Ceragon Networks Ltd (CRNT) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the Ceragon Networks Ltd. first quarter 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 current beliefs, expectations and assumptions of Ceragon's management. For example 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 risk and uncertainties that may cause actual results to differ materially, including risks associated with a decline in revenue due to our focus on single market segment; risks related to the certain -- concentration of Ceragon's business in certain geographic regions, such as India and in other developing nations; political, economic and regulatory risks from doing business in other developing regions, including potential currency restrictions and fluctuations; risks related to our ability to meet the demand of our products due to shortage in raw materials, including certain passive components; risks associated with a change in Ceragon's gross margin as a result of changes in the geographic mix of revenues and/or result -- as a result in (sic) [of] increase in costs in raw material, including certain passive components; risks associated with loss in single customer or customer group, which represents a significant portion of Ceragon's revenues; risks associated with Ceragon's failure to effectively compete with our wireless equipment providers; 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 that represents our views only as of the date they are made and should be relied upon (sic) [should not be relied upon] as representing our views as any subsequent date. We do not assume any obligations 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.

As today's call will include certain non-GAAP numbers, for reconciliation between GAAP and non-GAAP results, please see the table attached to the press release that is issued earlier today.

I will 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.

Before we begin, just a short apology. Our website went down about 1.5 hours ago, and we redirected www.ceragon.com to this Web conference. So if you wanted to listen on the Web, it's there, and the link is working.

So let's begin. We are beginning 2018 with a strong quarter in all respects. We are particularly pleased to see strong bookings in Q1, given that we had record bookings in Q4 and then tendency is for Q1 to be seasonally affected. At this point, with a growing backlog and strong booking quarter, we believe we have enough visibility to raise our quarterly run rate expectation for 2018 to the $80 million to $85 million range from our previous quarterly run rate of $75 million to $80 million. Revenue in Q1 was slightly above our expectation at $83.3 million and in the new range.

The reasons for this performance include our longtime leadership in all-outdoor solutions, coupled with our strong relationship with operators in highly competitive markets globally. Strong orders for all-outdoor multicore solutions from India are continuing. If anything, competition among the 3 largest operators in India seems to be intensifying. This competitive situation continues to drive very aggressive network densification and optimization projects.

We recognized the potential of the market in India early on, and we have cultivated strong relationship with all the operators. Therefore, we are very well positioned to capitalize on this continuous demand because we understand the needs very well. Over the past decade or more, we have gained a very high share in the best-of-breed portion of the market in India. We estimate that our share is probably close to 50% in this portion of the market.

Since most deals are multivendor and operators are not willing to have a single-source relationship, this is about the highest attainable share we can target. We had some growing pains along the way while we figured out how to approach this market correctly and make money. But that has been behind us for a long time now.

The major Indian operators have been some of the leading adopters of best-of-breed wireless backhaul solutions to expand, densify and optimize their networks. We are a primary vendor, enabling these operators to launch 4G on a very large scale while dealing with lack of real estate, lack of spectrum, expensive power and extremely high price sensitivity for the whole solution. To respond to these needs, we started to introduce this product 4 years ago, and we have very compact and value-effective multicore all-outdoor solutions to cover the full range of use cases.

Anywhere in the world that you find aggressive network densification initiatives, you find operators turning to all-outdoor solutions because they have a smaller footprint, consume less power and are much simpler and faster to install. So it's not a coincidence that those challengers in another hypercompetitive environment have chosen to work with us as the primary wireless backhaul vendor, deploying all outdoor equipment.

The challenges are exactly the same in North America as they are in India, so we are puzzled when some investors seem to view our business in India as some kind of negative or something to overcome. We have a large share of a huge market, and we think a gross profit dollar generated in one region is as valuable as a gross profit dollar generated in another.

At any rate, it appears we have another hypercompetitive situation likely to intensify, assuming the Sprint-T-Mobile merger closes. Both companies have proudly claimed the title of disruptor and state that together, they will be an even stronger one. We are a preferred vendor to both companies, and the reasons each chose to work with us will still be valid, perhaps even more valid when they become one company. Just like the operators in India, the new T-Mobile will need to move very aggressively to challenge the incumbent vendors. Therefore, we believe we are very well positioned to take advantage of the aggressive spending on gigabit LTE and 5G for our primary U.S. customer. In the meantime, spending by both parties to the merger is likely to be constrained.

