Ceragon Networks Ltd (CRNT) 2013 Q4 法說會逐字稿

Welcome to Ceragon Networks Ltd. fourth-quarter and full-year 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 statements concerning Ceragon's future prospects that are forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including risks associated with doing business in Latin America, including currency export controls and recent economic concerns; the risks relating to the concentration of our business and developing nations; the risks of significant expenses in connection with the potential contingent tax liability associated with nearest prior operations for facilities; risks associated with increased working capital, needs, and other risks and uncertainties detailed from time to time in Ceragon's annual report on Form 20-F and Ceragon's other filings with the Securities and Exchange Commission; and represent our views only as of the date they are made and should not be relied upon as representing our views as any subsequent date. We do not assume any obligation to update any forward-looking statements. 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 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 period with me on the call is Aviram Steinhart, our CFO. Our Q4 results were in line with our guidance within a generally still challenging CapEx environment. Our businesses remain pretty stable. The feedback on our new product portfolio is outstanding, and we are looking for gradual improvement beginning in the second half of this year. There are no meaningful (inaudible) changes during Q4, just the normal quarter to quarter fluctuations. Latin America continued being very strong, and Africa showed the lumpiness we have come to expect.

Our book to bill in Q4 was below [one], but not enough to cause us any major concerns. Some seasonal softness is typical in Q1 and is almost always a bit lower than Q4. Therefore, as we expected, 2014 is likely to get off to a slow start, followed by a pick-up in the second half of the year; something we have been talking about for quite a while.

We want to emphasize that we have some very specific reasons for expecting improvements in the second half in addition to our sense the deployment and expansion of LTE networks in North America, Europe, India, and parts of Asia will lead to gradual overall growth in demand.

We have made significant progress on the number of large opportunities since we first began looking through the second half of 2014 at the beginning of an [up-trend]. The closer we get, the more confidence we are developing, and it's becoming more apparent that the timing of our IP-20 platform is an advantage. We are moving through the various stages of evaluations and field trials with various operators, and the feedback is consistently very positive. Several of these opportunities are both large and appear sufficiently advanced, so we can reasonably expect to receive orders in a time frame that will turn into revenues in the second half of the year.

As you know, per announcement a few weeks ago, we have already received the first order of our IP-20C and IP-20N from a new customer for a very large project in India. And we expect to play a key role in this project by taking a majority of the microwave holding portion, including installation. As we announced at that time, we also received an initial order from North America for the IP-20A, which supports multi-gigabit data rates to meet the requirements of the coast-to-coast LTE network. This is just the beginning of what could be a very large project. We expected strong interest in our new IP-20 platform because of its ability to address the full scope of backhaul and front-haul needs and its total cost of ownership benefits in addition to functionality leading with the capacity.

We expected our time-to-market advantage over our competitors to open some doors for us. This is often what it takes to penetrate new customers; a change in the requirements that only you can advance with a proven, working solution. So we expected a lot of interest; we are pleased to see that it's already growing beyond the curiosity stage.

Our bookings in Q4 of IP-20 were already 15%, while revenues were still single digits. We are also pleased to see that we are being encouraged to participate in tenders with new T-1 operators in multiple regions where we have never participated before. Seeing our large competitors respond with promises to deliver similar capabilities validates our vision and confirms that we are not only on the right track but also some distance ahead of the pack. Taken together, all these indications give us confidence in our mid- to long-term future.

Meanwhile, we continue to grapple with a variety of day-to-day challenges in our existing business. Negotiating acceptable payment terms and getting operators to honor them afterwards continues to be a large challenge in certain places. Economic turmoil in certain countries and the implications for currency devaluation issues is causing us to shift our focus somewhat within certain markets.

And there is always the potential for short-term hiccups as our customers organization evolves and adapts to internal and external change. Therefore, in the first half of the year, Latin America may be slower than it has been recently; Africa will probably continue to be lumpy; and North America and India will probably be a bit stronger, consistent with our recent announcement. Then, as we get into the second half of the year, we will be looking for gradual improvement from both a pick-up in the market as well as initial contribution from new business we hope to win from the T-1 opportunities we talked about.

Now I would like to turn the call over to Aviram to discuss the financial details.

Thank you, Ira. I will go through the Q4 results and provide some comments on the outlook for the coming quarter. Our fourth-quarter revenue was $89.5 million, within the range of our guidance, close to the average of the past several quarters. Our GAAP gross margin was 31%. Non-GAAP gross margin was 32.1%, a slight sequential improvement as expected. The non-GAAP figure excludes $300,000 from amortization of intangible assets, $200,000 of changes in pre-requisition indirect acquisition, $400,000 of construction-related expenses, and $40,000 in stock-based compensation. Fourth-quarter GAAP operating expenses were $37.3 million. Non-GAAP operating expenses were $30.3 million, compared to $31.6 million in Q3, reflecting a portion of impact of our restructuring measures taking (inaudible).

