Ceragon Networks Ltd (CRNT) 2022 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Ceragon Networks Q3 2022 Earnings Call. Our presentation today will be followed by a question-and-answer session, at which time, if you wish to ask a question, you'll need to raise your hand using your mobile or desktop application.

I'd like to hand over the call now to our first speaker today, Ms. Mao Lustig, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I am joined by Doron Arazi, Ceragon's Chief Executive Officer; and Ronen Stein, Chief Financial Officer. Before we start, I would like to note that certain statements made on this call, including projected financial information and other results and the company's future initiatives, constitute forward-looking statements within the meaning of the Securities Act of 1933 as amended, and the Securities Exchange Act of 1934 as amended and the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

Ceragon intends forward-looking terminology such as believes, expects, may, will, should, anticipate, plans or similar expressions to identify forward-looking statements. Such statements are subject to risks and uncertainties, which could cause Ceragon's actual results to differ materially from those projected in such forward-looking statements.

Such risks and uncertainties include, but are not limited to, those that are describing Ceragon's most recent annual report on Form 20-F and as may be supplemented from time to time in Ceragon’s, other filings with the SEC, all of which are expressly incorporated herein by reference.

Forward-looking statements relate to the date initially made do not support to be predictions of future events or results, and there can be no assurance that they will prove to be accurate and Ceragon undertakes no obligation to update or revise them. Ceragon's public filings are available on the Securities and Exchange Commission's website at www.sec.gov and may also 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 will now turn the call over to Doron, please go ahead.

Thank you, Maya, and good morning, everyone. I would like to start by thanking all our employees and the leadership team for an outstanding quarter, especially given all the challenges and uncertainties we dealt with.

The third quarter was a highly busy quarter for us on multiple fronts. First of all, we have a new CFO, Ronen Stein, who I'd like to acknowledge for deciding to join the company at such a turbulent time and already starting to play a key role in strengthening our financials. Ronen will be sharing with you the financials later in the call.

I'm pleased to report that in the third quarter of 2022, we achieved significantly improved results in many key areas. Also, our diligent execution on our long-term strategy has begun to bear fruit and prove directionally correct.

Our increased focus on North America and the software upgrade portion of our offering manifested into a very strong gross margin of 35.5%.

Our book of orders continued to be very high. In fact, it was the highest for a single quarter since the beginning of 2017. And more importantly, our backlog grew significantly.

We placed an increased focus on delivery optimization, and we saw some improvement over previous quarters. So supply chain disruptions are still part of our daily challenges.

I'm also pleased to share that we generated positive cash flow.

Though the nature of our business is lumpy. These strong signs of success show us we must continue to pursue our strategy and that high margins are within our reach. Looking at the big picture, as global demand continues to grow for faster speeds, network upgrades and expanded services, we are there to support the operators by enabling faster 5G rollouts. And we are there to support private networks to modernize their networks. Our third quarter 2022 wins and bookings reflect our growing market presence across key regions.

I'd now like to give you an overview per region.

In North America, the third quarter 2022 was very successful for us with bookings exceeding our record second quarter. This record quarter was driven by strong demand, which came from multiple customer segments, primarily top tier operators followed by ISPs and critical infrastructure.

A leading top-tier North American operator selected our equipment software, rollout services and managed services for a large expansion project. This operator is planning to leverage our high-band spectrum assets to enhance its 5G service offering. Implementation of this multimillion dollar project is expected in the first half of 2023, and it is expected to further expand our market share in North America.

We have made good progress on executing our strategy to increase our market share in private networks and small operator domain. Since the beginning of the year, we accumulated wins and orders in these domains. For example, in Q3, we signed a deal with a public agency utility in the U.S., namely the Yuba Water Agency in California to replace and modernize their legacy private network with a high-capacity, low-latency 5G network. Such wins and project orders present strong signals that encourage us to continue to pursue market share in these segments.

We continue to invest and intensify our sales and marketing efforts in North America and plan for further growth in all segments with higher than our average margins, coupled with an increase in our service portion.

In India, the 5G rollout started intensely. Operators are first augmenting their network capacities with additional fiber and wireless deployments to achieve high speed. The opening of the E-band resulted in major orders. Bharti Airtel already booked its first wave of E-band orders with us as well as continued the procurement of our microwave solutions, reaching bookings with tens of millions of dollars just this quarter.

The E-Band orders from Bharti were at higher quantity than we had planned, and I believe we have received the lion’s share of the initial wave. The main reason is simple – when Bharti entered its decision-making stage, we were the only vendor with successful field-proven trials of E-Band with a vendor agnostic multi band solution, and the best total cost of ownership.

In India, in addition to everything I said, we saw improvement in our delivery capabilities towards the end of the quarter. We are in negotiation stages with all other main players in this market, leveraging our plans to launch our new lower cost E-Band product in 2023.

