Ceragon Networks Ltd (CRNT) 2016 Q1 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Limited First Quarter 2016 Results Conference Call. Today's call is being recorded and would be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks.

Today's call will include statements concerning Ceragon's future prospects that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the current beliefs, expectations and assumptions of Ceragon's management. For examples of forward-looking statements, please refer to the forward-looking statements paragraph in our press release that was published earlier today. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including risks associated with a further decline in revenues beyond Ceragon's expectations; the risk that Ceragon's expectations regarding future profitability will not materialize; the risk that Ceragon will not achieve the benefits it expects from expense reduction and profit enhancement programs; the risk that Ceragon will not continue to comply with the financial or other covenants in its agreements with its lenders; risks associated with doing business in Latin America in general and in Brazil in particular, including currency export controls and recent economic concerns; risks relating to the concentration of our businesses in India, Africa, and in developing nations, including political, economic and regulatory risks from doing business in those regions; the risk of significant expenses in connection with potential contingent tax liability; 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 represents 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 from Ceragon's website at www.ceragon.com.

I'll now turn the call over to Mr. Ira Palti, President and CEO of Ceragon. Please go ahead, sir.

Thank you for joining us today. With me on the call is Doron Arazi, our CFO. We're very pleased with Q1 considering it is typically affected by sequential factors. We had higher gross margin, we controlled our expenses and were breakeven on a non-GAAP basis even at a lower level of revenue. More important, we had very strong cash flow and our balance sheet is looking much healthier after we further reduced our debt and still increased our cash on hand.

The most significant message I have today is we believe Q1 was our tough quarter and expect our revenue trend to go back to an upward trend. Our Q1 bookings, pipeline of business and feedback from the field caused us to expect higher revenue sequentially each quarter for the balance of the year. And we continue to look for profit improvement in 2016 versus 2015.

On the last call, I noted that we are taking some steps to fine-tune our execution in an effort to optimize the trade-off between revenue and profit. We believe we are making progress. And we are pleased to see our gross margin improving across regions and customers, including some of the most challenging ones. To be clear, we are not encouraging you to think our Q1 non-GAAP gross margin of over 36% is sustainable for the rest of the year. Doron will give you a detailed explanation of gross margin. My point is, optimizing the trade-off between revenue and gross profit has been a continuous process over the past year; one that we have fine-tuned and improved along the way and we'll continue to improve. Meanwhile, we are satisfied that our organization is the right size in relationship to the available opportunities with acceptable margins for the foreseeable future.

We took the necessary steps to adopt more than a year ago. And we are getting better at executing while some of our competitors continue to struggle with the disruption of right sizing and achieving profitability. Some of the factors working in our favor include, a market opportunity that justifies new investment; the wireless backhaul market is a good business, although not an easy one.

While not every deal may be attractive to us, we don't need a $5 billion global opportunity to succeed. The segment we call best-of-breed, which is probably half the size of the total market, provides ample opportunity to continue to innovate, bring new technology and be successful in both business and financial terms on a global basis. Because it's an attractive market, we see competitors trying to catch up on the technology front rather than getting out of the market, because they see the volume of links growing in the future; we agree.

Industry and market trends are moving towards our strengths, ultra-high capacity. It's important to remember that unlike Reliance Jio, one of our largest customers that is building a nationwide greenfield LTE network, most of our business comes from upgrading networks by increasing capacity to existing base stations. This means as operators' attention and budgets shift from coverage to densifying the network, the need for ultra-high capacity continues to grow.

Sustainable technology leadership; note that a significant portion of our current R&D effort is related to the evolution of our platform towards 5G capabilities, many of which will only begin to contribute to revenue in late 2017. We're in a strong financial position to continue making the necessary level of investment in innovation to maintain our leadership and time-to-market advantage. This is the key aspect of the customer/vendor best-of-breed business proposition. By offering very high value solutions to our customers and by helping them to put these solutions to the best possible use, we can generate the returns required to continue to innovate and provide even higher value.

What is high value to a customer? An easy network upgrade. What makes it easy? Being better, faster and less expensive; because our solutions are designed to do things others not always can. A simple example would be the ability to reuse antennas and cable even when upgrading competitors' equipment to reduce installation cost and time.

A proven market strategy that works in the current environment. We've made necessary adjustment and reestablished (inaudible) in our organization while many of our competitors, large and small, continued to face the disruption of product integration, right-sizing, et cetera. We've a head start in the product cost area. We've substantial know-how for being far up the learning curve with our IP-20 platform by improving ability to evaluate opportunities in terms of profitability based on the value we bring to customers and we've significantly improved our financial position. Therefore, we believe we are well positioned to remain one of the strongest vendors and can maintain and increase our share of the most desirable business while also continuing to invest in the next generation of technology and to maintain and expand strong customer relationship globally.

