Ceragon Networks Ltd (CRNT) 2016 Q3 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks' Third Quarter 2016 Results Conference Call. Today's call is being recorded and will 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 assumption 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 the risk that Ceragon's expectations regarding future revenues and profitability will not materialize; risks relating to the concentration of our business in India, Latin America, Africa and in developing nations and other regions, including political, economic and regulatory risks from doing business in those regions and nations, including in relation to local business practices that may be inconsistent with international requirements, such as anti-corruption and anti-bribery regulations, currency export control issues and recent economic concerns; the risk that amount of business coming from our most significant customers will go down or cease; the risk that Ceragon will not achieve the benefits it expects from its expense reduction plans and profit enhancement programs, as may be implemented from time to time; 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 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 from Ceragon's website at www.ceragon.com. Also today's call will include certain non-GAAP numbers; for a reconciliation between GAAP and non-GAAP results, please see the table attached to the press release that was issued earlier today.

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. Our third quarter results were very good, with the highest quarterly net income we have achieved in several years. We continue to execute on our strategy of focusing on the best-of-breed portion of the market and evaluating each deal individually, according to the value it generates. What I can report about this strategy is, it's working. We are having success in conveying this concept of total value our solutions provide to our best-of-breed customers. We continue to benefit from a global presence, a very strong product offering and a long-term focus on design to cost improvement and a stable organization. We're able to focus on execution rather than being preoccupied with downsizing as some other companies in our industry are. We are winning the deals and that we should and want to be winning. Price is always part of the equation, but we excel in situation where it's not the only factor where overall value including efficiency, performance, reliability and peace of mind also influence the selection process.

In Q3, India remained a source of strength along with Mexico, similar to the last quarter. In North America, we were pleased to be awarded and designated by Sprint as the primary wireless backhaul vendor for their network densification and optimization project. We have received the first order for this project as part of a multi-year contract. Providing that we perform well, we expect to receive the lion's share of the wireless backhaul business. We are one of only two vendors selected after a rigorous process they evaluated seven different vendors. We expect this to contribute to our revenues beginning in 2017. But due to complexity of the project, orders may not occur in an entirely linear fashion throughout 2017 and beyond.

To summarize, we expect continued strength from India, at least through next year. Similarly Latin America, most notably Mexico is likely to remain a source of strong bookings. And beginning next year, revenues in North America are expected to increase as a result of the multi-year contract with Sprint. However, with this very positive outlook in certain regions, we must also deliver a note of caution regarding others. The spending outlook has recently started looking weaker for next year, mainly for operators in emerging market economies that are sensitive to the price of natural resources, such as oil and minerals. In addition, it can be difficult for some of those operators to obtain sufficient hard currency, which is a problem for us if they can't comply with our payment conditions.

In 2017, lower revenues from Africa alone could offset a significant portion of the growth expected from North America. With pockets of weakness possible in parts of Latin America, we don't see a lot of justification for raising expectations for next year. At this point, we are not counting on significant revenue growth in 2017 compared to 2016 to achieve our target increase in net income and will not encourage analysts to increase the revenue assumptions.

To those of you who may find this cautious top-line outlook a little disappointing, we would like to put it in the context of the market in which we operate. Two of our large generalist competitors have been lowering expectation and some of our specialist competitors continue to struggle. Against this backdrop, we expect relatively stable revenues aligned for typical seasonality. Our focus will not to be on the top line, but on delivering another year of solid improvement in net income, regardless of the exact revenue level.

Also, while it's premature to get into any specifics, we have an ongoing internal process aimed at identifying new high value opportunities that would expand our addressable market. We mentioned one of them on the last call, when we discussed some new opportunities in public safety and cybersecure backhaul, driven by initiatives like FirstNet in the US, a new network dedicated to first responders. We are also deep into internal analysis and design of the best way for us to capitalize on the evolution to 5G. The new emerging standard is being designed to take advantage of both microwave and millimeter wave frequencies, where we have a strong relevant experience. This will open up new opportunities to fuel future growth.

