Ceragon Networks Ltd (CRNT) 2013 Q2 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Limited second-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 Networks.

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 future results will be achieved and actual results could differ materially from forecast and estimates that are important factors that could cause actual results to differ materially from forecast and estimates.

Some of the factors that could significantly impact forward-looking statements in this include the risk of significant expenses in connection with potential contingent tax liabilities associated with nearest private operations and facilities; risks associated with unexpected changes in customer demands; risks 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 Securities and Exchange Commission.

Forward-looking statements speak only as the date on which they are made and Ceragon undertakes no commitment to revise or update any forward-looking statements in order to reflect events and circumstances after the date any such statement is made. Ceragon's public filings are available from the Securities and Exchange Commission website at www.SEC.gov or may be obtained on Ceragon's website at www.Ceragon.com.

I would now like to turn the conference over to 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.

We are pleased to report that we are beginning to see signs of improvement in the business environment. Revenues in Q2 were towards the upper end of our guidance. After a weak booking quarter in Q1, we were very pleased to see Q2 bookings return to levels near the average with a book to bill well above one.

Operators are still proceeding cautiously due to ongoing macroeconomic uncertainty, revenue per share and the challenge of planning a smooth transition to next-generation LTE networks.

Within the context of a generally cautious environment, our pipeline of potential business continues to increase. We are beginning to see some encouraging signs in the form of more LTE-related projects notably in Latin America and Asia. As we announced recently, while partnering with the largest mobile operator in Brazil to expand and upgrade its network capacity to accommodate full LTE coverage before the Mondial, the Soccer World Cup next year.

In India, where our 3G deployments have been mired in regulatory issues, one of the largest LTE networks has been rolled out deploying over 10,000 links of microwave backhaul over the past year and a half. By addressing the needs of this operator in India, we have acquired a very strong reputation which positions us very well for the new highly prized greenfield LTE project in India that everyone is talking about.

The new one is extremely large, several times larger than the first rollout. We are on the short list and we believe we are well positioned to benefit from our strong reputation and long-standing presence in India to gain a significant share of this project.

During the second quarter, Latin America and Africa continue to be the main drivers for our business. The impact of our strong Q1 relationship is becoming more apparent as these operators extend their deployments and we expand to additional geographic regions served by these customers.

As you may recall in Q1, Latin America was quite strong led by a key customer group which accounted for over 10% of revenues. We expect Latin America to remain one of our strongest regions. In addition to the 10% customer group from Q1, we are expanding our relationship with Telefonica, a global Tier 1 telco with operations throughout 10 countries in Latin America. It is likely they will become a 10% customer in the future quarters.

In Q2, Africa was quite strong and we had a 10% customer from this region. Sub-Saharan Africa is considered the fastest-growing mobile subscriber market in the world and Nigeria is the most populous country in Africa. We have a long-standing relationship with Globacom, one of the largest operators in Nigeria and Africa's fastest-growing telecommunications company. So this type of relationship we expect to be able to take advantage of this subscriber growth.

While mobile subscriber growth in emerging countries is to be a source of growth for us, the main driver of micro evolving growth over the next several years is likely to be the implementation of next-generation LTE-based networks.

Most of the major LTE launches to date have been in the US, Japan and Korea in open areas with high availability of fiber. As LTE deployments extend to suburban and more rural areas and to other parts of the world, microwave will play a greater role.

Industry analysts estimate that microwave could account for over 35% of the LTE backhaul market outside North America within five years and could even serve 50% or more of the LTE cell sites in many developing countries.

As operators evaluate their LTE business models, they are considering a variety of strategies. It's no coincidence the telco mergers and acquisitions have reached a level not seen in over a decade. In addition to T-Mobile and MetroPCS, to SoftBank and Sprint Clearwire in the US, consolidation among mobile operators picking up in Europe as well.

Recent examples include Telefonica agreement to buy E-Plus, the German mobile unit of KPN which is the third-largest mobile operator in Germany; the announced combination of Telefonica O2 Hutchison's 3 brand to create a strong number two carrier in Ireland; and Hutchison's acquisition of Orange Austria.

