Ceragon Networks Ltd (CRNT) 2014 Q3 法說會逐字稿

(Audio in progress) joining us today. With me on the call is Aviram Steinhart, who has been our CFO for the past three years. This conference call will be his last with Ceragon. So I'd like to take this opportunity to express my, the Board and the team appreciation for the many contributions of Aviram has made with Ceragon and extend our best wishes for much success in the future.

Also on the call with me today is Doron Arazi, our new CFO, who has been working closely with us over the past few weeks to effect a smooth transition. Doron will assume all the CFO responsibilities on November 1st, he has been leading our planning and budgeting for next year. This will be your best opportunity to hear from Doron. He will discuss the outlook and some of the priorities after Aviram complete the Q3 discussion.

As we have been anticipating for the past several quarters, Q3 represents a revenue inflection point due to overall improvement in global demand and a very strong reception for IP-20 platform. After a year and half of essentially flat revenues, we broke out the pattern with 9.5% sequential increases in revenue. We expected a pickup in revenues beginning in Q3 due to our strong bookings during the first half of the year.

Actual revenues in Q3 were at the high-end of our own expectations driven by particularly strong demand from customers in India. We were roughly at a break-even level, on an operating basis for Q3, despite a strong pressure on gross margin from our revenue mix being skewed heavily towards India. Now, that we see revenues growing again, achieving sustainable profitability and positive cash flow is our primary focus and this is the core objective of our various operating initiatives.

Since we launched the IP-20 platform, we have continued to be gratified by the positive response from around the world. The strong reception we have received validates our strategy of being first to market with full product line on a single platform, providing the highest capacities close advance features for the entire array of products.

Customer feedback conforms that we offer the best performance, as well as the most flexibility for both current and future requirements. We continue to be involved in a growing list of trials, technical evaluations and qualification activities. Our bookings continue to accelerate with a book-to-bill ratio well over 1:1 again in Q3.

Very large orders from our customers in India continue to drive the increase and we continue to grow our backlog as demand for IP-20 challenges our ability to ramp manufacturing quickly. IP-20 accounted for 46 of total bookings year-to-date and well over half of bookings in Q3. As we discussed on our last call, we did not anticipate that the pace of the various projects would result in the huge pickup in bookings from India several quarters ahead of most of the large project in other regions. We also didn't anticipate this much pressure to deliver such large volumes of IP-20 products so early in the manufacturing ramp-up.

Recently, our biggest challenge have been a direct result of our success. On a geographic basis, except for India, bookings so far this year have been very much in line with our expectations. On the other hand, orders from India so far this year are tripled our earlier expectations. Our ability to reach the high-end of our guidance was directly related to our push to ramp up manufacturing of IP-20 to satisfy demand particularly in India. We were able to ship close to 50% more IP-20 links in Q3 than Q2, but the push to do so also affected our gross margin. We experienced higher costs associated with shipping this much IP-20 business due to items such as extra hours, expediting fees and shipping costs.

Looking ahead, based on our booking, we expect more of the same challenges to affect us in Q4. Our revenue target for Q4 remains the same, but the revenue mix is likely to be even more skewed towards India. So with the ongoing ramp of IP-20 production, we expect our gross margin to be lower than Q3. The current (inaudible) optimal geographic mix of revenue will not prevail indefinitely. Projects end, then other come on stream, so to some extent, the geographic mix of revenue will be self-correcting over time. However, we are not willing to tolerate low margin growth in the mean time. And we are evaluating initiatives and that will enable us to make good progress toward our long-term operating margin goal during 2015.

We intend to carefully evaluate the extent to which we should continue to accept certain volume orders and we intend to become more selective in the deals that we are pursue in general. We will be reevaluating and perhaps adjusting our criteria for deciding whether to accept various terms in a given deal. We'll also take steps to ensure that we focus on the most profitable opportunities and avoid having our resources spread to same. In other words, we are carefully mapping our best towards our goal of exiting next year with an operating margin near the mid-single digit level and moving toward our longer term target beyond 2015.

Now, I'd like to turn the call over to Aviram to discuss the financial results of Q3. Aviram?

Thank you, Ira. I will go through some of the details of our Q3 results. Our third quarter revenue was $99 million, at the high end of our guidance range. Our GAAP gross margin was 25.6%. Non-GAAP gross margin was 25.7%. The lower gross margin reflects a geographical mix skew more towards India than anticipated. The non-GAAP figure excludes $300,000 of amortization of intangibles, $200,000 of exchanges in pre-acquisition indirect tax position and $50,000 in stock-based compensation.