No change in customer reaction to macroeconomic concerns. We do find that customers continue to be cautious with their spending due to macroeconomic fears. Since the last call, we've seen no deterioration in spending trends or network plans. The relative strength of various geographies is a continuation of the same pattern we saw last year.

India continues to be strong revenue engine for us and we expect this to continue with the leading operators of India well into next year. The sequentially lower revenue from India this quarter does not signal any trend change and our booking from India remain quite strong with low but acceptable margins.

Europe is stable at a lower level than we would like to see, but we see opportunity for improvement ahead. As the LTE coverage build-out is complete and we begin an upgrade cycle of one year to two years, we expect to see higher demand for E-Band solutions to replace 38 GHz and 42 GHz and densify the networks.

In North America, we've a strong and stable business with existing customers who are aggressively densifying the networks and we continue to believe we are well positioned for business from another US large operator, as the network densification program is supposed to pick up late this year. This particular customer has a very large spectrum position in some of the high-access frequencies allowing them to offer a lot more high-speed and high-data rates, and this leads to the need for a lot more backhaul capacity. This in turn provides us with opportunity to bring value to this customer with our ultra-high capacity, IP-20 platform.

Business also looks steady in Latin America. The Southern Cone could even be called strong. Our business in Argentina seems to be stabilizing. Now business in Brazil is also stable at a relatively lower level. Africa remains weak by historical standards, mainly due to macroeconomic caution, as well as strategic issues faced by one of our key customers in the region.

To summarize, it's a little too early to have good visibility on the entire year, but what we can see is encouraging. We continue to target a further improvement in profitability in 2016 as a result of higher gross margins on lower revenue compared to 2015 as we've indicated before. As we look out to possible market trends beyond this year, it's important to distinguish between growth measured in links versus revenue dollars. We do expect to see gradual growth of the types of products and the structure of the link is likely to mean that the total market measured in dollars will be fairly flat. This is one reason that we're so focused on product cost and business profitability, and we believe the business environment next year will give us the advantage of continued rollout of 4G in emerging markets, while in parallel we prepare for the evolution to 5G during the following years.

With that, I'll turn the call over to the Doron to share more of the financial details and key business metrics with you. Doron?

Thank you Ira. Since you have all seen the press release, I'll just highlight some of the significant items. Our first quarter revenues of $59.8 million represented a 21% sequential decrease from Q4 of 2015. I want to echo Ira's comment that we believe Q1 represents the bottom in terms of revenue and we expect to see higher revenue in future quarters beginning in Q2. The geographic breakdown of Q1 revenue appears in the press release. The most significant change from Q4 to Q1 was the lower revenue in India, which Ira has already spoken about. We had one above-10% customer in the quarter, a large operator in India that is a long-standing customer.

In Q1, our gross margin improved sequentially again to 36.3% on a non-GAAP basis. Gross margin was high this quarter primarily because of significantly lower revenue from India and APAC, as well as exceptionally high margin revenues in North America and Europe. While we think these margins are not a new standard that should be expected going forward, we continue to believe we can sustain gross margin levels solidly above 30% in 2016 with some fluctuations from quarter to quarter based on the exact mix of revenues we recognized during a particular period. Non-GAAP results in Q1 excluded the net expense amount of $300,000. This amount included expenses of $1.2 million of the usual items; non-cash tax adjustments, stock-based compensation and amortization of intangible assets. These expenses were offset by non-recurring income of $0.9 million on financial expenses that was excluded for non-GAAP results as well. This income resulted from an adjustment to the provision taken for the re-measurement of certain dollar-related assets in Venezuela.

Unexpectedly, we received payment from the Venezuelan government-owned oil and gas company. We do not think this signals an overall shift in the situation, and while we continue to explore different ways for collecting from our customers there, we are not expecting to collect any further payment at least in the immediate future.

In Q1, we continued to maintain tight control of our operating expenses, which were $19.6 million. We expect to be able to keep operating expenses around $20 million per quarter. We reported a non-GAAP operating profit of $2.2 million. Our non-GAAP operating margin of 3.6% is below the level we would like to see and is a function of the low level of revenue in Q1. We expect that our operating margin will improve as revenue increases.