Keep in mind, however, that we have been watching this dance for the past 4 years, so we've already been using conservative assumptions on the 2018 outlook for these 2 operators. As a result, this merger announcement will not mean any major change to our business outlook. Longer term, we see it as very positive. In a recent interview, John Legere spoke about $40 billion of overall spending in the first 3 years, and he predicted their competitors will spend an extra $20 billion.

Going back to the underlying reasons for our selection. One of the major pain points in an aggressive densification situation is the installation and site acquisition. So it's not surprise that operators are moving to all-outdoor configurations. They are simpler and faster to install, you don't need air-conditioned shelters, site acquisition is less complicated, and you can make more efficient use of limited spectrum. In fact, all-outdoor is becoming a dominant trend in most geographic areas.

Within our served market, what we call the best-of-breed segment, all-outdoor units have increased from around 18% of the total market in 2015 to about 48% in 2017. This is an area where we have and are leading since we first introduced our IP-20 all-outdoor solution in 2013. Since then, multicore all-outdoor has grown to become over 60% of our business, measured by units shipped. As network complexity continues to increase, simplicity and speed of installation become even more critical factors for all operators. And this is where we expect our leadership will help us to continue to gain market share.

Returning to the general update by region. We have seen some pickup in Africa as one of our large multinational customers have resumed investing in this region. However, it's too soon to be able to determine if this pickup is sustainable.

In Europe, we are not seeing any major changes in demand, and it continues to be fairly slow overall. However, we have achieved an important milestone for Ceragon this quarter in Europe. After several years of effort and a long evaluation process, once we gained their attention, we have finally been selected by a large multinational carrier headquartered in Europe. This probably won't result in orders until late this year or early next year, but as they make the purchasing decisions on a centralized basis, so gaining this approval was a very important accomplishment.

Asia Pacific continues to do well and grow in the context of its tendency to be lumpy from quarter-to-quarter. Business in Latin America remains steady. We are continuing to support existing customer network expansion, upgrade and densification programs.

We are also indirectly part of a consortium that recently bid successfully on the government-sponsored project to bridge the digital divide in rural areas in Latin America. Our portion of the project will be around $30 million over 2 years. We believe this could begin to contribute to revenues early next year.

We are also gaining market share in vertical market segments, and we have some good news from North America. We won a new U.S. customer for a government-related project that is large for this type of a deal, a couple of million dollars over the next 2 to 3 years. This win is another indication of our success in penetrating the noncarrier market in North America.

In addition, we are making headway through our channel partners in the public safety market and when we have an ongoing marketing campaign in Europe, which is identifying and reaching out to new opportunities.

Finally, to summarize. We keep gaining confidence in our assessment of the market and the suitability of our solution as more operators choose our multicore all-outdoor solutions to meet their gigabit LTE and 5G network objectives. We are enjoying some success in gaining a greater share with carriers in certain markets, having displaced several different competitors during the past year. Over the longer term, we believe our superior technology and global presence will help us continue to grow faster than the market as a whole.

Now I'll turn the call over to Doron for some detailed remarks on our financials. Doron?

Thank you, Ira. Since you have all seen the press release, I'll just highlight some of the significant items.

Our first quarter revenue of $83.3 million represented a 3.9% sequential decrease from Q4, reflecting typical seasonality. We had 2 above-10% customers in the quarter. Both were large customers in India, reflecting the high competitive market Ira spoke about. The continued strength in India is also demonstrated by the geographic breakdown, with India accounting for 46% of total revenue.

Non-GAAP gross margin was 33.2% in Q1. There are some factors that affect the gross margin this quarter that merit discussion. Although the geographic mix was skewed toward India, the product mix between equipment and software was skewed toward more software, creating higher margin.

We also were affected by shortages of passive components during Q1. Our gross margin was affected by the higher cost of these components, which are in very short supply recently due to the soaring demand for such components. So far, we are managing through this, although our costs are much higher. But if these shortages persist, it could begin to interfere with our ability to meet delivery commitments.

Without the impact from the component shortage, our gross margin in Q1 would have been about 34%. For planning purposes, we are assuming the shortages will continue through the end of this year, and currently, we estimate that this issue will shave about 1 full percentage point off each quarter's gross margin during the balance of the year.

