Ceragon Networks Ltd (CRNT) 2014 Q2 法說會逐字稿

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

We are pleased to report that the second-quarter bookings showed a continuation of the strong trend that began in Q1. Our bookings in the first half of 2014 support our belief that we will see a second-half pickup in revenue. We believe this pickup will mark the beginning of a substantial uptrend in revenues, followed by a return to profitability with substantial operating leverage. This is based on three primary factors: subscriber growth and the expansion of data usage in emerging markets, the acceleration and expansion of LTE deployment globally, and the penetration of our new IP-20 platform.

We originally assumed the overall improvement in demand would be fairly gradual, and we assumed that IP-20 would account for a significant portion of bookings only in the second half of the year. In both cases our assumptions were too conservative.

Our bookings in Q1 were 19% above the average quarterly bookings in 2013, and in Q2 bookings were 30% above the quarterly average in 2013. IP-20 represented 39% of total bookings during the first six months of 2014.

On the other hand, we expected three large projects to move faster than they are currently moving, which caused us to make different assumptions about the geographic mix of our revenue. Aside from timing, the overall developments on this project have been positive from our perspective. During the first half of 2014, our three largest customers together have generated more than $100 million in orders, with all orders already received in the second half of 2014. One of these customers is a new customer during the last year.

With business picking up faster with larger orders than we anticipated, we must focus on ensuring that we have the necessary working capital and financial flexibility in the short-term so that we don't hamper our ability to respond to customers or have an issue with our loan covenants. As a result, we are moving forward immediately to raise additional equity.

Now we have tangible evidence in the form of firm orders that the pickup is real. Furthermore, we believe we are on the cusp of a multiyear investment cycle related to a technology inflection point. LTE is driving the shift to two all-IP networks with ultrahigh capacity. We believe that we can take advantage of this technology inflection point to gain market share, so we are very focused on capitalizing on our current position with the IP-20 platform.

We completed the restructuring in Q4, and the full impact is reflected in our Q2 OpEx. As revenue grows, OpEx should use increase only modestly, because we believe our current organization can support an increase in quarterly revenue run rate to as much as $120 million before we need to significantly ratchet up operating expenses.

Generating operating leverage is an important part of our story, and the long-term operating targets remains the same: 35% gross margins and 10% operating profit.

Turning to the results of Q2, our revenues returned to the $90 million level, as expected; and we dealt successfully with the issues that caused a hiccup in Q1. We completed the negotiation with our large African customer that reduced the size of the existing receivable balance, and we were successful in getting improved terms for new business going forward. We believe that the relationship remains strong, and they are currently placing additional small orders.

We continued to ramp up our production capabilities for the IP-20 platform during Q2 and more than doubled the number of links we could ship with an increasing level of ongoing for IP-20. We will continue ramping manufacturing capacity during the second half.

Looking at Q2 by region, we saw a pickup in revenues in Africa. As we have noted in the past, business in Africa tends to be lumpy; but we expect this region to be an overall upward trend from both modernization and expansion projects. Airtel, which is one of the three Tier 1 customers that I mentioned earlier, serves 20 countries across both Asia and Africa, and most of the current long-haul deployment is going on in Africa.

In Q2 we also saw another sequential increase from India, driven mainly by Reliance Jio, an operator that is attracting a lot of attention as they deploy a very large greenfield LTE network. We were selected as a primary microwave backhaul vendor for this project.

We received our first order in Q4, followed by additional orders in Q1 and in Q2. Based on the information we have, we believe that we are supplying close to 80% of the links that have been ordered for this project so far. We do not know if the split will remain 80%/20%, but we are confident that we will continue to supply the majority of the equipment for this project.

The other operators in India are beginning to move forward with their own modernization project. Our revenues from India in the second quarter reached $15.8 million, which is the highest level we have seen during the past two years. We have been doing business in India for a very long time, and six of the seven largest mobile operators are Ceragon customers. With such a strong presence and a very positive reaction to our IP-20 platform, we expect to retain or even increase our market share as the Indian market continues to grow.

Latin America is likely to remain a source of substantial business, particularly in Brazil through Telefonica Vivo. Now that the World Cup is over, we expect to see orders from our key customers for network expansion projects leading up to the Olympic Games. Even with more business in countries such as Peru, Colombia, and Bolivia, Latin America is likely to be relatively flat compared to 2013 because of the shift away from Venezuela and Argentina, where doing business has become too difficult due to regulatory issues or currency problems.