Non-GAAP financial expenses declined to $1.8 million primarily due to lower expenses from exchange rate differences. Subject to currency fluctuations, we expect our financial expenses to remain in the range of $1.5 million to $2 million during the near term. Assuming currency exchange rate differences are fixed at the level we have seen in Q1, the range we suggest will be primarily driven by the level of utilization of our credit facility and factoring activity. We had a very small non-GAAP net loss of $147,000, which was break-even on a per share basis.

Turning to the balance sheet, receivables were $82.1 million with DSOs of 95 days, a major improvement from Q4, primarily as a result of very strong collection in Q1. Going forward, we target DSO to be in the range of 105 days to 125 days subject to the geographic mix of revenue.

One of our goals is further optimizing cash balances and debt facility utilization to reduce interest expenses. At March 31, 2016, we had cash and cash equivalents of $41.8 million, a significant increase from the end of Q4. We generated cash of approximately $10.5 million and we reduced our debt to $30 million at the end of Q1 from $35 million at the end of Q4. It is noteworthy that our cash net of bank debt now exceeds $10 million. This cash flow was higher than our planned for Q1 primarily due to better collection than expected and therefore may impact our cash flow in Q2.

Overall, we continue to focus on better payment terms from our customers and collection on time. Our book-to-bill ratio was significantly above 1 during Q1, which is one reason for our conviction that we have the low point of revenue behind us and can look forward to higher revenues in coming quarters, particularly in the second half of the year. As we mentioned, based on the success of our sales strategy, we expect our gross margin to remain solidly above 30% throughout 2016 and we want to emphasize that we continue to believe we can achieve significantly higher profit on a constant currency basis in 2016 versus 2015 and sustained positive cash flow.

The one caveat we need to mention is the global macroeconomic picture. Since last quarter, we have not seen any increase in customer concerns over marco factors and our assumption is that this will remain the case.

Now, we would like to open the call to questions. Operator?

(Operator Instructions) James Kisner, Jefferies.

Hi, thanks very much for taking my question. So, I just want to drill down on the high margin. You said that it's mostly due to geographic mix, but it's an exceptionally high margin in North America and Europe. Why are those revenues so high margin? Is that just the nature of the business in the region or is that because of the deals are based on technology or mix of additional hardware versus capacity, or is there some other factor why those revenues are so high margin in America and Europe?

Basically you mentioned a couple of reasons. I think that most of them are relevant. And I think most of them got together and brought us to this situation. So first of all, obviously the geographical mix has a very significant impact on our gross margins. It's not a secret that the level of pricing between developing countries and developed countries is very significant in our industry and that obviously drives a margin higher where the geographical mix is skewed more to developed countries.

Regarding the relatively high gross margins in North America and in Europe, it's more of a specific particular deal that were, I would say, to some extent unique. It's not something that we, as I said, believe is sustainable for the long term, but obviously from time to time, we expect to enjoy that situation where we bring so much value to our customers.

Right. That's very helpful. So, in the -- heard your comments about the revenues improving through the year. Last quarter, I think you talked about average revenue run rate of $75 million this year. Should we assume that that is probably not on the table any more, perhaps [there appears to be] higher margin but should we not assume that that average revenue run rate is $75 million?

I would say that generally speaking, seeing the models that were developed by the analysts covering us and after the call in queue at the end of Q4, these models have very good proximity to what we believe the year can look like, and in other words, it's probably the still something around $75 million; it might be slightly lower, but it's not a big difference at this point as opposed to what I see from the analysts covering us.

Okay, thank you very much. I will pass.

Alex Henderson, Needham.

Just a follow-up on that last question, so when you say, it's not meaningfully different from what was in the models prior, are you implying that it's not meaningfully different on the June, September, December or are you saying for the full year? Because obviously you came in a little light on the revenues relative to where the street was for the March quarter. Should we adjust out that March number from the full-year and just leave the three quarters the same or are you saying you are going to make it up?

Hi Alex, thanks for the question. As you know, I'm not giving guidance, but I would say that when I look at the numbers that are expected from us at this point before this call, for Q2, and also for the rest of the year, both of them, Q2 and the full year are in very close proximity to what we believe we can still achieve for 2016 and the relevant quarters.

So, what I'm hearing you say is the numbers that were out there for the June, September and December quarter are reasonably useful metrics, but not necessarily the full year from the -- because of the miss in the March quarter?

I think that the difference between March quarter and that was anticipated and what we achieved is not that big. And from my perspective, looking at the full year, it's less than 1%. So, I'm not sure this is the level of accuracy we are talking about now when we are not giving even any guidance.

