Ceragon Networks Ltd (CRNT) 2016 Q4 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks' Limited Fourth Quarter and Full-Year 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 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 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 developing nations in 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 the business coming from our bigger customers will [go] down significantly or cease, the risk that Ceragon will not achieve the benefits that 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 & 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 & 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.

Q4 represented a very strong finish to 2016. We continued to execute well on our strategy. For anyone new to our story, the main elements of our strategy include focusing on the best-of-breed portion of the market, evaluating each deal individually based on the value it generates, continuously improving our product costs, and carefully controlling our operating expenses while maintaining a global presence.

By meeting our goals in each of this area for the full-year 2016, we achieved $11.4 million in GAAP net income, our best performance in six years. We also exceeded our non-GAAP net income goal of 50% growth compared to 2015, reaching $11.5 million of non-GAAP net income. We generated strong positive cash flow during the year, which we used to pay down debt.

We are very pleased with this performance, particularly considering the market conditions globally were far from ideal. Doron will get into the detail of Q4. I just want to note that we exceeded our own goal and raised the bar in terms of continuing to deliver strong profit growth.

On our Q3 call, we set a preliminary 2017 profit goal of 40% increase in non-GAAP net income on constant-currency basis. Since then, we received some very large orders, and the profit outlook has improved. We are raising our target for non-GAAP net income growth in 2017 to 50% when compared to 2016, also on a constant-currency basis.

So, the main message we want to convey today is we had a very good year in 2016, and we are expecting an even better one in 2017.

Turning to the global market conditions, we don't see any major change since our last call when we said we expected the overall market to be down slightly in 2017. We also conveyed a note of caution regarding the outlook in a few regions, notably further weakness in Africa and certain parts of Latin America, as well as continued softness in Europe. This is still our view.

There are three specific areas of the world where the fierce competitive situation between operators for market share is resulting in the need for more microwave backhaul capacity. Specifically in India, there are Reliance, Geo, and Bharti. In Mexico, there are AT&T and Telcel. In the US, there are T-Mobile and Sprint. Each operator has its own business strategy and network plan. Just as the strategies are different, their microwave backhaul requirements are different, but we can address all the different variants with our IP20 platform and provide the type of value that each carrier is looking for.

Therefore, we have all six operators as our customers. The key for us is having a global presence, having a comprehensive and flexible platform that can be sold on the value it creates for the customer, and the ability to provide strong support and execution within a very demanding timetable.

On our last call, we discussed being chosen by Sprint as a primary wireless backhaul vendor for their [densification] and optimization project, and said we expected it would begin to contribute to revenues in 2017. However, we were able to meet the request for an accelerated timetable. We recognized some revenue from this project already in Q4, which is the main reason revenue was a little higher than expected. This project is going very well, and we believe we're in a very strong position.

Recently, we announced that we received $60 million of new orders from a large customer in India. The first thing I want to say about this business is this, that the situation is much different than it was two years ago when we took on a big batch of orders with a tight delivery schedule. As [the] result of the lessons learned back then, we reorganized the entire relationship with the customer in 2015, and the new orders we received are on the basis of the new relationship. This deal will add significant incremental gross profit dollars.

We are doing well for one reason - we have earned the confidence of each of the operators that happen to be buying a lot currently. And [with some], we have earned the lion's share of their business.

The last point I want to make is regarding the optics of quarter-to-quarter fluctuations in our results. It would be great if we could get our customers to place orders with [the] nicely-spaced delivery dates throughout the year and order the same quantity of everything each time, but that's not the real world. The large order we received recently are expected to [exaggerate] fluctuations in gross margin, with very lumpy revenue during the first half. Doron will explain in detail, but it's important to remember that no one quarter will provide an accurate sense of the impact of this orders on our results. This is why we [are] explain our view of the full-year profit performance.

Before I turn the call over to Doron, I want to say a word about how excited we are about new technology and products we are developing. Another successful outcome of our strategy is that it has enabled us to continue to invest aggressively to maintain our technological leadership. At Mobile World Congress in two weeks, we will be announcing the next phase of our advanced products developments, extending our multi-core strategy to deliver higher capacities to prepare for 4G advanced networks and to move forward on the evolution towards 5G.

One of the most frequent questions we are asked is about competition for the IP20 platform. It's been almost 3.5 years since we first introduced the IP20 platform, and you want to know if competitors have caught up with us by now. The answer is that some have been advancing and closing the gap during that time, but we have not been standing still, and we are about to increase the gap once again by building on our current success during the next phase beginning toward the end of the year.

