Ceragon Networks Ltd (CRNT) 2014 Q1 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Ltd. first-quarter 2014 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 increased working capital needs; the risks that sales of Ceragon's new IP-20 products will not meet expectations; 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 in developing nations; the risk of significant expenses in connection with potential contingent tax liability associated with Nera's prior operations or facilities; 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 of 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'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.

Thank you for joining us today. With me on the call is Aviram Steinhart, our CFO.

The major highlights of the first quarter was clearly the improvements in bookings, which were up more than 25% sequentially and represented a book-to-bill well above the one based on our original expectations of $83 million to $93 million Q1. This is particularly significant since Q1 is usually a relatively weak quarter for bookings.

In addition, we saw strong initial demand for our new IP-20 products, with much higher proportion in Q1 orders than we anticipated. New products accounted for over 40% of our Q1 bookings compared with only 15% in Q4. This helped support our expectation that we will see a pickup in revenues during the second half of the year.

As you will recall, we were expecting revenues to remain generally stable, around $90 million third quarter, for the first half of this year. The decline in Q1 revenues do not suggest an overall claim in demand since booking picked up, and we think we will be back on track in Q2 and beyond.

Now I will update you on a development that affected revenues in Q1. Final revenues were within the range of our updated guidance. As we indicated on the call a few weeks ago, there were two main issues.

First, we decided not to ship and install an order we received in Q4 from a long-standing customer in Africa and to renegotiate payment terms. We have reached an understanding with this customer with respect to payment terms for new orders and the schedule of payments on existing balances that would significantly lower our exposure. The relationship is strong and we are confident that they will continue to order from us, but the new arrangement will cause orders to be spread over a longer period and we will probably only ship small quantities during the balance of the year to this customer.

The second factor affecting Q1 related to the fact that we are building the initial ramp up of manufacturing for our new products and we are not expecting such strong demand for the IP-20 products this quickly. This was combined with the fact that a large part of the orders came late in the quarter.

We have been walking through the normal issues and efficiency holdbacks through the process of ramping up the production line and working with the relevant supply chain. We are seeing an improvement in efficiency and rate in Q2. We have continued to ramp up as quickly as possible to accommodate the expected demand for IP-20 products.

Geographically, revenues from Latin America were sequentially lower after a very strong Q4, as expected. We have already discussed part of the reason for the weakness in Africa, and this is a region that tends to be lumpy.

On the positive side, we saw a major pickup from India and also improvement in North America consistent with the major deals we announced in the fourth quarter. These two regions also look like they will continue to be strong as bookings were higher than expected in Q1.

As expected, all the operators in India are moving forward to again in response to the aggressive buildout of a new LTE network by one operator. Although some expected us to lose share as the Indian market began to pick up, we have retained our share with the existing customers and [have taken] more than we expected with new customers. Our success in India will affect our blended gross margin until we win more large projects in other regions and as they have time to impact our results.

The important point is that we are the vendor of choice among specialists for product and performance in India and we have the cost structure to make money at lower margins. At the same time, we have certain requirements for payment terms that we are not willing to compromise. In the current highly-competitive environment there is always a chance that another vendor will be willing to give terms that we consider unacceptable.

As indicated a few weeks ago, the overall level of new business activity continues to increase. We are busy responding to RFPs, participating in trials and evaluations, and walking through the selection process for a variety of projects in all regions. Some of them quite large. We continue to have a sense that we will see gradual improvement in overall demand beginning in the second half.

In addition, we are making strong progress on some of the larger opportunities. As we have said before, we will need to land a portion -- a few of these Q1 opportunities in the timeframe that will generate revenues in the second half in order to meet our objectives for the second half of the year.

To summarize, we are encouraged by initial strong demand for our new IP-20 platform translated into orders in Q1, which is leading for a very good pipeline into the second quarter and positioning us in a favorable place in large RFPs. Bringing this game-changing family of products to market quickly was a major focus of the entire organization. We are now well positioned to take advantage of the growing need for higher capacity and advanced features. We believe our advantage will become more current as we move into the second half.

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

Thank you, Ira. I will go through some of the details of our Q1 results and provide some comments on the outlook for the current quarter.

Our first-quarter revenue was $17.5 million, within the range of our revised guidance. Our GAAP gross margin was 22.1%. Non-GAAP gross margin was 23.3%.

The low gross margin was primarily related to the revenue level and the low absorption of fixed costs, less the geographical mix skewed more toward India. The non-GAAP figure excludes $300,000 of amortization of intangible assets, $300,000 of charges [in three acquisitions] in that exact position, $200,000 of structuring-related expenses, and $100,000 in stock-based compensation.