Combining Metro (inaudible) mergers obviously creates a unique set of challenges. Some of these operators are our customers and this consolidation creates opportunity for us to provide technical solutions, network planning assistance, and support to solve the challenges all focused on very high capacity and efficiency.

Another new business model is to share infrastructure without merging. Network sharing is becoming an accepted model among mobile operators looking to reduce costs. These arrangements are becoming more widespread in Latin America where our OEM team were among the first to agree to share physical LTE infrastructure. Network sharing is also gaining momentum in Europe as operators look for better ways to handle the investments associated with deploying LTE.

Another approach gaining momentum is a wholesale capacity models using or alternative access vendors. This is what we used to call carriers of carriers. As operators consider some of these strategies as well as continue with traditional network deployments with small cell options just around the corner, it's obvious how complex a task of network planning has become. In the long run, we believe this complexity favors large specialists like Ceragon because we are focused 100% on addressing these pain points.

Currently we find that among the things that all operators are looking for are more capacity in the case of wholesale model, a lot more capacity in the small form factor and smaller footprint regardless of cell side. Additional spectrum requires additional radios. As one operator put it, space is money.

It's important to know that we are leading the way in alkali capacity microwave. We recently introduced the first product in our FibeAir IP-20 series featuring the most complex, highest bandwidth, highest power radios in the industry. Notably, we serve many of the alternative access vendors and we have received orders for our new products from eight customers, six of them in the US.

Our ability to offer ultra-high capacity means we are in a good position to grow our share of the LTE backhaul market. We have seen signs of this already in the field but the operators was planning fiber but reverted to microwave due to high capacity available combined with superior speed of deployment.

It is becoming apparent that our future roadmap is also an extremely important competitive factor. Soon we will be introducing additional products that address the unique requirements of network sharing with advanced features to support operators' diverse requirements and provide transparency for the individual service-level agreements and key performance indicators.

We will also be offering products tailored to the much discussed small cell architectures but we don't see significant volume until around 2015. Meanwhile, these other strategies are adding to a pipeline of business opportunities and generating revenues to date.

To summarize, we are experiencing a little better overall environment. We think we have seen the low point in terms of booking and expect revenues to stabilize in the second half with some gradual improvement to bring us back to profitability by Q4. We also continue to be encouraged by the customer feedback on our new products and expect meaningful revenues from new products beginning in 2014.

Now, I'd like to turn the call over to Aviram to discuss the financial picture. Aviram?

Thank you, Ira. Our second-quarter revenue was $90.1 million, near the high end of our guidance and the same level as Q1. Our GAAP gross margin was 31.7%. Non-GAAP gross margin was 32.4%, a slight improvement from Q1. The non-GAAP figure excludes $300,000 for amortization of intangible assets, $200,000 of changing the acquisition indirect tax position, and $100,000 in stock-based compensation. Second-quarter operating expenses were $33.2 million. Non-GAAP operating expenses were $31.9 million compared to $32.1 million in Q1 reflecting our continued focus on expense control.

The non-GAAP operating expenses excludes $300,000 in amortization of intangibles and $1 million of stock-based optimization. On a GAAP basis, we reported an operating loss of $4.6 million. Our non-GAAP operating losses for the second quarter was $2.8 million.

Finance expenses in Q1 was $2.2 million which includes a $900,000 currency devaluation in Argentina. We expect this to be recurring so our assumption for quarterly finance expenses going forward is around $2 million. Tax expenses was about $700,000 in the second quarter.

On a non-GAAP basis, we reported a net loss of $7.5 million or $0.20 per share. On a non-GAAP basis, we reported a net loss in Q1 of $5.7 million or $0.15 per share.

The geographic breakout of revenue appears in the press release. Africa was particularly strong increasing significantly from Q1. Latin America was down a little from an extremely strong Q1 but still showing very good results, while the remaining regions continued to be sluggish. We had one 10% customer from Africa this quarter and our OEM sales accounted for 11% of total revenue in Q2.

