'll see is there is a major cost differential between fiber and microwave, which plays in both ways. And where fiber exists, people will use fiber. Where fiber does not exist today, we'll see a lot of microwave usage.

Okay. And then the time frame where you think that we'll see those investments related to 4G really kick in? And maybe asked differently, what is the percentage you think right now of your businesses related to wireless subscriber growth versus data usage growth?

I think the easiest way to characterize it is if you take our North American business and Europe business, it's data related. The rest of the world, it's subscriber growth.

Now the easiest way to calculate it -- yes, there are differences in the different regions. We have customers in APAC which do -- because of data growth, I see business with them mainly in the Philippines and Australia. We have some because of subscriber growth in the US and Europe. But roughly, this is the large ballpark.

Okay. Very good. Thank you. Good luck.

Thank you, Daniel.

Ilya Grozovsky with Morgan Joseph. Please go ahead.

Hi, guys. Thanks.

Morning, Ilya.

Can you guys talk a little bit more about your 10% customer in North America and kind of how business is going there and if you see that expanding? I know you guys had announced it originally that you were in a couple of markets. And kind of give us an update there.

I'll be careful with the comments because the customer -- we did a press release with them. And as in the press release, they asked not to be named. So, we are working with that customer. That customer is expanding rapidly their backhaul networks using wireless. We are in a few markets with them. And we work closely on their expansion and they have been a 10% customer this quarter.

We're working very hard to try to make them a 10% customer in the next quarter and the next quarter after, nothing ensured at this point. And you know me about this. Usually I prefer about customers after I have orders delivered to talk about it, not before.

Okay. Thank you.

Thank you.

Larry Harris with CL King. Please go ahead.

Yes, good morning. And congratulations on the results.

Thank you.

A little bit in terms of the competitive dynamic, I think at the outset of the call you mentioned that Ericsson, Huawei, NEC were your major competitors. Any comments on some of the other IP players, like DragonWave or Harris Stratex, I guess now Aviat? And any thoughts in terms of pricing trends in both the TDM and IP-type radios?

I'll start with the two other competitors. We do see both of them in specific markets and specific niche markets in some of the deals. I don't see them across the board, depending on their strength and strength of their equipment.

We see more competition from both of them in WiMAX projects versus in large carriers. Still number one competitor is Ericsson. It's NEC, and it's Huawei as we move forward within the carriers worldwide.

You asked a little bit about pricing trends. I think prices are not changing differently than prior years. I think what is happening, which is a similar trend to what has been happening. Although if I look at our specific mix because we are now delivering complete turnkey projects from the access all the way to the aggregation and the core, we see a mixture of solutions from mid capacity to high capacity, which changes our ASP a little bit throughout that mixture.

But overall, pricing trends fairly temperate or nothing to get excited about or anything like that? Fairly stable?

Stable is not the right word. It's stable in the decline. The rate of decline is stable.

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

Like in -- by the way, like in any technology.

Absolutely. Thank you.

Thank you.

Matt Thornton with Avian Securities. Please go ahead.

Hey, good morning, guys. Thanks for taking my question. A couple quick questions really more on the housekeeping side, Tali, I think you mentioned OEM partners were 15% of revenue. Is that correct?

Tali, you're on mute.

Yes, this is correct.

Okay. Got you. And gross margins, first half of the year, 32%; is the thinking still that that should gradually improve towards the back half of the year as some of the other markets continue to come on?

Right. Geographical mix changes in our favor, we are assuming that it will improve above the 30% range.

I'm sorry. Was that 30% or 32% for the first half of the year?

First half is around 32%.

32%. Okay. Got you. Perfect. All right. And just to confirm -- I think you mentioned this -- on the inventory, 50% was already shipped and it's just not recognized. Is that correct?

This is correct, yes.

Okay. Perfect. And then just couple of other housekeeping items. I know you guys had disclosed the IP versus SDH/SONET and the percentage of sales from new platforms. Any update there?

Yes, the IP platform this quarter was about two-thirds of the revenues. And as far as the new platform, it was around 60%, same as in the previous quarter.

And in terms of 2010, how should we think about I guess currency impact? Number one, I know, Tali, we talked about this. You guys were getting ready to re-establish a new hedging program for the year. How should we think about FX in 2010?

And I guess how should we think about tax rate as well? Are we still in that 5% to 10% range?

Yes, as far as tax rate, I'm still assuming it will be in this range of 5% to 10% of taxable income. Currency impacts -- currency impact is very difficult to predict, of course. As far as our expenses -- and we have a big chunk of expenses in Israeli shekel -- we have had everything upfront. So, I don't expect on this front changes or any movement.