First-quarter GAAP operating expenses were $32.7 million. Non-GAAP operating expenses were $27.3 million compared to $30.3 million in Q4, reflecting close to the full effect of our restructuring measures. The non-GAAP operating expenses exclude $4.2 million for structuring-related expenses, $200,000 amortization of intangibles, and $1.1 million of stock-based compensation.

On a GAAP basis, we reported an operating loss of $17.1 million. Our non-GAAP operating loss for the first quarter was $10.8 million.

Finance expenses in Q1 was $8.2 million. Non-GAAP finance expenses of $1.9 million exclude $4.1 million of currency devaluations in Venezuela and $2.2 million related to actions taken in order to expatriate cash from Venezuela and Argentina. In February, the Venezuelan government adopted Sicad II, a new exchange control mechanism to replace the former official exchange rate of VEF6.3 per US dollar. The planned Sicad II rate of approximately VEF50 per US dollar is the reason for the charges in Q1.

Tax expenses was about $1.7 million in the first quarter. Non-GAAP tax expenses was $200,000 excluding $1.5 million of non-cash tax adjustment. On a GAAP basis we reported a net loss of $27 million or $0.51 per share. On a non-GAAP basis we reported a net loss in Q1 of $12.9 million or $0.25 per share.

The geographic breakout of revenue appears in the press release. After a very strong Q4, Latin America accounted for a smaller percentage of revenue in Q1, while India and North America increased. We had no 10% customer in Q1. Our OEM sales accounted for about 6% of total revenue in Q1.

Turning to the balance sheet, trade receivables were similar to Q4 at $130 million, putting DSO at 139 days. Cash from operations was negative by $34.8 million. We used our available borrowing capacity to help fund the negative cash flow and our cash and equivalents declined to $13.5 million at the end of Q1.

Sequentially, we had received $17 million from Eltek settlement. We expect to be approximately cash flow breakeven in the second quarter based on our revenue expectation and assumption about gross margin.

We expect revenue in the second quarter to range between $85 million to $95 million, about the quarterly level we originally expected during the first half of the year. With the improvement in revenue, we expect gross margin to improve in Q2, reflecting better absorption of the fixed costs, but will probably be slightly below the 30% gross margin level of Q2 and Q3 -- sorry for Q2 and Q3 because of the continued manufacturing ramp up for new products and the geographical mix of revenue that is likely to be skewed even more toward India. We expect only a very small amount of restructuring charges in Q2.

With non-GAAP operating expenses expected to grow only slightly from the current level as revenue improved, we are positioned to deliver a return to an operating profit and general positive cash flow, assuming the market begins to pick up in the second half as expected. It is too soon to assume we will be able to offset the weak revenue in Q1 during the remainder of the year, but we believe we are at least back on path we were expecting for the balance of 2014. We continue to believe we can exit the year at the quarterly run rate of about $100 million in revenue with gross margins slightly above 30%.

Now that we have seen the pickup in India that is greater than we expected, it's a bit difficult to know exactly what assumption to make about the timing and magnitude of the higher-margin business from our projects in other regions, except to say that we expect a more favorable geographic mix and steadily improving manufacturing efficiency for new products during the year.

Now I turn the call back to Ira.

We believe that we will be back on track in Q2 as a result of the improvements we are seeing in bookings. We are further encouraged by the high proportion of IP-20 products and we are focused on continuing to ramp up manufacturing to accommodate this demand.

The next major milestone will be to win a share of the Tier 1 projects we have been working on. As you would expect, some are moving faster than others. Projects in North America are moving along, while one or two projects in Europe have been moving more slowly recently. While we can't control the pace that the operator chooses to move forward, we are pleased with the progress we are making and our position within each one of them.

The timing and magnitude of our share of new projects will obviously have implications for our working capital requirements. We acknowledge it's getting a little tight and Aviram is working on adding some near-term flexibility by expanding our receivable financing capabilities. We are watching our cash closely and beginning discussions with the Board to refine the list of possible long-term options as we gain a better sense of the pace of pickup during the second half and beyond.

Thank you, now we will turn to questions.

(Operator Instructions) Alex Henderson, Needham.

Thank you very much. I was hoping you could give us some clarification on the announcements you made here a couple of weeks ago or just recently on the North American Tier 1 reorder. It wasn't clear in the press release whether that was one single order or four orders, or what exactly it was, and how many of those were new customers versus existing customers. The language was a little confusing.

Can you just clarify on that the contract what --?

I will clarify, Alex. It's a single customer which has been a long-standing customer of ours for a few years, which for a while lowered the level of operations and has now returned to resuming and deploying LTE and expanding their network in the LTE competitive environment. This was an order from them as part of the sequence of orders we have been seeing over the last two quarters.

I think we started seeing again significant orders in Q4 and now in Q1 as well.

The orders out of Latin America, you called out some issues in both Venezuela and Argentina which have to do with exchange rates. Have you now pretty much extradited yourself from that geographic exposure or do you still have some exposure in those two currency-troubled environments?

