Ceragon Networks Ltd (CRNT) 2013 Q1 法說會逐字稿

Good day everyone, welcome to the Ceragon Networks Ltd. first quarter 2013 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. Aviram Steinhart, CFO of Ceragon.

Today's call will include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and projections that involve a number of risks and uncertainties. There can be no assurance that the future results will be achieved and actual results could differ materially from forecasts and estimates that are important factors that could cause actual results to differ materially from forecasts and estimates.

Some of the factors that could significantly impact the forward-looking statements in this includes the risk of significant expenses in connection with potential contingent tax liabilities associated with NERA prior operations or facilities; risk associated with unexpected changes in customer demand; risk associated with increased working capital needs; and other risks and uncertainties which are discussed in greater detail in Ceragon's annual report on Form 20F and Ceragon's other filings with the Security and Exchange Commission. Forward-looking statements speak only as of the date on which they are made and Ceragon undertakes no commitment to revise or update any forward-looking statement in order to reflect events or circumstances after the date any such statement is made.

Ceragon's public filings are made available on the Security and Exchange Commission's website at www.SEC.gov or may be obtained on Ceragon's website at www.Ceragon.com.

I will 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 Aviram Steinhart, our CFO.

Today we reported our final Q1 results which were consistent with the preliminary figures we announced on April 8. At that time we explained it has been taking longer to close deals and our Q1 bookings were low even on a seasonally adjusted basis.

We also indicated that several factors are causing operators to hesitate and delay projects as long as possible mainly very difficult economics of adding capacity combined with a need to consider how and when to invest in implementing an (inaudible) architecture. Plus there are issues that vary from one operator to the other.

The picture remains the same as it was a month ago. Nothing has changed except we are in a position to share more specific details and we have more information from the field to support what we explained during the April call.

There are a number of positive aspects to the current situations. Carriers are not canceling or reducing the scope of their planned projects. Our detailed analysis during last month indicates that our customers will go forward with this project but they will do so very cautiously with the longer process and more layers of approval than in the past. We saw something similar in the 2008, 2009 period when there was a high level of uncertainty.

We believe we are not losing business and market share. In the last month we have become aware that more of our competitors have been making similar comments and industry analysts are revising the figures downward.

There is a continual excellent response to our new products and roadmap. We are currently involved in about 15 lab and field trials with various operators who are early adopters around the world. The most common reaction is wow. As the length of time from the wow reaction to issuing a purchase order is still going to be longer than originally thought because of the factors we have talked to about.

An additional positive sign is that our bookings so far in Q2 are better than the same period in Q1 as we expected they would be but not enough of an improvement to prevent small sequential decline in the revenues in Q2.

Again, this is what we indicated o the in April for the near term outlook is the exactly the same, assuming the improvement in bookings is a trend that continues, we expect gradual improvement as we move through the year.

After a careful analysis to see what action we might be able to take to remove some of the obstacles, our conclusion there are several factors that are for the short term and for the long term broken into several reasons. We enjoy a high market share. We are the number one long haul and we are the top specialist vendor in short haul. Currently close to 90% of our business comes from existing customers.

During times of uncertainty perhaps the easiest for a carrier decision is to do nothing or to turn to your existing vendor relationship for things that can be postponed. In the short term this will hamper our ability to displace competitors and increase bookings significantly but neither are we likely to be displaced. We will [live the spirit] to continue cultivating key carrier relationships for the long term.

We have worked very hard over more than a decade to achieve and maintain our position as the lowest cost vendor in the industry. Unfortunately in the near term this well not help us increase our bookings because existing customer reasons for hesitating will not be overcome by price alone. Longer-term, our cost position will be a critical advantage in our ability to penetrate new customers, gain share, and increase gross margin to our target level.

Our customers are doing initial evaluations under [NVA] of more unannounced new products in the IP 20 family and the feedback is very encouraging. This gives us a lot of confidence in our long-term position and reinforces our determination to maintain our product development effort through this temporary slowdown.

Our customers are counting on our existing solution and roadmap that will sustain our leadership. It is also what will enable us to gain new customer and increased market share. We have to continue to manage the Company for the next several years, not the next several quarters.

It is our strong conviction that another major wave of technology change is coming. This wave will be similar in magnitude to the shift from low medium capacity to high capacity or from PDH to SDH. When the small cell hype first begun more than a year ago, we said it would take two years to become reality and we still see 2014 the beginning of the news cycle. We believe the next wave will lead to further industry consolidation and that we are well-positioned to benefit if we continue to build on the strong lead we already have.