Third quarter operating expenses were $26.1 million. Non-GAAP operating expenses were $25.4 million compared to $27 million in Q2. The non-GAAP operating expenses exclude $200,000 of amortization intangibles and $500,000 of stock-based compensation. Operating expenses were temporarily lower than anticipated, as I mentioned, due to seasonal factors.

On a GAAP basis, we reported an operating loss of $800,000. On a non-GAAP basis, we reported an operating profit of $100,000. Finance expenses in Q3 were $3.3 million, the increase related primarily to the discounting of a letter of credit from one of our largest customer and to the lesser extent, from the impact of foreign exchange currency valuation.

Tax expenses was about $1.5 million in the third quarter. Non-GAAP tax expenses were $300,000, excluding $1.2 million of non-cash tax adjustments. On a GAAP basis, we reported a net loss in Q3 of $5.6 million or $0.08 per share. On a non-GAAP basis, we reported a net loss in Q3 of $3.6 million or $0.05 per share.

The geographic breakout of revenue is presented in the press release. The most significant change was another large sequential increase in India on top of the large increase from Q1 to Q2. We had two 10% customer in Q2; one in India and one in Africa. And our OEM sales accounted for about 7% of total revenue in Q3.

Turning to the balance sheet. Credit receivable increased to $162 million from $146 million in Q2 putting DSO at was 169 days. This reflects the sequential increase in revenue as well as the impact of the geographical mix. At the end of Q3, we had $48.5 million in cash. We used net proceeds on the following offering closed in August of approximately $45 million to pay down approximately $23 million in debt as well as strengthened our cash position. Cash used in operations during Q3 was $7.9 million.

Now, I'd turn the call back to Ira.

Thank you, Aviram. I'll ask Doron to elaborate on some of the priorities we have been walking on since he joined. Doron?

Thank you, Ira. Hello everyone, I'm just speak about my new role at Ceragon and look forward to having the opportunity to meet many of you as possible in --. One thing that has really made a big impression on me. Since joining Ceragon is the customer reaction to the IP-20 platform, it is obvious not only for financial metrics like bookings, but also the level of good activity and the extensive pipeline of opportunities that IP-20 is highly differentiated in the market.

We expect to reach our targets revenue range for Q4 of $105 million to $115 million. For the reasons discussed, our gross margin would be more affected by even a larger volume of lower margin business in Q4 compared to Q3. Therefore, we expect Q4 gross margin to be lower than Q3. We also expect operating expenses to return to the $26 million to $27 million level over the near term. As we move into 2015, we are likely to see a gradual trend towards a more optimized revenue mix based on shifts in geography and we also plan to be more selective and focused on these terms as Ira described.

Also given the large projects that constitute our future opportunities, we expect some lumpiness from quarter-to-quarter, according to the timing of various project volumes. Given our assumptions about the pace of various large projects and our intention to be more selective, we are tempering our revenue assumptions for next year, but not our profitability goals.

We continue to have a goal of making substantial progress towards our target operating margin. We intend to focus on finding ways to further improve our already best-in-class product cost position. We will target improvements within the supply chain and optimize our manufacturing efficiency even as we continue to ramp production. We will continually reevaluate our allocation of resources, explore opportunities to further reduce operating expenses and focus even more attention on improving our working capital management.

Through a combination of these initiatives, we believe we will be able to generate positive cash flow and achieve a gradual improvement in our operating margin until we reach our goals.

Now, I will return the call back to Ira.

With market leading technology, the best cost position in the industry, the scale and global reach to participate in the global rollout of the largest LTE networks, we strongly believe we have the ability to reach sustainable profitability by further improving our execution and this will be our focus over the coming quarters.

Now, we will be pleased to take your questions. Operator?

(Operator Instructions) Alex Henderson, Needham.

Lots of questions generated by the commentary here. The first one is you obviously got a heavy skew to the mix to India in September and December quarter. Can you give us some sense of, based on the order rates you've seen from other geographies, when do you expect the mix to shift back to a higher margin geography (inaudible), so that we can get the mix back up over that 30% threshold. Is it reasonable to think that in the first half of the year that both quarters, will the impact be over 30% gross margins? Can you give us a little bit better clarity on that kind of trajectory?