With that, I'll 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 fourth quarter revenue of $84.7 million represented a 7% sequential increase from Q3. As expected, our big book-to-bill ratio was substantially below one. In addition to [typically] seasonality, Q4 booking reflected the fact that orders were expected from our large customer in India were held up by the negotiation to increase the size of the deal. Adjusted for this factor, our booking level in Q4 was in line with the expectations, and we are expecting that our Q1 book-to-bill ratio will be significantly above 1 despite the fact that Q1 is also usually a seasonally weak booking quarter.

As shown in the press release, the geographic breakdown showed a similar pattern to the one we saw in Q2 and Q3, with continued strength in India, a portion of Latin America, and some improvement in North America. We had one above-10% customer in the quarter, our large customer in India.

Non-GAAP gross margin was 32.9% in Q4, down a bit from Q3 and showing typical mix-related quarter-to-quarter fluctuations and the impact of some non-recurring costs, such as changing the location of some of our distribution hubs in order to be closer to our customers.

In Q4, we continued to hold our non-GAAP operate expenses steady within the $20 million to $21 million range we have been targeting. Although for comparability reasons the non-GAAP income figures are the ones most often tracked, it worth mentioning that, in Q4, we had non-recurring other income of $1.9 million and positive impact on taxes of $1.8 million, which caused GAAP net income to reach $8.3 million, or $0.10 per diluted share in Q4. Non-GAAP net income was $5.2 million, or $0.07 per diluted share.

For the full year, revenue declined 16% to $293.6 million while all other metrics improved significantly. Non-GAAP gross margin increased 460 basis points to 34.5% from 29.9% in 2015. GAAP and non-GAAP net income were nearly the same at $11.4 million and $11.5 million, or $0.15 per diluted share, respectively compared to GAAP net income of $1 million, or $0.01 per diluted share, and non-GAAP net income of $7.4 million, or $0.10 per diluted share in 2015.

Turning to the balance sheet at year-end, receivables were $107.4 million with DSOs of 133 days. The DSOs continue to reflect several factors, including the ramp-up in revenues and longer payment terms typical of certain geographic regions where revenue have increased.

At December 31, 2016, we had cash and cash equivalents of $36.3 million, and we reduced our debt by $3.3 million during the quarter to $17 million at year-end. This gives us net cash of over $19 million, as well as significant unused borrowing capacity.

To give you the cash flow figures, we generated $7.3 million of positive cash flow in the fourth quarter, and for the entire year, we generated nearly $18 million of positive cash flow, which we used to reduce our debt.

As Ira mentioned, we received recently large orders from India. After integrating these orders into our overall operating plan, we now feel comfortable raising our net income target for 2017 relative to 2016 from 40% non-GAAP net income growth to 50% growth on a constant-currency basis.

On our last call, we indicated that our assumption was that revenue would remain relatively flat in the area of $75 million to $80 million per quarter during 2017 except for a possible seasonal dip in Q1. We continue to think this holds true with the exception of Q2, as we indicated when we announced the orders a few weeks ago.

Assuming the customer continues to push for a very aggressive delivery schedule, we expect Q2 revenue to be substantially higher than our original expectation. These orders will also have a significant impact on gross margin in the first half of the year. The entire deal is a combination of equipment, software, and services. Not all of these elements will be delivered in the same proportion in each quarter. This means that we could see significant fluctuations in gross margin between quarters in Q1 and Q2 returning to a more normal level, above 32%, in the second half, assuming that deliveries to India are not stretched out.

In Q1, due to seasonal factors and the requirement to deliver to India as quickly as possible, the revenue mix is expected to be very skewed toward India. This is likely to combine with a less favorable equipment/software mix due to timing issues and suppressed gross margin.

Based on our current view, we don't see gross margin dropping much below 30%, but it will depend on a number of variables that are not within our control. With the high volume expected from India in Q2, we expect gross margin will also be under pressure during that period.

Finally, to summarize the overall financial picture, after two consecutive years of improving our financial condition and results of operations, we are looking forward to making 2017 the third consecutive year of improvement for Ceragon.

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

(Operator instructions.) Alex Henderson, Needham.

So, a couple of questions, if I could, just to clarify the guidance a little bit. When you're talking about a spike in 2Q, I assume that that also implies that the revenue numbers for the full year would, in fact, be a little bit higher as a result of that, as opposed to the prior guidance, I believe, which was flat revenues for the year. Is that correct?