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

Thank you, Ira. Since you've all seen the press release, I'll just highlight some of the significant items. Our second quarter revenues of $79.1 million represented a 13% sequential increase from Q2. And our book-to-bill ratio was above 1. We've been saying that we believe, Q1 was a trough quarter in terms of revenues and our results in Q3 continue to reinforce that view. Our booking pattern provides another indication that we can expect revenues to stabilize in an acceptable range of around $75 million to $80 million over the next several quarters, with the possible exception of a seasonal dip.

As shown in the press release, the geographic breakdown showed a similar quarter to the one we saw in Q2, with continued strength in India and Latin America. We had two above 10% customers in the quarter, one large customer in India and one in Mexico. Non-GAAP gross margin was 33.8% in Q3, which was our fifth straight quarter of non-GAAP gross margin above 32%. We have a very strong product offering that continues to succeed in the market and our strategy of focusing on profitability deal by deal is working. Seeing the levels of our anticipated gross margin in our bookings during the last couple of quarters, we are raising our gross margin goals and we wouldn't rule out the possibility of staying at an average gross margin near 34%, assuming a revenue level that is around $75 million to $80 million a quarter and subject to geographic mix.

In addition to geographic mix, gross margin could be affected in a particular quarter by accounting requirements that could create differences in the timing of revenue recognition for different elements of a particular project. Almost two years ago, we acted decisively to reduce our operating expenses to a level that would enable us to invest for the future, while remaining solidly profitable. We've been successful in holding these expenses steady for six quarters now, and we believe we can continue to keep them under control while maintaining our leadership position from a technology standpoint in the market.

While we are still working on our plans for next year, including some strategic initiatives that could require some additional investment. At this point, we target keeping non-GAAP operating expenses around $20 million to $21 million per quarter. We have reported a non-GAAP operating profit for nine straight quarters and a net profit in five out of the last six quarters. In Q3, our non-GAAP net income reached the highest level in recent memory: $4.8 million, which was $0.06 per share.

On an annual basis, our goal is to achieve around a 50% improvement in non-GAAP net income in 2016 compared to 2015. This is a goal, not a forecast, and it would require us to reach $5 million in non-GAAP net income for Q4, which is doable, but by no means assured. Many of our competitors are lowering their expectations for next year and continue to cut expenses in an effort to stem their losses. It is within the overall environment that we are targeting another increase in non-GAAP net income for 2017. This is where we are keeping our focus.

Turning to the balance sheet, receivables were $109.6 million, with DSOs of 141 days. This is somewhat higher than our target range of 105 to 125 days, but it is not of concern to us. The higher DSOs reflect several factors, including ramp-up in revenues, reduced factoring and longer payment terms typical of certain geographic regions where revenues have increased. At September 30, 2016, we had cash and cash equivalents of $32.4 million. We had very small negative cash flow of $1 million related mainly to lower factoring of receivables and we reduced our debt by $1.2 million to $20.3 million at the end of the quarter. This gives us significant unused borrowing capacity and the financial flexibility to fund additional working capital needs, if we experience higher than anticipated growth. To repeat what Ira said from a slightly different perspective, we are discouraging you from focusing too (technical difficulty) and on quarter-to-quarter revenue changes for a few reasons. First, as we continue to remind everyone, we are managing the business to maximize profits, not revenues; and we continue to target a third year of significant profit improvement in 2017. This is our management focus and this is how we think we should be measured.

With overall secular market trends looking flat to down and our larger competitors talking about lower top line in 2017, we continue to believe revenue can increase slightly next year, but again this is not our focus. Our aim is to achieve another significant increase in profit and continue to generate positive cash flow. Although it is a very ambitious goal, we are targeting something on the order of a 40% increase in non-GAAP net income on a constant currency basis for 2017 compared to 2016. We believe that if we are able to even come close to this target level, it will represent excellent performance in the current market environment. So that's a snapshot of where we are and what we are aiming for from the financial perspective.