Lastly, there are large projects pending in the developed market: most notably, Sprint in the US; VimpelCom and MegaFon in Russia; and Vodafone in Western Europe. We believe that we are well-positioned to be a vendor. For example, Sprint is looking for ultrahigh capacity capabilities, and our IP-20 can deliver 1 gig to each site in the air, whereas competitors can only achieve this using compression technology. Aside from the large projects, we expect our business in North America to increase due to more business from alternative carriers, expansion of existing customers' network, and growth from vertical markets.

We have been getting questions about China due to the much-publicized LTE buildout, led by China Mobile. We have a presence in China. Our business is increasing there, and we expect to get our share going forward; but it's important to keep this opportunity in perspective.

Although China is a very large country with a large population of mobile users, until very recently all backhaul has been done during fiber. Although laying fiber has become more difficult and there is a small amount of microwave in a few provinces, we expect most of it to be awarded to Chinese vendors. So realistically this is not a big market opportunity currently, nor is it likely to become one in the near future.

A final point before I turn the call to Aviram. Our visibility is improving. During the last strong investment cycle a few years ago, it was not unusual to have a backlog that equaled about two quarters of revenue, even as quarterly revenue continued to grow. After a few quarters of declining backlog in 2013, I'm pleased to say that our backlog is building again, and we have returned to a backlog that's about two quarters of revenue, but not to the extent that we need to be concerned about meeting customer delivery requirements.

I can also say that we have a larger number of opportunities in our current pipeline of potential business than during the last two years. Also, today we have the scale and global reach to address larger opportunities than we were able to during the last major investment cycle in our industry.

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

Thank you, Ira. I'll go through some of the details of our Q2 revenues results and provide some comments from the outlook for the current quarter. Our second-quarter revenues were $19.4 million, slightly above the midpoint of our guidance range. Our GAAP gross margins was 26.3%. Non-GAAP gross margin was 27%.

The sequential improvement in gross margins is related to the higher revenue level that continued to be reflected the geographical mix skewed toward India. The non-GAAP figure excludes $300,000 of amortization of intangible assets; $200,000 of changes in preacquisition indirect tax position; $40,000 of restructuring related expenses; and $60,000 in stock-based compensation.

Second-quarter GAAP operating expenses were $12 million. Non-GAAP operating expenses were $27 million compared to $27.3 million in Q1, reflecting the full effect of our restructuring measures. The non-GAAP operating expenses exclude $16.8 million of other income related to the Eltek settlement; $600,000 of restructuring-related expenses; $200,000 in amortization of intangibles; and $1 million of stock-based compensation.

On a GAAP basis we reported an operating income of $11.8 million. Our non-GAAP operating loss for the second quarter was $2.6 million.

Finance expenses in Q2 was $2.2 million. Tax expenses was about $1.6 million in the second quarter. Non-GAAP tax expenses were $300,000, excluding $1.3 million of non-cash tax adjustment.

On an NGAAP basis, we reported a net income in Q2 of $8 million or $0.15 per share. On a non-GAAP basis we reported a net loss in Q2 of $5 million or $0.10 per share.

The geographic breakout of revenue appears in the press release. Revenues in both India and Africa showed larger sequential increase, while revenue in other regions were up more modestly. We had two 10% customers in Q2, one in Africa and one in India. Our OEM sales accounted for about 7% of total revenues in Q2.

Turning to the balance sheets, trade receivable increased to $146 million from $130 million in Q1, putting DSO at 155 days. At the end of Q1 we had $13.5 million in cash. And we received approximately $15.2 million in cash from Eltek settlement, net of the settlement-related legal fees and Nera's split acquisition guarantees forfeit, which increased our cash to about $45.7 million.

We ended Q2 with $36.4 million, which means we used a little over $9 million during Q2. As Ira said, we plan to add cash to the balance sheet through an equity offering.

Turning to the guidance, we expect revenue in the third quarter to range between $90 million to $100 million. With the improvement in revenue, we expect the gross margin to improve in Q3, but unlikely to exceed 30%, given that the revenues will continue to be skewed toward India.

We believe we can exit the year at a quarterly run rate between $105 million to $115 million in revenues, with improving gross margin.

It is difficult to predict the timing or magnitude of business from Tier 1 projects while final decisions are still pending, but we continue to assume a more favorable geographical mix and steadily improving manufacturing efficiency for the new product in 2015.

Now I will turn the call back to Ira. Ira?

Mr. Palti, we can't hear you.

As the operator mentioned in beginning of this call, as the Company is commencing a public offering its shares today, we have been advised by counsel that, unfortunately, unlike our usual process, it is inappropriate for us to field questions during this call.

We look forward to continuing our normal dialogue with regard to our third-quarter result. Thank you.