In Q2, we expect the geographic mix to be even more heavily skewed toward India, with revenue likely to exceed the high end of our quarterly run rate, meaning over $85 million. This is due to the strong orders from that region in Q4 last year as well as in Q1. We also expect the product mix to have a lower proportion of software, so we expect gross margin to be lower in Q1 than in Q2 -- sorry, lower in Q2 than in Q1. When you include the impact of the component shortage, we could see temporary dip in our gross margin at around 31% in Q2.

Turning to operating expenses. Non-GAAP OpEx of $21.9 million was at the high end of the quarterly range we indicated for 2018. This relates mainly to the seasonal factors and higher-than-expected business volume. We continue to expect OpEx to remain in the range of $21 million to $22 million per quarter this year.

Our financial expenses came higher than what we have seen during the last couple of quarters, primarily due to a devaluation of the Venezuelan currency of approximately 1,200%. The devaluation resulted in a foreign exchange expense of approximately $600,000, primarily related to cash received in advance for deferred maintenance revenue. This expense is expected to be recovered by recording higher revenue during the maintenance period.

Going forward, assuming no major fluctuations in currency exchange rates, we expect financial expenses to average about $1.5 million a quarter or even slightly lower for the balance of the year.

On a GAAP basis, we reported $2.1 million in net income compared to non-GAAP net income of $3 million.

Turning to the balance sheet. At March 31, receivables were $116 million, with DSOs of 125 days, similar to Q4 of 2017. We were at breakeven with respect to cash flow during the quarter, and we continue to expect that we will generate substantial positive cash flow for the year as a whole. At the end of March, we had cash and cash equivalents of $26 million, with a $50 million unused line of credit.

To summarize the intermediate-term outlook, we have enough visibility to raise our quarterly run rate expectation to $80 million to $85 million per quarter for the balance of 2018, with Q2 coming even higher. Even with such a large proportion of revenue coming from India and the impact of the component shortage, we are targeting more or less a 33% gross margin for the year. As mentioned, we see operating expenses continuing in the $21 million to $22 million per quarter range.

In addition to the $1.5 million of finance expenses per quarter that I spoke about, taxes could be slightly higher for the year since we have used up our NOLs in some subsidiaries.

As we mentioned on the last call, our expectations for the net income already take into account around $2.5 million in currency headwinds. Nevertheless, we continue to target a fourth consecutive year of net income growth. While we may only be able to achieve a small increase given some of the factors we have just discussed, we are continuing to make progress on all our major objectives, and we believe 2018 will be a very good year.

Now I'd like to return the call back to Ira.

Before we open the call to questions, I'd like to mention that our proxy material for our Annual General Meeting of Shareholders will be going out shortly. You will notice that we are adding 3 new independent directors. And once they have been elected, this will automatically cure the issue with a NASDAQ listing requirement that has existed since our longtime director, Avi Patir, passed away in January.

We also look forward to seeing some of you in person at the Oppenheimer conference in Tel Aviv on May 13 and the Cowen conference on May 31 in New York City. We'd be pleased to connect by phone with any other investors who have questions.

Now operator, let's open the floor for questions.

(Operator Instructions) And our first question comes from the line of Alex Henderson with Needham.

Great, can you hear me?

Hearing you clearly.

Great, super. So clearly, the India stuff is a big tailwind here in the first half of the year. I think at the end of the year, you had suggested that given the scale of the orders that came in, in the fourth quarter, that you might expect India to be down over the full year in '18 because of that big spike. Clearly, that doesn't look like it's happening. But should we assume that the back half is down as a result of the exceptional orders that you've landed over the last couple of quarters and persisting into the June quarter? Or is this something that is now at a different level that will persist at higher levels of demand because of the competitive environment?

I think I indicated very clearly on the call, we believe that the demand in India will continue well into the second half of this year and probably well into 2019. The competition is only intensifying. It's intensifying both between Bharti and Jio. And Vodafone, with their merger with Idea, is pitching in. And we believe this is not a short term, it's a much longer-term type of opportunity, at least well into 2019, if not the whole year of 2019. If you look at bookings and revenues, bookings tend to be fluctuating ups and downs, but delivery seems to be and will be probably strong. I think Doron indicated Q2 will have large numbers, and we do expect to continue having significant numbers well second half and into 2019.