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

(Operator Instructions) George Iwanyc, Oppenheimer.

Thank you for taking my question. So looking at the immediate coming up quarter, the fourth quarter, what type of seasonality do you expect here? Do you expect revenues to be in that, $75 million to $80 million range or a seasonal lift and then a seasonal correction in the March quarter?

As we said and we're saying that all along, we're not discussing specific revenue guidance. I can tell you two things, first of all, our backlog allows us to meet the levels that we have recently seen, and even higher than that. And obviously, it's up to us whether we are able to deliver in a single quarter the ramping up backlog. I think that we need to think in terms of the net profit, and I think that you can do the math and understand that if we want to make $5 million in the bottom line, the levels of revenue cannot be that different than what we have seen in Q3.

And when you're looking at the gross margin target of 34% on average, does that assume a strong contribution from Sprint and is that something we should be looking at more as of a mid-2017 and later target, and not in the immediate quarters given the heavy contribution from India?

Let's start with the last, you mentioned India. India is a significant portion in our revenue this quarter and yet we were able to achieve a percentage that is very near to 34%. Obviously, Sprint is going to contribute to our margins positively, but I would not say that this is the main factor we build on when we assume we can come near the 34% average.

Okay. And one last question, you dig in maybe a little bit on the pricing environment with some of the larger infrastructure vendors pulling back expectations. Are you seeing more price pressure and are you seeing a tougher competitive environment in general when you're looking at what had been good deals?

What we see is a tough environment. I don't think it's any tougher than it used to be. Let's remember that mainly the big operators or the big generalists go after system deals worldwide; and dependent on large system deals, less on specific microwave backhaul deals, which go for the best-of-breed. Although, we see some of it also in the best-of-breed segment, I don't expect that environment to become any easier In some of the markets also a little bit more difficult for us like I mentioned, that's why we are balancing the outlook for next year from a revenue growth perspective. But I do not expect a significant change in the pricing worldwide, which is tough as it is at this point.

Alex Henderson, Needham.

So just trying to band what you mean by fairly tough environment here on the revenues for 2017, is it that you're saying that you think it's going to be flat at that $290 million range or do you think that you can pierce $300 million or is it is flat 5%, 6% or is flat 1%, 2%, 3%? What are we talking about here, I guess a little bit more granularity to that.

Alex, I think you need to think of it in terms of how we can achieve a 40% increase in our net profit relative to the expected net profit in 2016. For this, obviously, we're not magicians and we'll probably not find ourself reducing our operating expenses much more significantly than what we have done a couple of quarters back. So, obviously, we do believe that we'll see some change in the revenue, in the top line number, but you can do the math, we have 34% and reach a number that I'm sure will be cohesive to the bottom line targets, we are just communicating here on the call.

So if your gross margin in 2016 looks like it's on track, which is around 34.6%, you're saying 34% for the year, your OpEx is online to do just under $20 million a quarter, you're saying it could be $20 million to $21 million a quarter going forward. And I'm trying to make sure I understand the mechanics of how you get to that bottom line. So your gross margins are going to be down and your OpEx is going to be up, relative to the averages for the year, right?

Our gross margin at this point, as we said, is around 34% and that's what we expect to see, it is a level that is at least from our perspective the lower end. And we were talking about $75 million to $80 million of revenue range for this level of gross margin. So I think that you have all the information to do the calculation.

And as we go into the fourth quarter, I assume that the Sprint stuff is really more 2017 and not a fourth quarter event given the timing here?

Yes, Ira mentioned that, obviously there is a push coming from the customer, but we have our plans, the impact is probably going to be much bigger on 2017.

And did you have any 10% customers in the quarter?

Yes, we already said that, we had two 10% customers, one in India and one in Mexico.

And what was the headcount for the quarter at the end of the quarter?