As we indicated on April 8, even though bookings seem to be coming back from the low level of Q1, we still have a couple of unprofitable quarters ahead. This is not something we are comfortable with but neither does it indicate that our business model is broken. Everything we have spoken about in the past, gaining market share, achieving topline growth, reaching gross margin in the mid 30s, and creating operating leverage is still realistic but not during 2013 as we expected before the Q1 decline in bookings.

To summarize, there is no change in the outlook since our April 8 call. The cautious spending environment that is affecting our market is likely to improve gradually during the year. This is the pattern we saw during a similar period four or five years ago. The improvement was gradual rather than abrupt and our older (inaudible) eventually became much stronger and led to significant increase in bookings and backlog.

As we and others have pointed out repeatedly, the fundamental growth drivers remain unchanged so we expect a similar pattern in the coming cycle. We have a large pipeline of potential business including a lot of interest in our new products. We are determined to maintain our lead both in terms of technology and costs and (inaudible) to capitalize on the upturn when it comes.

So unless something changes, we intend to carefully manage through the short-term, sustaining our investment in key areas but maintaining tight controls in order to build long-term value.

Now I would like to turn the call over to Aviram to discuss these matters in more detail from the financial perspective. Aviram?

Thank you, Ira. Our first-quarter revenue was $19.9 million, a decline of about 16% sequentially due to lower than expected bookings which were unexpectedly weak during Q1. Our GAAP gross margin of 13.5% includes $300,000 of amortization of intangible assets, $400,000 of inventory step up, $200,000 of restructuring charges, $300,000 of charges in pre-acquisition indirect tax position, and $100,000 in stock-based compensation. Excluding those items, non-GAAP gross margin was 31.9% below Q4. Finally, due to lower absorption of fixed costs because of the lower level of revenue.

First quarter GAAP operating expenses were $36.2 million. Excluding $400,000 in amortization of intangibles, $1.1 million of stock-based compensation, and $2.6 million of restructuring charges, our non-GAAP operating expenses were $32.1 million compared to $33.8 million in Q4 reflecting the full effect of the cost reduction initiative implemented during Q4.

On a GAAP basis we reported an operating loss of $8.7 million. Our non-GAAP operating loss for the first quarter was $3.4 million.

Finance expenses in Q1 was $4.6 million mainly due to the one-time currency devaluation in Venezuela in the amount of $3.1 million and tax expenses was about $800,000. Note that excluding the currency devaluation, finance expenses was about $1.4 million in Q1, $1.5 million sold in Q1. (inaudible) we want to assume a similar rate of non-GAAP finance expenses for the balance of the year.

On a GAAP basis, we reported a net loss of $14.1 million or $0.38 per share. On a non-GAAP basis, we reported a net loss in Q1 of $5.7 million or $0.16 per share.

The geographic breakout of revenue appears (inaudible). Asia-Pacific, where revenue tends to be lumpy decreased in Q1 versus Q4; India, which has not opened up as yet was about the same as in Q4; Latin America continued to be the primary source of strength and remains about these same as Q4 in actual dollars and increase of a percentage of revenue. Africa improved in both absolute and percentage terms. Europe which has been holding up well was weak in Q1. We had one 10% customer in Q1, a large Latin America group of affiliate customers. OEM sales accounted for 4% of total revenue.

Turning to the balance sheet, trade receivables decreased $129 million putting DSO at 110 days, another sequential decline. Cash flow from operating was $2.9 million and our cash and cash equivalents were $51.6 million, the same as at year end.

As you will recall in March, we completed the new $73.5 million credit facility that replaced our previous credit agreement. As of March 31, we had $42.7 million in debt leaving us with significant additional borrowing capacity.

Looking ahead to Q2, we are expecting revenue to range between $82 million to $92 million, no change from the indication we gave in April. We arranged for the additional credit facility recognizing that our working capital needs could be very lumpy. Although we still see significant negative operating cash flow in Q2, we expect an improvement in bookings to bring us back above the revenue breakeven point within a few quarters making our cash needs quite manageable. We have enough finance flexibility to take us well into next year in the current environment.

Now I will turn the call back to Ira.

As you gathered from our remarks, the picture is the same as we described in early April. As expected, we have seen the first signs of improved bookings and we will manage carefully for some difficult quarters just as we have during past periods of uncertainty, staying focused on delivering the long-term performance that our already identified opportunities will support.

Now we will be happy to take your questions. Operator?

(Operator Instructions). George Iwanyc, Oppenheimer.

Thank you for taking my questions. With the relative strength that you are seeing in Latin America and the improvement in Africa, can you give us a sense of what is happening in those regions relative to the weakness in the rest of the world?