Yes, that is correct.

So, we should still expect revenue in the $75 million to $80 million in the other three quarters?

Yes. I think what we expect is let's start with the second half of 2017. There we expect to maintain the level of $75 million to $80 million per quarter. On the first quarter of 2017, we expect to be at the low end of the range, and maybe slightly lower, as we communicated in the past. And the second quarter is expected to be a very strong quarter, and that's [what] we also announced in the press release relating this deal. We believe that this could boost the revenue by approximately $20 million, maybe $25 million relative to the regular level, or the average level that we're indicating [in the past].

Just going back to the Sprint stuff in 4Q, I assume that there's a fair amount of business behind that initial purchase. That was a fairly small number relative to the scale of their facilities. Is that the right way to be thinking about it, that that's just the initial order, even though you've absorbed some of that in 1Q, that there should be further ramp in that business as we go through the year?

I think Sprint, from that perspective, is a little bit more of a [planned] company than we see in other places. We do expect to see regular pieces of the whole order, and I think I said it last time, over a period of between two to three years, where each quarter we're getting a small piece. And while it's in advance (inaudible) the orders from the prior quarter and moving ahead, the start was in Q4, and we do expect that to continue throughout the year.

And just for bookkeeping purposes here, what are your expectations in terms of staffing levels? I assume it's fairly flat staffing over the course of the year, therefore OpEx is fairly steady over the course of the year. Is that still kind of the plan?

Yes. We intend to continue and keep the same level of OpEx as you have seen in the two recent years, between [$20 million] to [$20] million per quarter, or $80 million to $84 million per year.

Any thoughts on the tax rate numbers for 2017?

I don't expect any major changes in tax rate. Let's not forget, the (inaudible), the intellectual property of this company is primarily the Israel entity, [which] suffered accumulated losses from past years. And despite the fact that we pay taxes in some of our satellite subsidiaries, we don't expect a major change in tax percentages in the upcoming year.

So, around the same dollar amount, or same percentage amount?

I expect in terms of dollar amount, I expect some increase, but not a significant one to the total numbers that we hope to achieve.

George Iwanyc, Oppenheimer & Company.

Ira, can you expand on Latin America and just the positive trends you're seeing in Mexico versus the rest of the region?

What we are seeing, and I think I talked about it a few times, one of the big drivers today within specific areas around the world is what I call [first] competitive situation [for market here], which usually comes up as someone decides that they want to gain significant market share within the territory, then start rolling out, and then you have the [other] operators chasing them, trying to better them and do the [work]. This is the situation we see in Mexico, which drives large volumes of business.

If I look at the other parts of Latin America, there are big differences between the different countries. Brazil, which used to be a significant revenue generator for us because of macroeconomy right now and other conditions, it's much slower from our perspective, also because when we evaluated specific deals in Brazil the way we do as a strategy, they were not as profitable as we wanted them to be. And in some places, even in Brazil, we said no, although it's still generating revenue.

On the other hand, we have other very good customers in some of the other countries where we work closely with, and in some countries you still feel the economic pressures similar to Brazil. But, I think we highlighted Mexico specifically because of the first competition for market share, which then drives network expansion, which is today mainly 4G expansions, or 4G advanced expansions, with huge amounts of data, which requires very large amounts of backhaul.

When you look at your regional mix, excluding India, do you feel visibility is improving, or is it still a pretty mixed environment? And what are you seeing on the pricing environment?

First, it's a mixed environment, independent, by the way, of the pricing issues, because I think the main drivers are in the different places, both local macroeconomics, and I think, as I said on the Q3 call, also availability of hard cash to use because of the lower oil prices, and other countries cannot buy as much as they want. And we see that mainly in Africa, and some of it in places like Russia and others, which is slowing down, which now then lowers the visibility, but this is already taken into account in our plan for 2017.

I don't think any of that effectively changes the price pressure picture. Price pressure picture has been here for a long time and is still there, and I don't think it has changed. I think that our strategy going and selling to best-of-breed where we can show the value, and the value that we uniquely bring to the customers allows us to also mitigate some, but not all, of the price pressures.

You've talked about TAM expansion opportunities into public safety and a couple other areas. With the product update that you're looking at, is that mostly incremental improvements in performance, or are you looking at adding new functions and features that can help expand TAM further?