The non-GAAP operating expenses excludes $12.1 million for structuring-related expenses, a $1.3 million adjustment of pensions liability in Norway, $7.7 million primarily related to the expiration of certain pre-acquisition indirect tax exposure, $300,000 in amortization of intangibles, and $900,000 of stock-based compensation.

On a GAAP basis, we reported an operating loss of $9.6 million. Our non-GAAP operating loss for the quarter was $1.6 million.

Finance expenses in Q4 was $5.2 million. Non-GAAP finance expenses of $1.8 million exclude $3.3 million related to the actions taken in order to [expatriate] (inaudible) Argentina. Tax expenses was about $700,000 for the quarter.

On a GAAP basis, we reported a net loss of $15.4 million, or $0.35 per share. On a non-GAAP basis, we reported a net loss in Q4 of $4.1 million, or $0.09 per share.

The geographic breakout of revenue (inaudible). Latin America continued to be particularly strong, partially offsetting low revenue from Africa, which tends to be lumpy from quarter to quarter. We had one [10%] customer this quarter in Latin America. Our OEM sales accounted for about 4% of total revenue in Q4.

Turning to the balance sheet, (inaudible) increased slightly to $131 million. Cash from operating was negative by $16.1 million. We repaid $4.4 million of our bank loan. And with the net proceeds of our following offering in November, we ended 2014 with cash and cash equivalent of $52.3 million at the end of the quarter. At the year end, we had annual borrowing capacity of $16.3 million in addition to the cash on our balance sheet.

Looking ahead, we expect revenue for the first quarter to range between $83 million to $93 million and will probably remain at this level for the first half of the year. We expect the remaining construction-related expenses in Q1 to be at the range of $3 million to $5 million, with a very small amount remaining in Q2.

As we said on the last call, the measures we took in November are expected to result in savings of about $25 million a year. Lower COGS and higher margin on new premium products will have a positive impact on the gross margin in the second half of 2014. For the first half, gross margin will likely be similar to Q4.

With non-GAAP operating expenses expected to range between $27 million to $28 million in the third quarter, after the full effect of the restructure in Q1 we are positioned to deliver substantial operating leverage, assuming the market begins to pick up in the second half as expected.

Now I will turn the call back to Ira.

(Technical difficulty). I think you lost me because I was on mute. And Aviram turned to me, so I apologize. Aviram, thank you for the details. I'll repeat what I had to say, that we are encouraged by the way that several major new opportunities are developing. We believe that reaching a certain scale as the largest holding specialist with the broadest global footprint is an important factor in our progress in addition to our technology leadership. We suspect that the gap between the competitors this year will widen and that the pick-up in demand will benefit us more. We are determined to build on our strengths and think we are in a very good position as we enter the new year.

Now we will take questions.

(Operator Instructions) Ittai Kidron, Oppenheimer.

A couple of questions here. I wanted to talk about the new platform, the IP-20. Clearly, it's going well in the field, and you've talked about the growing interest from some tier ones in the platform. But maybe you can kind of lay it out for us more in an historical perspective. In the past, when you went through such product transitions, how long did it take before they actually hit inflection points, and how long did it take before they were at the kick cycle from the time of the initial product announcement?

I think we look at -- and I look at two cycles of the client down -- we have done here in Ceragon. One, in the beginning of 2008 with our IP-10 platform; and then a second cycle -- a much smaller one when we acquired Neva when we had to replace their products with our own platform.

It usually takes around the year to reach 70%, 80% of the bookings on a new platform. That is also our expectation for this year that, by Q4 of 2014, we will be in those ranges of the bookings coming in, which will probably have an effect on the revenue -- the revenues are stretched a little bit longer because, until you recognize some of the -- it is spread out probably over one or two more quarters.

And from a cycle perspective and a market perspective, it's probably a year and a half in total what you would call full-blast moving ahead.

So just skipping forward, then, from your perspective, 2015 is a full-blast year, as you described it?

Yes. Assuming the market and the market demand is there, and we believe the market demand will be there (inaudible) last year.

Okay. Can you tell me how much of the interaction you have regarding this new platform is with new customers versus existing customers?