Alex, that has not changed significantly, since we have announced our restructuring back at the end of 2014. We have around 1,000 employees all over the world, sometimes it's slightly less, sometimes it's slightly more, but there is no growth in headcount and at this point, at least there is no in planned growth in headcount.

James Kisner, Jefferies.

Just a quick clarification -- by the way, great quarter, and thanks for taking my question. But a clarification I mean you're talking about a Tier 1 in this release, and you are not naming the operator. You were talking about Sprint now on the call quite clearly, so are we talking about two different operators, or are we talking about just Sprint?

Just Sprint.

Okay, thank you. So, regarding that, what is annual -- do you have any idea what the annual spend is for wireless backhaul at Sprint for 2017, what the target might be and what the trajectory might be, might it be a very strong 2017 kind of tail off (inaudible), any thoughts on that?

I cannot get into all the numbers. We see the Sprint numbers and their plans for densification and optimization. The only thing I can say that the overall project long-term for microwave backhaul is closer to probably $100 million, but that's over a six or seven year period. How will this be divided in between the different years and different vendors is not 100% sure. Although, we think and we know we'll get the lion's share of that. How quickly and how fast over next few years, I don't know yet. Highly dependent on the way and how quickly Sprint executes on the overall plans on densification and optimization. And we are confident in their capabilities to execute very rapidly as they meet their target goals, but at this point, that's all I can talk about from that perspective.

That's pretty helpful. But I also appreciate you guys sort of (inaudible) next year and kind of giving us an outlook. I'm just really curious that kind of how are you sizing up your business opportunity for next year, regionally? Are you looking at a pipeline, are you looking at a market research vendor forecast, like what's your kind of --?

We are doing everything that you said. I'm looking at the macro and the macro has effects. And then, we're in the midst right now of doing our annual operating plan for next year. This is being done both top down and bottom up customer-by-customer, where our sales team, which has spread geographically talking, walking with the customer on the different expectations. And like always, the plan at the beginning of the year and the actual for the year usually have large variance for it, but is a part of the planning process and taking into account experience on variation and fluctuations within the different markets and balancing risks from the different places. That's where our best estimate at this point is what we indicated on the call on the one hand continued strength in India and Latin America, a little bit of growth coming from the North American region and regions which are -- or countries which are more inclined on natural resources become very hard on hard currency, which usually slows down investments in telecom business and that's where part balances are.

And just one last one, do you think there's any -- there is so much talk about 4.5G and 5G in China, it's very clear these guys are going to try to be leaders in developing or deploying new wireless technology, is there any chance that there might be incremental opportunity there for you and that's my last question, thank you.

In China, in general for many years, we did not see any microware backhaul. In China, it's a country where almost by -- I won't say regulation but government directive you reach every site with fiber. Over the last year, we started seeing some change in those, but the numbers at this point are still overall not significant and less significant for us. Yes, we are monitoring the market, we did see of every small order something we did not see for a long time from China last quarter, but I don't think it'll represent an avalanche at this point, I think it'll be a little bit of pieces, I don't see it as a significant at this point on the table.

Gunther Karger, Discovery Group.

Yes, thank you for taking the question. The question has to do with market shares. Do you believe you have gained market shares over the last six months, that's part one of the question; part two, do you expect to increase the market shares over the coming year?

Depending on which specific market, because this is highly dependent on specific geographies and different things. I do expect, for example, in North American market, yes, we will gain market share. I think in some places in Latin America, we gained market share. I think we lost some market share in other territories like APAC. Depending on the region local performance of significant customers, overall -- and that is the important piece -- if I look at the overall picture worldwide, we think we are slowly gaining markets not in significant numbers but in partial percentage points year-over-year.

(Operator Instructions). And with no further questions coming in, Mr. Palti, I'll turn it back to you for any closing comments.

I'd like to thank all of you for joining us on the call. Like always, we will be glad to entertain any one-on-one calls and open discussions on the quarterly results and our outlook into 2017. Thank you very much and talk to you either face-to-face or on the phone soon.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, you may now disconnect.