In general, we talked about expanding the TAM. The product features and the products we are putting on the table at this point is still to the same TAM we are in. It will also expand parts within the TAM, but not significantly.

James Kisner, Jefferies.

So, (inaudible) to India for a second. It sounds like you have pretty good visibility, and this is going to be confined to Q2, but I'm just wondering if there's any potential for there to be additional orders from India in the second half, or is it pretty much a virtual certainty that there [won't be follow-on] orders?

We do expect follow-on orders from the same customer towards the second half, and we do expect also to have a flow of orders from other customers in India, which we are getting on a regular basis.

So, what about the United States this year? In terms of your revenue outlook, what are you implicitly assuming in terms of the US business? Is it going to be up tens of millions this year within that outlook, or not as dramatically? Just any thoughts on that portion of the mix?

As you can see, portion of revenue in 2016 was even slightly lower than what we had in 2015. We expect to actually, I would say, resume the growth in revenue in North America. And our target is to exceed the numbers of 2015 as a minimum.

Maybe just step back again, it sounds like this is going to be kind of flattish excluding India. It sounds like US is going to be up, Mexico's going to be up. Can you just recap, just geographically, what's up, what's down in the revenue outlook based on what you're currently assuming?

Yes. If we go back a second to our previous conference call, I think except for these big orders from India, nothing has really changed in our anticipations and estimations? So, to summarize what we said, we said, within Latin America, we expect to maintain the same level of business, more or less, also making a cautious statement that Brazil is still weak, and might be even weaker. For Europe, we said that we expect, I would say, flattish year. We did mention Africa as the place that we expect even further reduction in business in 2017 relative to 2016. And in APAC, we hope to start seeing signs of small growth, not that big, that make things change dramatically.

So, all in all, what we expect is North America to be stronger than this year, and this piece will be probably offset by the relatively weakness in other places, especially in Africa. And now, you can add to this equation the big order we received from India, and this will probably drive the total revenue to go up slightly relative to what we were anticipating before these orders were received.

(Inaudible) general, how do you expect cash flows to correlate with revenues this year? Should we expect them to be similarly [apportioned] through the year, or could we see more back-half loaded cash flows? Just any thoughts on the impact of the balance sheet (inaudible) [to investors] would be helpful. Thanks.

Yes. So, generally speaking, if I'm trying to look at the full 2016, we still maintain our view that we are going to continue generating positive cash flow probably in a magnitude that is relative to what we have done in 2016, maybe slightly lower, but not dramatically lower, because obviously an increase in the business, especially in countries where payment terms are relatively longer, we anticipate to have a higher working capital that will definitely be on account of some positive cash flow.

If [we] try to look into the year, I think that we expect the first part of the year to be around cash flow breaking even, and there's a good chance to be even slightly positive. And we expect that we will generate the majority of the cash during the second part of the year.

(Operator instructions.) [Haral Shah], Credit Suisse.

Could you help me again with the size of the order that you have received from India? What is the timeline that you are looking at in terms of the implementation of the order? And can you bifurcate that into what percentage would be completed, say, in 1Q related to what would be completed in the second Q? Can you compare this order with what order you had previously received from the same customer? Thank you.

Okay, I'll try to give some color into it, but not all the color, because I'm not sure that's all the details. I think we said on our press release very clearly, order size was around $60 million from that customer, with a requirement for very quick delivery, within Q1 and Q2 delivering to the customer. We do expect, if conditions do not change, we'll deliver most of that order within that time period. And again, I'll refer you back to Doron comments, because there's all sorts of pieces there, which is equipment, which is services, which is licenses. Revenue recognition, there is a little bit more complicated and a little bit lumpy, and probably might extend a little bit longer than the two quarters.

For your last part of the questions, we continue to be and receive the major lion's share of microwave backhaul orders from that customer, the same as has been in the past, depending on their rates of deployment.

Can you help me with the size of the past order that you had received from the same customer?

We didn't announce it in the past, and I don't think we want to put it on the table at this point.

And Mr. Palti, no further questions in queue.

So, thank you, everyone, for joining us on the call today. Like always, we'll be glad to entertain one-on-one calls if people have further questions, by reaching out both to myself, Doron, and have more detailed types of questions. I do encourage anyone who's going to be participating in Mobile World Congress in two weeks in Barcelona, please come into our booth, and we can show you around, discuss the new products we are excited about, and have further on conversation face-to-face in Barcelona.

Thank you, everyone, and have a good day.

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