I think that what we indicated over time is that what we see with our existing customers is they continue to deploy. The places where people continuously deploy extensively at this point is the place where we are still expanding the 3G or 3G++ types of networks letting what you see in Africa and Latin America. In places like Europe or where they are planning on LTE deployment in some places in Asia-Pacific, they are more hesitating within those regions and the only place which is extensively deploying LTE at this point is the US.

That is why we believe Latin America and Africa will still stay a very much focused area for us with our existing customers for continual business with them.

Okay. You mentioned that 90% of the revenue stream right now is coming from existing customers. What has been typical if you went back a year or a year and a half ago? How do you see maybe getting back into an area where you can either grab new customers or start displacing competitors?

The number 90 plus is a little bit on the high side but a year, year and a half ago we would have seen above 80% of where we are going. I think that the trick there is gaining market share and moving within customers is highly dependent on the ability to use what we call disruptions within the market or changes within the market and provide those changes. The thing that we have rode over the past shift from PDH to SDH event from no capacity to high capacity to hybrid, we believe that the shift towards small cells will be a similar opportunity for us and we are already introducing new products both what we announced like IP-20 which caused us a disruption on the capacities and the ability to do one gig in year in a single channel and to do some additional products into customers.

What we are really seeing there, the customers say yes, it is very interesting but it is not yet turning into business. This is more of an opportunity as we proceed into -- end of this year but mainly as we proceed into 2014 where we believe the disruption or the change in the market will give us an advantage for the many new technologies we are introducing.

And when you look at small cells, is that largely incremental new locations and new opportunities to -- more of a greenfield opportunity as opposed to an existing and upgrade opportunity?

Both because when you look at small cells, they are part of our vision of what we call [CH] and of (inaudible) networks and their holding and it changes the whole network architecture and it is not just the small cell itself. It is the way the small cell is being integrated into the macro base stations, different technologies for small cells and other pieces of that how do you do (inaudible) totaling for the macro cell.

So there is a whole architecture that needs to be moved ahead to be able to do holistic holding of the network.

Okay. Just one last question. Can you give us a sense of the capacity utilization and back haul right now with the equipment that has been installed over the last two years? Are carriers in a position where they have ample capacity right now on the back haul or are they going to see a bottleneck with this held off spending right now?

Operators are seeing a bottlenecking capacity and equipment which was installed five and seven years ago. With equipment that we have installed as high capacity ever the last few years, it is still not reaching, we don't see a cycle of replacing that equipment very soon but as we progress, that equipment will shift.

We still see a lot of replacement, a lot of our business both in Latin America and other places really in taking old equipment and upgrading it to the 250 type megabit type of links.

Okay. Thank you very much.

(Operator Instructions). Aalok Shah.

Ira, just a couple of quick questions. One of your competitors last week mentioned that the pricing environment has gotten even more worse. And I'm trying to get a sense of are you seeing something similar in terms of pricing disruptions you have seen in the last few months as well as are you seeing the Asian competitors getting a little bit more aggressive? Also in the same timeframe?

Not really. I think that we are still seeing the same level of pressure from the Asian competitors as we have seen in the past. I don't think that we have seen any significant change within the pricing although I should say that because of the position and our cost position in the market we are a little bit less sensitive to the pricing pressures within the market.

And then specifically if you can kind of walk us to geographies as to what you think are going to be strong and weak over the next few quarters from a bookings perspective. Can you give us a sense of where maybe we should be starting to look for potential growth areas?

I think we will continue to see strength from Latin America and Africa over the next few quarters and I believe Europe will stay flat. And my belief -- Asia Pacific which will include India, will fluctuate over the next two or three quarters. For us, the US which is a smaller portion, will probably grow but the numbers for the US market are still small enough overall so they will not have a major effect on the total numbers.

And from a collection standpoint, any issues that you are seeing collecting from customers at this point?

No, as you saw, collection was strong; DSO went down to 110 days. So we don't see any particular -- this quarter we don't see any particular pressure on the payment terms at this point and the collection over the next couple of quarters.

Okay. And then last question for Ira, just in terms of again just the small cell opportunities. Can you walk us through what geographies you expect? I know that North America is moving fast with small cell as you mentioned already but can you give us a sense of where are you guys think you might be able to penetrate further with small cell?

Small cell I think will start penetrating mainly in Europe and take opportunities in Europe first. Maybe somewhat in the US but not as strong but my belief we will see them in our geographies first in the US and then in some places in the Asia-Pacific region.

Great. Thank you so much.

Thank you.

(Operator Instructions). No one is queuing up for questions.

Okay. So I would like to thank everyone for joining us this morning. We will be at Citi in Las Vegas May 21 to 23 and we will be in the booth so if anyone wants a one-on-one face-to-face discussion, you are invited to visit us at our booth at CTIA.

Thank you very much, everyone. Any further questions please don't hesitate to call us direct. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.