In Europe, given the macroeconomic environment and the impact of the war in Ukraine, we are seeing some deals slow down. In addition, competition previously focused on Russia has now become more aggressive in other countries.

In the third quarter, we continued to see strong demand for 5G. We had new wins, and saw good traction in our growth engines, namely our disaggregated cell site router and managed services and software offering.

Overall, we are pleased with the execution of our strategy in this region. As supply chain issues continue to thaw and our new low-cost series is launched, we believe we will be able to increase our market share in Europe.

In APAC, the market continues to be ultra-competitive. Yet we continue to be successful keeping our position with a potential business increase in our strategic accounts. We signed a large multi-year contract with a leading Tier 1 Oceania operator to extend and strengthen their nationwide 4G and 5G coverage. They will be deploying our microwave and millimeter wave solutions, SDN Suite, as well as turn-key services. This contract is valued at a potential of over$44 million over the next three years.

In Latin America, we saw heightened competition. Each country in this region presents different economic circumstances and challenges. Despite these challenges, we had a good quarter with increased bookings year on year. We are encouraged by the traction our managed services offering has achieved and plan to increase our focus in the services domain.

In Africa, while business closing is still soft. We achieved new wins in the Managed Services domain.

To summarize, the 5G era is not just a next-generation communications technology. 5G is creating new markets and majorly reshaping existing ones. So far, our strategy has proven to be an excellent approach to these developments. We continue to provide leading wireless solutions in our core wireless backhaul domain. We developed first-in-the-industry solutions for Open Network architecture, and we leverage our knowledge and homegrown software development for software-led services and managed services, all enabling us to capitalize on the opportunities the 5G era presents.

We expect to continue to be the first choice for our customers thanks to our category-defining technologies, vast experience in products and services, and customer-focused attitude.

I’ll now turn the call over to Ronen to review the financials. Ronen?

Thank you, Doron, and good morning, everyone. I'm excited to be here and to be participating on my first earnings call since joining Doron and the team at Ceragon a few weeks ago. I would like to thank everyone for the warm welcome. I will now share a detailed review of our third quarter 2022 financial results.

To help you understand the results, I will be referring mainly to non-GAAP numbers. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today's press release.

Let me now review the actual numbers with you.

Revenues for the third quarter were $78.6 million, up by 3.3% compared to $76.1 million in Q3 last year. Our strongest regions in terms of revenues for the quarter were India and North America, with $22.1 million and $21.6 million, respectively, reflecting ongoing deliveries for our main customers and in line with the strong demand we see in these regions.

Our third strongest region in terms of revenues was Latin America with $13.4 million followed by Europe with $10 million.

We had 2 above 10% customers in the third quarter. Historically, we had always had such big customers from India. And I'm happy to report that we now have as such a large customer from North America as well. They have been a long-term customer, and this year, their business with us grew substantially.

Gross profit for the third quarter on a non-GAAP basis was $28 million, giving us a non-GAAP gross margin of 35.5% compared to 31% in Q3 2021 and 30.5% in Q2 2022. Our improved gross margin in Q3 as compared to Q2 of this year is primarily due to the fulfillment of orders with better margins mainly in North America, strong software upgrade sales and to a lesser extent, a reduction in shipping costs.

I'd like to emphasize that the majority of our business is still project-based, and we see continued lumpiness in our revenues and gross margins on quarter-to-quarter. That said, the upward trajectory of our gross margin is very encouraging and reflects our ability to gain high margins when we execute on our strategy and operational efficiencies.

Operating expenses on a non-GAAP basis for the third quarter were $21.5 million, in line with our expectations. I'd like to draw your attention to the fact that on a GAAP basis, our operating expenses were higher, primarily due to a onetime expense of approximately $4 million related to Aviat's hostile attempt.

Research and development expenses for the third quarter on a non-GAAP basis were $7.2 million, up from $6.6 million in Q3 2021 and down from $7.5 million in Q2 2022.

Sales and marketing expenses for the third quarter on a non-GAAP basis were $8.3 million, same as in Q3 2021 and down from $9.1 million in Q2 2022.

General and administrative expenses for the third quarter on a non-GAAP basis were $6.1 million compared to $4.6 million in Q3 2021 and $4.6 million in Q2 2022. The increase is primarily due to an increase in doubtful debts.

Operating profit for the quarter was $6.4 million compared to $4 million in Q3 2021, reflecting an increase of 60%. When we take the 9 months view, we see that our cumulative operating profit in 2022 is $6.2 million, which again represents more than 16% increase over the same period in 2021. The increase in revenues, coupled with increased gross margins, both on a quarterly and cumulative basis contributed to the increase in operating profits.

Financial and other expenses for the third quarter on a non-GAAP basis were $2 million, within our expected range.