I would say almost 50-50. The reason being that we do have an inclination to walk in with a new platform into new customers. Because with existing customers, you have to walk very carefully on the plan with them to not totally cannibalize or stop our current sales with them. And they are less inclined on shifting to a new platform if they get very good service from the existing one. So we use it initially as a platform. And that's [with] being last year, into gaining new customer places we are not in and really using the technological leverage and the time-to-market advantage in those situations, while more gradually migrating existing customers to the new platform.

Got you. And then, Aviram, a couple for you. Just can you give us a little bit more color, just given you did the transaction in the market in the fourth quarter? How should we think about what is share count at current stock prices for the March quarter? And also, you've done a lot of the restructuring side. Where should the OpEx kind of bottom out here? At what level of what quarter?

Okay. In terms of number of shares, for the model it should be around between 50 to 52. (Inaudible) would be the share price, would go around to 51. In [total], 51 million shares. In terms of the restructuring, overall we are taking $25 million of expenses out of the P&L. $5 million is going out of the cost of control (inaudible) annually (inaudible) the OpEx. So it's $5 million a quarter in the OpEx; we were running [32], we should be around at [27] a quarter.

Next quarter, we should be somewhere between the 27 to 28, and the quarter after we should be, in Q2, [27] and [under] 27. In terms of the restructuring expenses, the vast majority of it was this quarter. And we have several employees who will continue to work us in the [customer] office (inaudible) which we are -- the (inaudible) mode, so there will be $3 million to $5 million in Q1; and less than [$1 million] -- or around [$1 million] in Q2. So there is really a small fraction of the restructuring staying in Q2. We are going to complete it this quarter.

Right. But just to fine tune that, when you talk about half of the benefits coming into COGS line -- so even though the IP-20 would make most of its impact starting late in the second half and into 2015, already in the June quarter we should see improvement in gross margin because of that, right? Because of the restructuring?

No. What I said in the discussion before was that we will see probably first happen around this range. The pick-up of the product with mass production will create a full effect in the margins in the second half. Because now the volumes, which also have an effect (inaudible) more trying. So I would model the first half of this [level], the second half start to pick up.

Alex Henderson, Needham.

Thanks. I just wanted to date a couple of couple of qualitative issues. One, can you talk about whether you have seen any change in what you have been thinking about; the field conditions as a result of what's going on in Latin America subsequent to you being out on the road for your offering?

What we see globally -- we see two things. Since we've been out on the road, we have been very encouraged by seeing -- in India, mainly Europe, and somewhat in Africa -- encouragement around pushing LTE, mainly in Europe, and big projects coming up. And I would say a competitive environment between the operating [happening]. We do see a lot more caution in Latin America at this point having to do with currency fluctuations and mainly [devaluations] and difficulties there. And we are a little bit more cautious with some geographies because of that and the way we do the business.

Do you have any exposure to the troubles that are going on in Argentina? For instance, where they are really talking about closing down that market in a hard way, as a particular venue?

We are seeing challenges in two countries -- Argentina and Venezuela. And our plan both on Argentina and Venezuela initially when we talked about the numbers was much lower than in 2013, look into 2014. Having said that, what you are saying could be even more challenging, and can we create additional [effects], because those two economies and the currencies around the (inaudible) processes [driven] and putting more (inaudible) on the operator to bring in equipment. So, for now, we already planned significant more lower revenue coming in in Venezuela and Argentina lower. And, again, we are monitoring it all very close (inaudible) differently can affect us.

So is the India tick-up more substantive than the slow-down in Latin America?

Over time, yes. Timing-wise, I'm not sure especially because of revenue recognitions. But just to highlight a point there, please note that even this quarter we took a hit of $3.3 million on a non-GAAP basis on the financial expenses because we took measures to take all sorts of cash we had in Argentina out. And we took -- there were issues around it, and we took a big hit there.

All right. And then looking at the commentary about larger -- significantly larger transactions, can you give us a little bit of a sense of -- and are some of these transactions, scale-wise, quite different from what you have been seeing in the past as a result of your big programs that haven't been evident over the last couple of years? And then similarly, does the rollout of LTE cause some acceleration in some of those contracts? And how do you see that playing out with a small-cell stuff?

Okay. So I will take it one by one. Yes, those are probably larger scale than we have seen in the last few years, mainly because we are talking to T1 operators we haven't been talking with before across a few of the markets. And those are -- tend to be much larger-scale type of operators that we have not been dealing with in the past, and the new platform generates that demand.

Those operators are really talking about rolling out LTE. By the way, mainly at this point, macro- and micro-cell sites; not as much as the small cells. Small cells -- or outdoor small cells (inaudible) around the corner are not there yet. And their plans are -- I would say are accelerating, but they will not occur as a very big boom because those are very big projects. And that is why we are saying we will see only initial set in the second half, but I think those will also roll out -- will start rolling out in the second half for those operators.