In Venezuela we are not doing any business inputting or selling into the country. For Argentina, we are doing only transactions in US dollars so we are not expecting any more significant effects of those over the next quarters.

Then the situation in India, one last question there. Can you give us some sense of what you think the second-quarter conditions are going to look like? Are you going to see a continued follow through on additional orders out of that geography in the current quarter that would give us some visibility to get into keeping the order book-to-bill above 1 here in the June quarter?

We do believe that we will see continued significant orders coming out of India for the next one or two quarters at least, all depending on rollout. As we said, we won one large operator with a significant LTE which is rolling out and we are seeing a sequence of orders from them.

As we move forward and -- our expectation and we are starting to feel pickup from other operators in India -- we will have also share, it's not a large share, as they start running in the market. It's very typical of markets worldwide where we see one -- you have the first runner or the one who jumped out of the block. Everyone runs after them and its typical networks currently run -- happening in India.

So do you think it's reasonable to think of a book-to-bill above 1 in the current quarter? Are the orders strong enough to continue to build some backlog there?

We are not giving guidance on the book-to-bill. It's one of the assumptions we do hope, as I said and I think I said on my script as well, that we do see a strong start for the quarter in booked earnings, which we hope will translate into above 1 book-to-bill for this quarter as well.

Great, thank you.

George Iwanyc, Oppenheimer.

Thank you for taking my questions. Aviram, what was the gross margin target for the end of the year?

We are seeing now as we see more business coming from India, which we see in large volumes going for the next three quarters, the revenue mix now is key to more lower gross margin heavy. And, therefore, we said that we are exiting the year with a gross margin of slightly above 30.

Okay. And that's including whatever improvements that you start to get from IP-20 as it starts to reach normal manufacturing volumes?

I think that's correct.

From an OpEx standpoint, should we anticipate another quarter of some modest decreases and then kind of a flat number for the second half of the year?

We are seeing some now between $27 million to $27.5 million OpEx for the rest of the -- every quarter. Even if we will see which we expect in the second half increasing revenue, we do not expect to see any increase in OpEx. Should be between $27 million to $27.5 million per quarter.

And then the $17 million from settlement, that is -- will be immediately available in the June quarter?

Yes, we received -- it in income in Q2. Of course, non-GAAP income of $17 million. We collected the cash and it's all in Q2, all have been collected already in Q2.

Ira, when you start looking at the second half, are there any areas that you are worried about from a booking standpoint or do you think you have been extremely cautious when you're looking at the trends in Latin America and Africa?

I think that is -- as we talk on the call, I think we usually are not either the optimistic or the cautious side. We usually give more color; best estimate is at this point. And I think that we will see still lumpiness in Latin America -- sorry, lumpiness in Africa. We will see a slight decline in Latin America as we move forward. My expectation is a pickup in the US and in Europe and in the India region.

And it's all balanced -- baked into the numbers which is leaving us to believe that we're starting to see trends where the demand is picking up.

How much of the pickup is from share gains and how much is just coming from ramping IP-20 with your existing customers?

Very hard to tell. I think part of it is the share gains. Again, we are dealing with small numbers, so we are not jumping from -- into a 20% market share, but from a 10% to an 11%, and that's within the [level] of measurements I think within the markets. But what we see in different places is also share gain, knowing that we're taking specific deals away from others.

Just on the competitive environment overall, how do you feel IP-20 stacks up with the competition? And from a pricing standpoint, mix aside and what's going on with margins in India, how are the other regions comparing?

I think that the IP-20 is picking up very, very good against the competition. We have two advantages with the IP-20 that we are using at this point. One is the technology.

It's the best radio out there, better than most of or all of the solutions out there in many parameters, which is opening, as I said, a few things. It's opening doors. It's allowing us to do other deals.

It also has for very high capacity at a very good cost point, which allows us to do deals in those places in a good way and also do deals in places like India, where the margins are very low and it excludes a lot of the other players, except the very big guys, which are probably cross-financing some of the deals. And it gives us the leverage to really see -- open doors and increase demand.

If I look at that compared to other product strategies, I don't see anyone at this point coming closer. But as we always expect, it will chase us and will catch up with us in whatever, a year, a year and a half from now and other strategies. But it does mean that it proves that investments we've done over the last few years and building our technology has proven ourselves very nicely.

Thank you.

Sid Sinha, Canaccord Genuity.

Thanks for taking my questions. I had just a quick question on India. You made a comment about certain competitors might get price aggressive or give better payment concession terms.

With regard to that, are you seeing that currently as you're rolling out in India and do you think your IP-20 product strength and portfolio strength could create an effective value to prevent share losses to these vendors?