Our tax expenses for the third quarter on a non-GAAP basis were $0.3 million. Net profit on a non-GAAP basis for the quarter was $4.1 million or $0.05 per diluted share compared to $1.4 million or $0.02 per diluted share in Q3 2021.

As for our balance sheet, we increased our cash position to $26 million by reducing short-term loans by $2 million from last quarter.

Our inventory at the end of Q3 2022 was $64.2 million, up from $60.7 million at the end of Q2 2022, reflecting our need to stock long lead time and strategic items as a combined result of increased customer orders, ongoing component shortages and the impact resulting of replacing one of our contract manufacturers, which we discussed last quarter.

We strive to keep our inventory levels lower and expect an inventory reduction following the completion of the transition between the contract manufacturers and as the components industry improves.

Our trade receivables are at $115.9 million, down from $122.7 million at the end of Q2 2022. Our DSOs now stand at 142 days.

As for our cash flow, our cash flow from operations and investing activities in Q3 2022 was $4.1 million, noting that most of the $4 million onetime expense related to Aviat's wholesale attempt recorded in Q3 2022 will impact our cash flow only in Q4 2022. This is the first quarterly positive cash flow from operations and investing activities since Q4 2020. This positive quarterly cash flow was mainly a result of our focus on collection and increased factoring of our blue-chip customers debts. As a result, we increased our cash position while reducing short-term loans, as mentioned before.

Net cash used for financing activities for the third quarter was $1.7 million, mainly as we decreased short-term loans balance. Therefore, at the end of Q3 2022, we had available unused credit facility of $20.1 million. Given only a slight improvement in supply chain issues, which continue to impact our ability to convert our strong backlog into revenues, we now expect to finish the year with a revenue range of $296 million to $304 million.

Our revenues within the new range will primarily be affected by a recent policy change by one of our leading customers regarding equipment received prior to year-end. We expect that any portion which will not be delivered to this customer in Q4 2022 will be delivered in Q1 2023.

Our 2023 revenue guidance of $325 million to $345 million remains unchanged. Our guidance is subject to potential upsides and downsides as we continue to address the supply chain challenges facing the industry.

With that, I now open the call for your questions.

"Thank you. (Operator Instructions) In order to ask a question, please raise your hand using your mobile or desktop application and wait for your name to be announced. Once again, in order to ask a question, please raise your hand and wait for your name to be announced. Our first question today will come from the line of Alex Henderson from Needham.

So, I was hoping you could talk a little bit about the scope of the backlog. You've had a lot of quarters in a row where you've produced orders in excess of revenues. And to what extent that has built a significant backlog is a critical variable. I don't see any specific delineation of it, but it would be helpful if we could determine how big it is relative to your forward revenue expectations. And it also critical to understand whether you're seeing any improvement whatsoever in the supply chain?

In terms of backlog, as we said, -- the backlog has increased significantly this quarter as well. In terms of magnitude, I would say it's probably getting beyond 2 quarters of a backlog, probably 2.5 pending also the revenue level. So the -- this amount is very substantial.

In terms of the supply chain and the component shortages. We see some improvement. And we analyze this by each and every product line, and we are maintaining a very close monitoring of the component shortages by product line. So while in certain product lines, we see the relief, so to speak. There are products in which we don't see the relief yet. And therefore, while we are encouraged by the general direction of the supply chain challenges, we are still very, very cautious because it takes only 1 golden screw to kind of make or break for a specific quarter.

So if I were to look at the supply chain and given the fact that most of the time you ship multiple products to a particular customer for an installation, is it reasonable to say that even where you're able to produce a portion of your product line without the supply constraints that still constrains you from shipping the full deployment to that customer?

I'm not sure I got earlier on or your question. Can you repeat it, please?

Yes. So if I need to ship 5 or 6 different products to a customer in order for that customer to have the network that they want to deploy, and you have only half of those products available because some are constrained, some aren't. Even the ones that are unconstrained, -- are those also then negatively impacted by the lack of supply on the other products?

So generally speaking, it depends from customer to customer. Generally speaking, you are right, because if the customer wants to deploy a combination of products, and he doesn't get them, it delays his installation. But then it comes to the customers' policy. There are customers that would like to actually get all the equipment they can and put it in a central warehouse. And once they start getting, so to speak, sets of products, they will just release the different markets or circles. There are customers that will not be willing to receive and to accept other than just a combination or kits of full variety of products. So it depends from customer to customer.

With respect to the M&A defense, I assume that the $4 million spend is now behind you that there's no meaningful additional costs? Or is there going to be continued expenses associated with that quarterly for a little while longer?

You want to take it?

Yes. We do not expect any significant expenses. We believe that this is what we have to record -- nothing more than that.