So, going back to the gross margin questions, obviously 36.3% and your seasonally softest quarter of the year is an exceptional number and clearly the Indian mix had a lot to do with that. It sounds like you've got some pretty good orders coming in from India. So, would you say that the gross margin assumptions that were out there in a kind of 32%, 33%, 34% range are still in the right ballpark, or is there more variability than that?

I think that, as you said, India has obviously a lot of impact on the gross margins, but as we've said in the couple of calls before, we were able to improve our gross margins in India. So, generally speaking, the impact that we have seen, for example in 2015, in beginning of 2015, is not expected to reiterate itself in 2016. I think that we can conservatively say that we'll probably be at the minimum solidly above 30%. So, if you mentioned 32%, it makes a lot of sense, if the mix is more favorable to developed countries, it can even go slightly higher.

Then, one last question. Do you have any 10% customers in the quarter?

Yes. I mentioned the one Indian customer that is a longstanding customer of ours is over 10%.

Thanks.

George Iwanyc, Oppenheimer.

Thank you for taking my questions. So, following up on the India questions, can you give us an idea of the type of seasonality you expect in India going forward, given the booking strength that you are talking about?

I think that what we mentioned on the call is that we believe India will continue to roll-out significantly over the next year and year-and-a-half. I think all of the operators in India and most of them are customers of ours are gearing up for very strong competition and for market share around 4G and high data services within India in between existing operators densifying their network and shifting to 4G and the need to redo the network for very high capacities to new operators like Reliance Jio, which are building large network to capture significant market share. At the same time, let's remember that the whole structure will be used for 4G and also data services because the fixed line alternative is not prevalent all over India at this point, so they are gearing up for very high capacity across the networks. And, we believe this will continue well into 2017.

From a percentage contribution, is the March quarter contribution a potential low for the year and that India grows as a percentage of mix in the rest of the year?

Yes, the answer is positive. We think that the contribution of India in Q1 of 2016 is probably at the lower end and we see much higher contribution in the upcoming quarters.

Okay, and then the potential stabilization you're seeing in Latin America, can you give us a bit more color on the dynamics there?

I'll give you the dynamics there. I think that we look at the politics and the macro-economics. I think we see it both in the business, but we read the papers where Argentina stabilized, where we had during some parts of last year a lot of currency and currency issues in Argentina. Since the last election there, I think we are in a good shape and we see a lot of the operators reinvesting into the mobile operators.

Brazil has stabilized. You can see from the currency exchange rate, which was very unfavorable for a while and then retreated and we think that we are in a good position there although at a lower revenue level, mainly because we chose the projects we want to do and do not want to do in Brazil. And we see strengths over in other places, in Latin America, Mexico and Colombia and other places where people are investing. Let's remember that, if I look at the worldwide trends of the 4G roll out, which drove North America and European business over the last two years, in most places have come to -- with some of the operators into, I'd say maturity, although what we see in Latin America and in APAC and India, this is where 4G will be starting to roll out or has started to roll out and is driving our business in those regions.

Okay. And from an overall pricing standpoint, do you see the vendor rationalization playing out as you mentioned last quarter? Has there been any more attention paid to the best-of-breed segment by either the larger vendors or some of the more niche vendors?

I can't quantify at this point as there is significant changes there. I think we see still the tough competition in both segments, in the non-best-of-breed and in the best-of-breed segment. I think because we have a technological and value-advantage in those markets, we're able to get our share and probably expand our share within the best-of-breed market.

Okay. Is it fair to say pricing is stable in the best-of-breed segment?

Yes, it's relatively stable. I think we see like in any technology continual slow decline, but I think it's slower than we've seen in prior years.

Okay, thank you.

Gunther Karger, Discovery Group.

Have you seen any shift from terrestrial backhaul to a satellite-based backhaul?

We do not monitor the satellite backhaul. But what we see in most places, and this is the trend over the many years that we have seen, is that the higher the capacities the more terrestrial that we see versus satellite. And satellite is moving and it's really a front where we in the very dense areas you see fiber, and then the next what we call suburban to rural areas, we see a lot of microwave. And then when you go deep into the rural areas, you see -- start seeing satellite, all depends on the capacities. By the way all technologies link up with the capacities as well, but I don't see a significant change in that area.

(Operator Instructions) And currently no questions in queue.

Okay. I would like to thank everyone for joining us this morning on the call. Please feel free to contact us if you need on one-to-one basis both myself and Doron for further questions and talking about outlook and products and as we move forward. And I do expect to see some of you on the one-to-one face-to-face basis during our US visits both on conferences and on the roadshows we do on a regular basis. Thank you and have a good day.

And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.