But the rest depends. Most of our revenues are in dollars. In some cases, we sell in euro, so that can be impacted. And then we have some other local currencies but usually, they have a small impact.

Okay. That's very helpful. Thanks, guys, and congrats on the quarter.

James Faucette with Pacific Crest. Please go ahead.

Thank you very much. I just wanted to ask -- I think, Ira, you made some distinction as to what was driving your opportunities in business in Western -- or I'm sorry, in the US versus other markets and that you said the US seemed to be data driven. What about Western Europe? What's compelling your -- the business improvement there?

And can you give a little insight as to what kinds of situations carriers in Western Europe are addressing right now? Are they -- is it anticipatory build? Or, are they really scrambling to relieve pressure that's already there on the network?

I think that I characterized it's both Western Europe and the US which is data driven. I think we see in both markets, both the trends that you are seeing is really -- some of it is preparatory actions and some of it is really scrambling to meet the data needs.

But people I think -- when you look at operators, operators usually plan and especially the European and the US operators plan long term. And what we are seeing is really upgrading of the networks based on existing data trends and their expectations moving forward.

Great. And then on the competitive front, it seems to be that you guys have an obvious strong advantage and differentiation in the upgrade path that you can offer to customers. What's your belief and understanding of where some of your larger competitors, like Ericsson or Huawei or NEC, are in developing and being able to offer IP-native transport capability? And, how do you expect their products to develop over the next one to two years?

If I see both Ericsson and Huawei, they are -- I should say from the offering stage, they are on par with us. Maybe they're a little bit delayed in being able to deliver to the customers. But, let's remember those are very large operators. And it's enough that they say, okay, they'll have it on the roadmap in X number of months, which allows them to win or compete for the business.

And I think they are developing very rapidly. NEC is a little bit -- from what we see -- a little bit slower, although I expect them sometime during this year, beginning of next year, to come up with their own solutions as well.

Okay. Great. Thank you very much.

Thank you.

Scott Searle with Merriman Curhan Ford.

Sorry. Good morning.

Morning, Scott.

Hey, Tali --

Morning.

-- quick question on the OpEx front and gross margins. It was a big step up in terms of costs this quarter. Will that increase sequentially as we go into the first half?

And on the gross margin front, just a clarification, you indicated 32% in the first half. Do you expect that then to improve in the second half, or really to be determined depending how the mix issues shake out?

It's really to be determined based on the geographical mix as it shapes up, but we are optimistic. Let's put it this way.

And as far as the expenses, yes, we do expect that the operating expenses will continue to grow. But our goal is to make sure that they grow in a lower rate than the revenue growth. This is how we want to continue to improve the operating margin.

And just lastly, in terms of the first quarter range of $54 million to $58 million, what do you see as the biggest swing factors over the next couple of months? And nice quarter. Thank you.

If I look at the swing factors, it's usually like any quarter. We have backlog which we need to convert into revenue. We need to get acceptances on projects which sometimes some fall in the quarter, some of them delayed. And we need to -- there's part of the quarter which is -- we still need to book and bring in, so it gives us some kind of a range where we expect the quarter to fall in.

Thank you.

Thanks.

Aalok Shah with D.A. Davidson. Please go ahead.

Good morning, Ira, and Tali. Just a quick question on India -- can you give me kind of a -- I know you've seen some pretty good revenue, and you're still expecting to recognize some revenue in the upcoming quarters. But is there any sense of how you think the 3G rollout in India will impact you guys?

And I know the timing of that has been delayed, but maybe you can give us an update on India.

From my perspective, 3G in India, licenses were almost issued already because any one of the operators that we work with or most of them already think in the terms of 3G deployments. So, they're building their backhaul networks to support 3G on the same network. So my expectation that when the licenses are out, I wouldn't see a jump. On the other hand, I don't think that any delay in issuing the licenses I'll see a slowdown.

So, Ira, in that sense, does that mean that we will see more kind of orders, purchase orders, coming for you guys in that geography and maybe even into other geographies based on further rollouts of 3G? Or has most of the work already been done on the India front?

No, the India front -- the work has not already been done. I think we expect to see the same level of orders for quite a while now -- for quite a while moving forward.

Okay.

As people roll out their networks.

Okay. Great. Thank you very much.

Thank you.

Mr. Palti, I'll turn it back to you for any closing comments.

Okay. I'd like to thank everyone for participating on the call today and asking all the good questions. I hope to see each and every one of you face to face over the next few weeks, and talk to you on the phone if you have further clarification of the issues as we move forward. Thanks again for being with us, and we'll talk again. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.