Turning to the balance sheet, trade receivables decreased to $123 million putting DSO at 111 days similar to Q1. Cash flow from operations was negative by $8.8 million, and after purchase property and equipment, our negative cash flow in Q2 was about $14 million. We drew down on our credit facility so that the cash and cash equivalents were $49.1 million.

It's important to note that as we expected our cash flow can be erratic from quarter to quarter. But over time, it is similar to the size of our profit or loss. As we move towards reaching break even by the end of the year, we expect the loss to decline but actual cash flow may continue to be erratic from quarter to quarter.

We continue to have ample financing flexibility to reach breakeven. At June 30, we had annual borrowing capacity of close to $20 million in addition to the $49 million in cash on our balance sheet. As mentioned, the improvement in booking patterns is encouraging and we are expecting revenue for the third quarter to range between $88 million to $98 million. We believe gradual improvement in the second half will enable us to return to profitability in Q4.

Now, I return the call back to Ira.

Thank you, Aviram. We have a large and growing pipeline of potential business with some central interest in our new products. We are pleased to see improvement in booking that we expect to take us above our revenue breakeven point. Meanwhile, we continue to manage carefully through the short term and continue to work on penetrating the market in our new products to enhance the likelihood that 2014 will be a much better year.

Thank you and now we will take your questions.

(Operator Instructions). Michael Walkley, Canaccord Genuity.

Great, thank you. Congratulations on the strong bookings. As you look into getting back to breakeven and longer-term, can you just discuss, with 90% of your business from current customers, are your new products driving incremental sales into your current customer base or are you seeing with your new products and expanding opportunity to penetrate new customers?

I think we have -- Mike, I think the answer to your question is both. A, we are going off our current customer base with the products and solving new areas and new problems with them and we are expanding and have incremental revenues with current customers. In addition, and that's even more important, to really gain market share I need to open new doors and the new products are opening new doors in places we have not been there before. Mainly at this point not as revenue but in trials and experiments and field trials and the ability to really gain additional customers within our portfolio.

Okay, great. And when you say your new products will be a material part of 2014 sales, can you give any kind of color around that? Is it more than 10% of sales next year or could it be even greater?

We believe if I look at the whole product set by 2014 and I'm thinking the whole year, it will be more than 10%. We believe it will range somewhere around the 15% to 20% for the whole year.

Okay, great. And then on your strong bookings this quarter, are those with your current customers and can you give us some color on the regions you are seeing the stronger booking activity?

I think we are reporting mainly the revenues but I think it's at the same level that we have seen. We have seen very strong bookings coming out of Latin America and Africa with okay bookings in Europe and a little bit of weaker bookings for us both in Asia-Pacific region and in the US. We have not seen those two last regions bounce back yet.

Okay, great. One question from me just on the model and I will pass it on. Can you go over again what you said about the financial expenses? Is it $2 million per quarter for the foreseeable future? Is that what you said we should model?

Yes. This is the number, $2 million going forward is the devaluation that we are facing in one of the Latin American countries.

Is that through all of next year? Is that a good way to just --?

Yes, Every quarter, $2 million next year.

Okay. Thank you very much.

Joseph Wolf, [Arc].

I have two questions. One on the booking side, as you talk about -- as you start to feel a recovery or a strength in the bookings, you are dealing with some larger customers so maybe even larger contract sizes, bookings for a longer period of time -- Meaning if we used to think about bookings turning into revenues over a certain amount of time, is that now a longer period of time or are things relatively stable? And can you talk about how we should think about how bookings turn into revenues with the customer base and the kinds of projects you are working on?

I don't think that the booking conversion into revenues change even with lower or higher bookings. I think the patterns that we have seen that is on average the conversion is somewhere around the six months is kept there.

The interesting part about some of those bookings as people are starting slowly to ramp up again, some of them become what I would call urgent. They delayed the bookings because there was a (inaudible) for a long time and then they are still not going for very large part. What they need is a little bit more urgent. I've seen a little bit more of those bookings with the customers saying okay we want it now.