The comment is not India-specific. It was done in the India context of the call, but it's something we sometimes see. One of the things we sometimes see as a competitive strategy in the position where people do not have the product or in a very pressurized market is that people use tactics of falling prices very drastically or giving very, very long payment terms.

One of the things that we are going to be cautious within our environment and really guiding the Company forward is there are deals we are not taking when they become totally crazy and one of those terms. It's something that will be put on the table.

Got it. In terms of North America for this Tier 1 that you are -- this carrier that you got orders from, is it fair to assume that the ramp continues through the year and perhaps probably gets a little stronger in the second half as they build on the second phase of their LTE network?

Then for strength in North America in the second half, is it this category that's driving this trend or are the other operators, perhaps Tier 1 carriers, that are also driving this trend for second half in North America?

I think that that operator, it is safe to assume, that we will probably see similar orders on the flat level for the rest of the year. And the strength we will see in North America we still need to win some big and significant deals for increasing the volume there, where we feel very comfortable with those deals and comfortable with our position, but nothing has been decided. But I think that once those will start kicking in we will start seeing also a ramp up in North America as well.

Okay, great. Just one last one from me. Could you give us an update on the number of customers who are trialing the IP-20 products or who you are shipping IP-20 products to?

It's at 50.

Okay, I think that the number is around 50. I don't have the exact number, but the number of customers we are shipping IP-20 to. Now it depends, some of them are very large, some of them are small. I can count about eight or nine large customers where we are shipping the IP-20 and then quite a few smaller ones.

Now the interesting part is that almost anything that we do right now is around the IP-20. We do ship a lot of the older products. I think we talked on the call that we had a target of reaching above 60 and up to 80% by Q4 of bookings on the IP-20 family as we ramp up. And I think we think it's a very achievable target with the strong demand we are seeing at this point.

Great. Thank you for taking my questions.

(Operator Instructions) Gunther Karger, Discovery Group.

Thank you for taking the call. Two questions. Question one regarding competitive postures; do you see any increase in market share generally with regard to your competitor? And the question number two has to do with any impact from your instability in the Russian area? Those are my two questions.

So let's talk -- we have started asking about market share. We do see in specific places where we are taking market share. It's very, very hard to judge from the overall numbers.

There are reports out there and the numbers are not that accurate, but from specific deals we see that we are taking market shares. I think we indicated, for example, in India we expected certain market share within some of the deals and we are getting a larger share than we originally planned. That means we are taking the market share out of those deals. We have seen similar things in other regions.

Of the questions around the Russian region, no, not yet but we are usually too small to judge those very large, I would say, global political movements to feel any of those differences at this point. At this point, all the RFPs and RFQs and processes in the sales in the Russian territories are progressing normally.

Thank you. A follow-up question on the Russian area; do you see any opportunities in that region going forward?

The answer is, yes, we are. As I mentioned, we are involved in large RFPs, some of them in the European regions. Some of those are within European, the Russian territories, at some of the big Tier 1s in Russia.

Thanks, Ira.

Alex Henderson, Needham.

I was wondering if we could just go back to the manufacturing comments for a second. I understand that you are trying to ramp this a little faster than you had expected and that's causing a little bit lower gross margin in the second quarter. But can you talk a little bit about when you expect to get the benefits of the improved production margins on the IP-20 and how that will play out over the course of the year?

Do we expect to get back towards that 35% gross margin relatively quickly as that increases as a percentage of sales? And how should we think about that over the course of the year and into next year?

Yes, there are three elements in the gross margin elements: the volume, the regional mix, and the ramp up and getting the production of the IP-20 smoothly. What we said on the discussion that we have seen for now, based on as renewed it is skewed more toward India and the volume that we are seeing, which is exiting the year at $100 million to support a higher gross margin, and gradual improvement in the ramp up as we exit this year with slightly above 30% in the gross margin.

We still can get back to the 35%, but it's depending on how fast we will win new projects in regions that have a profile of (technical difficulty) which is higher, so this is dependent. What we have in the pipe is some projects, very large projects in areas where the margins profile are much higher, which if we win them in the second half of the year we probably can say that we will see early next year back to the -- close to the range of the 35% gross margin.

So just to be clear, you had said on the prior commentary that the end of the second quarter was slightly under 30%. But I'm assuming that that is not the case in the back half of the year.

In the back half of the year, we said that we expect to be slightly below 30% in Q2 and Q3 and slightly above 30% in Q4.

Okay, thank you.

(Operator Instructions) There are no further questions in queue. Back to you, gentlemen.

Thank you, everyone, for joining us on the call this morning. We will gladly entertain questions on the one-to-one sessions. Please feel free to reach myself and Aviram if you want further clarifications.

Thank you and have a good day.

Thank you and that concludes our conference for today. Thank you for your participation and for using AT&T executive teleconference Service. You may now disconnect.