And have small cells slowed down the process, or is that now --

I think small cells is still a discussion within the operators. I think they need to deploy LTE first at the macro and micro level. Small cell is something which we'll see significant, especially on the outdoor side, only at the end of 2015 and 2016; it's not something around the corner. We will see coverage mainly indoor, where we are a little bit less involved, earlier where they will need to catch up LTE coverage on an indoor environment.

Then just going back to the share count question, what was the exact ending share count at the end of the year for our models?

As I said, it should be around $51 million.

So is the ending share count --

End of the year. You have the every (multiple speakers) --

Ah, the average.

No, not the average. The actual ending.

Yes. The [action] that you would use in the model, [said] it should be around $51 million.

What was the actual ending share count is what the question is. So year-end ending share count.

Total number -- I just need to make sure I understand it -- total number of shares out with -- out in the --

At the very end of the quarter. Not the average for the quarter, but the end of the quarter.

Yes. 52.

It's $52 million?

Yes.

So why with it be lower in 1Q, then?

Because it's depending on time of the calculations, the accounting, depending on the share price. (Inaudible) we need to look into. We should have some lower amount in the total number of shares.

Okay. I will take that off-line. Thanks.

Peter Misek, Jefferies.

Just a question on the industry in terms of competitive pricing dynamics. It seems, based on the work that we've done, that there has been a lot of price aggression by some of your competitors to try to stay in the market. Maybe you can address that.

At what extent -- at what point in time do we see one of the competitors drop out? Or should we think of industry consolidation? How do we solve this pricing dynamic? That's the next question.

And then the final question, for gross margins, I guess if we look at the operating model longer-term, we would expect that gross margins would have been a little bit better. Maybe you can help us understand the puts and takes as it relates to the medium-to long-term on gross margins. Thank you.

I'll take the first half and let Aviram handle the gross margin piece. Pricing dynamics have always been competitive, and I think you alluded to the fact there are quite a few competitors in the market. By the way, we do not see all competitors in all markets. We see different competitors in different markets, depending on the different geographies. In each one of those, we do see sometimes the competitor who is willing to be the [rabbit] on the pricing. By the way, sometimes we are the rabbit on the pricing in some of the deals. I do not think that the market dynamics of that type have changed over the last two to three years. It's always been aggressive. And usually when there is a change of the technology, the people who lag sometimes like to use the pricing as a way to stay in the game for a while. This plays into mainly deals which do not require the new functionalities. And there, I think, even with our current product, we can respond to the pricing pressure; which is balanced somewhat by getting better margins from the new products, both because of cost and because of sometimes a little bit of premium pricing because we advantaged the functionality of the product.

You did ask the question on when will some competitors be out of business. What should I say? Competitors -- from my perspective, the sooner the better. I think most of them have their way of running the business, and it's sometimes a variation from the other side. I do not expect that to happen soon or around the corner. We need to plan, as we will continue, to compete in this environment for a while.

Aviram, Do you want to take the work margin piece of that?

Yes. Can you please repeat the question on the gross margin?

Yes. Just on gross margins, I would have expected gross margins to have been a little bit higher in the last quarter. Maybe we can address gross margin pluses and minuses for the medium- to long-term.

As we said, the maybe you guide me to what you are looking at. We said we expect in the first half, gross margin to stay relatively flat, around the 32% that we have over the last several quarters. We are talking in the first two quarters.

The plus and minuses -- the minuses -- or the plus is improving the gross margin and basically the fact that we took measures which is roughly when the full effect is roughly 1% gross margin, influencing the gross margin up as a result of fixed expenses going down. On the other hand, we are just starting producing the new products. And here, there is mass production -- and the prices of mass production inhibit of beginning of productions of IP-20G; IP-20N in mass production; IP-20C mass production. There is a process when you start to put them on the lines (inaudible). Without [others] in the lines, there is a process that will take a quarter or two quarters; this is our experience. This is why we should expect the full effect of [V20s] becoming more into the revenue and more into a higher mass production in the second half of the year.

Okay, great. Thank you.

Sid Sinha, Canaccord Genuity.

Thanks for taking my question. Just a quick one on the IP-20 mix as a percentage of total revenue. Earlier, I think you said that it was about 15% of the bookings. And on the last call, you talked about expecting it to be about 50% of the bookings exiting 2014. So would you think that within a year, it should reach about 70% to 80% of bookings? Should we think about this as accelerating? IP-20 as a percentage of mix, throughout the year, was this your prior expectations?