I'll start with the order and the project focus that we see across the world to answer your question and I'll let Doron handle the margins question with you. What we see right now is that we see all other projects progressing a bit slower than a our original expectation from the point of off of the mix. We do expect project in the US to start ramping up towards the end of -- from a booking perspective, towards the end of Q1. And to see initial effects in Q2 and the second half of next year based on very good progress we are making in those but also based on timelines of those projects and the processes both of testing, integration and others, we are going in those projects those in the North American market and in some of the other markets.

So that to be --.

Regarding gross margin plans, as we said, we expect Q4 to be lower than Q3, but based on what we see now in terms of the funnel and the opportunities coming from regions that are lower cost, we believe that starting Q1 of [2005], we will start seeing gradual improvement in our gross margin. In terms of whether we're going to reach 30%, I think that the jury is still out there. I think it will take more time than anticipated, but obviously we tend to plan for a much better gross margin towards the end of 2015.

So it seems like a lot of the pressure here is a function of geographic mix, but it also seems like some of it has to do with the timing of the ramp obviously to the extent that you have ramped volumes, shouldn't there be an improvement in the efficiency of delivering those products, established as a result of that volume increase no longer needing expediting and air freighting and things of that sort?

I think you are 100% right that ramping up and ramping up the production, reduces costs, in the way that we deliver. And the production costs go down, but as skew towards low margin region will still be higher in Q4 than was in this quarter. We expect margin to come down and then start coming back up again because all of the things that you mentioned.

So I can you break out between the -- can you give us some sense of the magnitude of the expediting costs relative to the gross margin pressure? And so we can could at least get a sense of how much of this is mix and how much of this is temporary one-time costs?

(inaudible) the impact, Alex, is coming from the geographical mix. When you're shipping a substantial amount of -- as we did for India, this is the first (inaudible). I think you can contribute between 1% to 2% on everything that's associated to -- they're not fully optimizing yet due to the ramp-up, the production efficiency, so 1% to 2%.

Okay, that's helpful. Thank you. Just one other question and then I'll cede the floor. There are two variables here obviously what you report on revenues and what you've been seeing in orders. Can you give us some quantitative indication of where the book-to-bill was in the quarter? I assume it's well above one at this point.

It's well above one. As I said on the call, it's significantly well above one, which has been significantly building our backlog and continue to put huge pressure on delivery, because one of the things that when you have to have that ramp-up -- significant ramp-up in the bookings, it's also significant pressure on delivery, because customers really place in orders and want them yesterday.

Just to finish that thought, outside of India, it also looks like your book-to-bill was way above one with orders out of US, Canada, Colombia and the like, can you just talk about your non-India order rate?

Non-India, it's probably, book-to-bill was around one, a little bit above 1, but closer to 1.

Thank you.

Thank you.

George Iwanyc, (inaudible).

Hi, just -- thank you for taking my questions. Going back to the gross margin pressure, can you dig into the manufacturing ramp, what is surprised you, what can you do to make it go more efficiently, and are there any, specific surprises that has held you back from getting to that 30% level as quickly as you would have originally expected?

I think that, when we are putting an emphasis, the questions putting an emphasis on just on the cost of the ramp-up, I think as Ira mentioned, between expediting and everything and everything out there, somewhere like 1% to 2%, but not more than that. If you look at the ramp-up, we had over time three major challenges which are classical by the way in any significant ramp-up that we do.

One is the yields of products which when you start up, the yields are lower and then the increase on most of the line right now, the yields are where we want them to be or close to where we want to them to be already. And then we have also challenges around the supply chain, because you need really to get enough components in place. And some of the components that we are using are such that it takes time to manufacture them, it takes to bring them into the factories and do the assembly and when you do a ramp-up, we usually plan almost five to six months ahead on quantities and if you need to shrink the time, it has its costs.

So by the middle of next year, do you expect that the supply chain pressure will be normalized?

No my expectation is that by the middle of this quarter, already the supply chain pressure will be normalized around those. Because once we started ramping up some time in Q2, we already looked at the different quantities and we started moving a lot of stuff by, I believe, it's may be the middle of this quarter or beginning of next quarter, that pressure will have to be stabilized.

Okay. Does that mean --.

And it's really important for -- that is really important for our customers to -- for us the ability to deliver on time.

So, does that -- do you get some confidence that gross margins will start to improve in the first quarter, may be one quarter delay to what you are originally expecting a timeline wise?

That will probably start to improving towards the second quarter, but it's not because of that, it's because of geographical mix. Geographical mix is a much higher pressure when those are 1% or 2% and moving around the numbers, and I think that's the major effects that we see, it's not the manufacturing ramp-up costs within the picture, they added to it, but they added to it in there, what you're really seeing is our ramp-up of the manufacturing and the capabilities from $90 million last quarter, Q2, to $99 million this quarter to a range to $105 million and $115 million in Q4, which really means increased quantities out there.