But for a good guess, it is two quarters and that's why we believe that this will have an effect over the second half and we believe we can reach back to profitability by Q4.

Okay. Just a second question on the profitability and the cash and the facilities that you have. If I'm not mistaken, you talk to us -- if you look at the midpoint or so of the range that you gave on the guidance, that would point to operational cash loss slightly better than this quarter. How comfortable are you with where you are with that $20 million left in the facility or are you still working to extend your credit lines with some of your lenders?

We need to look at two elements. One is the overall cash reserve that we have in the balance sheet reaches $49 million. On top of that, we have close to $20 million of unused credit facility. If we are looking on getting back to operational profitability or net profitability towards Q4, basically over a longer period of time we are utilizing the fluctuation of the working capital, our cash generation or our cash use should reflect or reflect a trend the same as our non-GAAP profit and loss. So basically we have enough cash reserve plus in the balance sheet plus cash facility to maintain throughout the period as is required.

So you don't think they should we tapping that $20 million and you think that they will be around steady because it would seem to me as things get better there might be the high class problem of having to dip into your cash to fund some working capital to get stuff ready for a pickup in sales or is it not going to be that kind of acceleration?

I do not expect this kind of acceleration.

Okay, thank you.

George Iwanyc, Oppenheimer.

Thank you. Did I hear correctly that 11% of your sales were from OEMs in the quarter and is that a number that is going to jump around a little bit as we move through this year?

Yes, I think you heard correctly. 11% was from OEM sales. We have -- right now, it's going to jump -- it jumps up and down depending on projects.

Also the things we do today with OEMs and different OEMs is we work with them on specific projects and most of the deals are not ongoing blind eye orders but it's stuff we work with them and this quarter it's going up because we have gone from some projects in Africa with one of the larger OEMs and are supplying mainly at this point long haul with them.

As India starts to pick up, is that another area where OEM agreements could come into play and be a bigger portion to help drive more sales there?

Yes, again, project related. It's not overall India. With one of the customers, we do the deals, we are going to win, not with all the customers. Most of what we do in India is direct.

Okay. And then can you just give us your take on the current competitive environment both with the integrated suppliers as well as the merchant suppliers?

I think that the environment for competitive situation did not change. It's still tough out there. I don't remember and I've been here for a while, it's never been easy with the competition. I think in different markets we see different competitors. We don't see every one everywhere where we operate. And I think the market from the competitive environment is tough but stable. I think we've been seeing for example -- people sometimes ask me is there a change in the number or the percentage of system deals versus what you call merchant deal, or what we prefer as the specialist deals or best-of-breed deals. No. That number has been relatively stable around 50% in the market for the last few years. In specific environment or specific places, we see changes -- small changes in the competition as we go but nothing that is a significant change at this point. (multiple speakers)

The only other comment I will put on that is that what we do see that with our new products sets, we are changing the game plans in some places and have started seeing some of the competitors react with all sorts of things to try to soften the blow with the disruption that we put in some of the places.

Okay. And then just one last area. From a gross margin perspective, both when you look at the tail-end of this year, are we potentially getting back to a maybe more of a mid-30% type of gross margin as sales pick up a little bit?

And then when you look at 2014 with the new products starting to contribute, are they a higher-margin addition at that point or are they along the lines of traditional gross margins for you?

Well, you saw this quarter we improved the gross margin close to 32.5%. As we reach $100 million plus on the top line, it should bring the gross margin closer to 34%. Going to next year with the new product contributing 10% to 20%, the gross margin is higher which should model building them gradually through the year to 10% to 15% to close again to the 35% gross margin towards the middle of the year.

Okay, thank you very much.

There are no further questions. Please continue.

I would like to thank everyone for joining us on the call. Please feel free to call us both personally myself and Aviram if you have any further questions. And as the environment around us slowly improves and we launch our new products, we believe we are on the track that we want the Company to be in. Thank you, everyone.

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