Yes. I think it will meet -- probably grow almost linearly between now and exiting 2014 in the mix of the products. That is on the booking side. We probably we need to probably add [a quarter] to a [quarter and a half] into the revenue side. Which is typical to everything that we do is that between bookings and leveraging out effects of revenue, it's a [quarter] to a [quarter and a half].

Okay. Great. And just one last one for me. Just stepping back a bit, and as we step into the first quarter of 2014 with some of the larger operators [lean] on their CapEx plans for the year, where they are generally any surprises for you in terms of your prior expectations from these operators? Any losses or negatives for any region or any operator in particular?

I think that if you look at the budgeting cycles, I don't see any major surprises. But I think, as we expected, we will probably see a CapEx cycle going into and accelerating in India on some of the competitors there; but that was our expectation. We will probably see a little bit of a slow-down in Latin America -- somewhat also in Brazil for this year because they have the World Cup and probably they prepared for it. We'll wait for the World Cup, and then probably we will take up next year toward the Olympics in 2016, which is typical cycles within different operators.

Thanks. That's it for me.

Bob Sales, LMK Capital.

A couple of questions. First of all, you mentioned the Indian opportunity. Has that opportunity -- I think when you first talked about it a few months ago on the [deal] road show, you expected you would be splitting the business, if you were able to win it. Is there -- are you now seeing a bigger share of that rollout?

First, let's not talk about India. And I think it's not a single opportunity because once the India market starts to move, it's more than a single opportunity out there. You are referring to one of the opportunities which we think we are in. We will probably split that opportunity, but I'm not sure that splitting will be half-and-half. Like any deal that we do worldwide, there is never a single competitor within the operator. And we always walk in -- I wouldn't say two steps, but it's always a continual process. We enter, we take a certain market share, and then we work very hard to increase that market share within the operator. True for all opportunities, including India.

Okay. And then with respect to Latin America, are you seeing currency pressure across all the countries that you do business with? Or are there certain countries that, like Brazil, that appear to be more stable and business is being conducted as usual? I haven't really looked at the riel to see what the valuation has done.

We need to look on two elements. One is the fluctuation of the currency, and the second is the regulation that the government imposes on [importation] and taking money out. Any of this differentiation -- major differentiation between Argentina, Venezuela, and Brazil.

In terms of the regulation, the ability to import into the country and take money out -- Venezuela and Argentina, they are far more complex on top of the currency devaluation issue that those countries are facing and the control of the government on the currency.

On Brazil, it's of course open and you can import. And the regulation around the currency is much less strict, but the fluctuation of the riel has affected us. It went -- you see it was -- over the last year, I think it's around 15% or 16% evaluated, which of course affected us; at least, a portion of it. Because a lot of it is local services and also local equipment that we are buying locally, but the radios that we are shipping from here was effective. So we feel also in Brazil some (inaudible) around the currency.

So when you do business in Brazil specifically, are your equipment sales in US dollars or are they in riels?

No, the local to the customer, we are selling in riels.

Okay. And then (multiple speakers) in the installation services, you are buying in riels whatever you sub out, and then the equipment is -- your production basis is shekel or US dollars. Correct?

US dollars. Correct.

Yes. Okay. Got you. Okay. Thank you.

Gunther Karger, Discovery Group.

Good morning. Two questions. The recent announcement -- in fact, yesterday's announcement regarding the North American district distribution, what has been the impact you see that over the last year? Is that significant or insignificant? And the second question has to do with vertical markets. Would you care to make any comments on such markets as the Homeland Security or the utility markets -- markets of this type?

Okay. We did announce yesterday a deal we have signed -- an agreement we have signed with Tesco for distribution of the products. It is important for us because, in some of the region and mainly in the North American region, part of the business that we do to serve some of the vertical markets like Homeland Security and many of the smaller deals is growing through a distribution network. And this strengthens us significantly in the North American market. In the overall numbers, it's not, I would say, a huge number, but it is within the North American market. Will give us another foothold to increasing the business, mainly within the US market to non-operators and verticals.

In the vertical space -- and you mentioned Homeland Security and public safety applications -- we do have different channels, and we are competing for those in the US and in other places around the world; both in reaching for those direct, some of it through very -- for local and global large partners; and some of it through the distribution like Tesco that we announced.

There are no further questions at this time.

I would like to thank you all for joining us today on this call. We would love to hear from you on a one-to-one basis and have further amplifications if you need to. Thanks again, and we will talk to you soon both on the phone and on the road.

That does conclude our conference for today. Thank you for your participation for using AT&T teleconference service. You may now disconnect.