By the way, the ramp-up in -- because of the geographical mix, the ramp up in proportion on the number of links that we send is much, much higher than those proportions, which is a reflected backwards in the margin.

When you're looking at (inaudible) the new deals that you signed, when you look at a region like India or there deals that you're in right now that you would have been more cautious to enter in under the new statistics and way that you're going to be looking at ramping customers?

One of a few deals, yes. Not all of -- most of them, no, one of the few deals, yes.

Okay, and then how much of a IP-20 contribution do you have in the other regions right now when you look at Europe and North America and rest of world?

Let's do it this way. Overall what we see is we had over 50% this quarter is the number. APAC and India were higher in the proportion. US is leading, I think in US, we are close to 100% by now the IP-20 family in what we ship. And then we have Africa which is lower than the average, mainly because we ship a lot of long haul, which is just came up online as our IP-20 product in the last quarter.

We announced Latin America is below the averages, still takes time to transfer to customers. And Europe is close to or little bit below, numbers -- I don't have the numbers in front of me. So I'm -- in some ways in my head looking at customer and customer lists and trying to get the numbers out there.

And just one last question. North America saw some aggression in the third quarter. How comfortable are you with the ramp expectations you have for next year? Are orders already signed and it's just a timing of deployment or is there some work to be done still?

There's still work to be done. The process in picking up a large projects in the North American market is a long process. We always assume it's long and then it's even longer from that process, but we're making very, very nice progress on all of those. We don't see any stop points out there, but things are taking longer because of the processes and the way that we do. You're probably referring to one of the large projects, do we see orders from them, no, not yet.

All right. Thank you very much.

Thanks very much.

Thank you very much.

(Operator Instructions) [David Allen, MetLife.]

Good morning, gentlemen. I have two basic questions; the first one is, if you could give us more information of Europe, whether the European economy has been rather slow and I was wondering on a per-country basis, could you give us more information about sales into both Western and Eastern Europe?

Sure. We are seeing Europe as -- indeed is slow. We will not give a breakdown by country, but we can say that we are seeing more business at this point from Eastern Europe more than Western Europe. Hence definitely, we do not plan at this point for significant increase in this volume in Europe and we expect it to stay slower for the next several quarters.

You can't provide more color on that?

At this point, no. This is the color we can give.

What color are you looking at?

I'm trying to get a sense of trends whether the economic slowdown in Europe has affected by the sales cycle, the adoption rates of your technology?

Usually -- and I'll get back to that. Usually economic slowdown we see it very, very, late. I don't think, it's for the economic slowdown. I think in the Europe, most of business in Western Europe up to now has been in vertical market less to operators. We did mention on previous calls, we are involve with one of the largest operators in Europe as part of their projects. We are making progress there, but slow progress at this point. So, I don't see a ramp-up within the next one or two quarters on the bookings.

In Eastern Europe and Russia, we are involved with more operators in both. There, yes, we see hesitation, I am not sure, it's relevant to the economic slowdown. It has to do with local market conditions and competitive conditions in each one of those markets.

Got it. Thank you. Second question is about headcount, what was your headcount on 9/30 versus last year 9/30?

I don't know -- I don't think, we published the headcount and I don't have it in top of my head and I'm looking at Aviram. Of course, he doesn't have the exact numbers, but I'll give the rough numbers. If I look at the 9/30 last year from now, I would guess around between 1,400 and 1,500 where we are down to 1,100 at this point.

Okay. And is that primarily in the production side, sale side or research side?

I think all across, we've taken significant steps last November in reduction of headcount, which had to do -- first we reduced one R&D site, which was in Bergen and then we reduced across the board in all sort of other functions both in -- we have a lot of our employees involved in projects and project installation, we reduced there. And we also reduced G&A functions. I think the easiest way to look at it almost is if you look at the proportions on sales and marketing, R&D and G&A costs coming down it's about the proportions that came on headcounts.

Got it. Thanks for your comments there. I appreciate it. Good luck.

Thank you very much.

We have no further questions in queue at this time.

I would like to thank everyone for being with us on the call today. We would love to entertain your one-on-one questions both in the short-term over the phone and then one-on-one, face to face in the second week of November. In the second week of November both myself and Doron will be on [your side] to meet with you face to face both for introduction and for further follow-on questions. Thank you.