So the second question is, how big of that exposure do you have on the Sprint-T-Mobile situation? If there is a hiatus in spending at the

(technical difficulty)

I lost you, Alex. Alex, I lost you.

Can you hear me?

Now I can hear you. You were asking, Alex -- I think I indicated on my call, on my part, again, on Sprint and T-Mo, we believe it's a very strong opportunity once the merger will be completed because the merger...

Particularly the shorter-term type of exposure.

Okay. And in short term, as I said, we were -- as we have seen this dance for the last 4 years, we were very cautious in our outlook for 2018 originally on both. So my guess is we'll see little, if not none, from the outlook that we need to decrease. Based on all those factors, that's why we feel very comfortable in raising the range to $80 million to $85 million. We do expect some things in the U.S. but not significant because originally in the outlook, we were cautious.

So if I were to put those 2 together, you talked about $325 million to $330 million before. It sounds like you're now over $330 million for the year. Is that the right way to think about it?

This is Doron. Yes, I think at this point, our view is that we can get to $330 million and maybe slightly even higher.

Perfect. Just one last question, then I'll cede the floor. The exchange rate, the shekel has moved down quite substantially over the last 2 or 3 weeks. I know that's a short-term move, but at these current levels, should we expect the OpEx to revert back towards the middle-point portion of that $21 million to $22 million as opposed to being so close to the high end, as you generated in 1Q, which is normally not the strongest spending quarter?

The short answer is no because as I discussed this topic in the past, our policy is once we have closed the budget, especially for the shekel piece, we usually hedge all our fixed expenses in shekel for the whole year. So what we did in the first month or so this year is going -- we are going to live with for the whole year. So the, so to speak, erosion of the shekel in the last couple of weeks is not going to have any positive impact on our OpEx.

I see. So that'll roll out into '19?

Exactly.

And our next question comes from the line of George Iwanyc with Oppenheimer.

Ira, when you look at the overall market, previously looked at mostly a flattish or maybe a slightly down 2018. Has the market outside of India improved overall in your view?

No. I think that the market outside of India, depending on specific regions, has not improved. If you look at the overall statistics that's coming out from analysts, the market is about flat. In general, by the way, including some of the India effects in general, but within this market, I think we are gaining share. We are gaining share in the best-of-breed. And as I said, we are gaining share based on our ability to be the leader in all-outdoor multicore solutions, which become more and more the need or the de facto way to go for 5G and 4G gigabit LTE densification projects. But in general, I don't think the market is growing at this point. I do assume the market in overall will start growing when we see significant new 5G deployment, but this is at least 1.5 years, if not more, down the road.

Okay. And how do you feel about the competitive environment in general? Do you see the potential of any price pressure developing as you gain share?

If you ask me that question, my automatic answer is yes. I don't think that the environment became any easier over the last year, but it's always been very competitive, very sensitive. Let's remember, we are also working in very sensitive, very highly sensitive areas to price like India, which doesn't make our life easy. We need to generate a huge value for the customers so they'll select our solutions. And I don't see that price pressure easing anywhere else around the world. But that's where the ability to generate value for our customers through both technology and presence and our knowledge help us able to really win the deals.

Okay. And Doron, you have held to the 33% gross margin outlook for the year. With the pressure from the passive components, is this a mix shift where you expect a good software contribution later on in the year? Or are there some other areas where you're able to offset some of the pressure?

I think it's more of a regional shift. Although we expect India to continue to be strong in the second part of the year, we believe that the first quarter and the second quarter, because of the orders that came in Q4 and in Q1, will not sustain. So generally speaking, when we look into the second part of the year, we believe that India will have a relatively smaller portion as compared with the first part of the year. And this is why we believe that gross margin will improve despite the pressure coming from the passive component price increase. Obviously, we continue with the, I would say, regular and very fragmented process of reducing our cost and expenses in the cost of the product all the time. So we are also taking into account that this will contribute the same it has contributed in the past years, except for the issue of the passive component we talked about.

(Operator Instructions) And allowing a few moments, there are no further questions in queue. Please continue.

So I'd like to thank all of you for joining us. I'll repeat my invitation for any one of the investors. If you want a phone conversation with us and follow-ups, you are most welcome to contact us. And we can further discuss either in person via the 2 conferences that I mentioned or on the phone. Thank you very much, and have a good day.

Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you very much for your participation and for using the AT&T Executive TeleConference. You may now disconnect.