Okay. And then going back to the outlook here. It seems pretty clear that you've gotten a significant backlog. If you were to see improved supply chain, would you be able to ship that backlog? And how do you think that, that might translate into orders? Is there a duration stretching happening here? Or are these orders that are real-time in nature, I'll take them as soon as you can get them kind of situation?

Once again, it's not just one way to look at it because different customers have different [car] policies. I would say that in the majority of the cases, -- if we can deliver customers will accept what can be delivered. There are cases where there are certain orders that were booked in advance by the customers, anticipating that the lead time is going to be long. And in those cases, they don't expect to get the products, even if the supply chain has improved significantly before the future due date. So it's a combination. But generally speaking, the vast majority of our backlog is in a situation where customers would love and encourage us to deliver as fast as possible.

Obviously, this could be subject to changes such as this case that we have this quarter that one of our customers decided to change their policy in terms of accepting and actually receiving equipment before the year-end.

Just one last question. Why not disclose the actual backlog level as opposed to giving this soft range of possible calculations beyond 2 quarters and maybe 2.5 as opposed to just giving us the data, letting us judge of that.

I'm not sure I understand Alex -- how this number--

-- as opposed to giving us a range of time line to measure it against?

So first of all, Ceragon, up until the hostile attempt by Aviat, did not disclose this number. We disclosed this number last time for a very simple reason. We wanted to make sure that shareholders clearly understand where we are at in terms of the backlog. I don't think it is worthwhile mentioning this number on a quarterly basis. But I got your comment. Let me think it over and maybe we'll change our policy in the future.

But just to be clear, almost every other company in the networking space is disclosing backlog and historically not disclosed that log and then putting out specific numbers, whether that be Extreme, Cisco, Juniper, even Arista gives some clarity around it. So it's kind of the norm these days given the supply chain is so unusual. But I would see the floor. Thank you.

Our next question will come from the line of George Iwanyc from Oppenheimer.

Congratulations on the improvement. Doron, maybe given the big impact that mix had on your gross margins, can you give us maybe a sense of what do you feel seasonality and the demand pipeline will have on your regional mix over the next 6 to 12 months?

So overall, obviously, we are encouraged by the relatively high gross margins, we were able to generate in Q3. I think that the mix of the backlog is such that I can expect our margins to be continuously better. For me, I would say that hopefully, we have finished the period in which our gross margins are significantly below 30%. And if you ask me, pending obviously the revenue mix per quarter, the numbers can vary between a little bit above 30% and all the way up to 35% once again, pending on the regional mix and the software upgrade portion in that particular quarter.

And Doron, maybe one more question, kind of big picture with respect to -- you mentioned that managed services continues to be something that's developing as well as strong software contribution this quarter. How do you feel about the contributions going forward?

So in terms of software upgrades, while this is something that can come relatively high in a single quarter and go slowly or slower in a different quarter. Overall, it is my feeling that if we take 12 months period, Software upgrades can contribute easily between 1% to 2% to our gross margins on an annual basis.

Regarding the Managed Services, we are still building up this business. So the impact at this point is not that significant.

And Ron, congratulations on joining Ceragon and just one question for you on the OpEx side. Do you feel the level that you're at right now is what you're managing to? Or could you see a little bit of improvement on the G&A side with the doubtful debts?

And I think that the G&A is something that we will look into to make sure that it will not grow dramatically. And in general, the OpEx is something that will grow according to our expectations with gross margins. But we are now just in the period where we are in the process of the AOP for next year. So it's too early to say about how it's going on next year.

Our next question will come from the line of Rommel Dionisio from Aegis Capital.

Yes. I wonder if you could just provide a little more granularity on the North American shift to some of these smaller customers. Will that come at a higher margin or about equivalent margins in the rest of the North America business? And also, you talked about increased sales and marketing resources. Are those going to be -- those expenditures going to be incurred here in the fourth quarter? Or is that more of a 2023 event?

So generally speaking, we believe that the margins coming from business increase in private networks and also in small ISPs will not make a big difference in the gross margins from North America. So all in all, we believe it will be more or less in the same levels. Our comments on the script was primarily to reflect that our overall gross margins in North America are higher, significantly higher than our corporate overall gross margin. And the more business we bring from North America, the better our gross margins are going to look like.

In terms of the investments in sales and marketing, this is a gradual approach. We are actually taking a very close look at the success and the indications of success we are getting from the market. And based on that, we are increasing our investment in sales and marketing. So I would say that over 2022, we see a gradual increase in our sales and marketing, and we believe that this will continue also into 2023.

And just wanted to echo the congratulations on the better momentum and a very warm welcome to you, Ron.

Our next question will come from the line of Scott [Sarel] from Roth Capital.

Maybe just to follow up on George's question on gross margins. If I could, Doron and just to dig in, I want to clarify, there are no onetime benefits in the gross margin results from this quarter. Is that correct? This is purely mix driven, so it's favorable in terms of geographies and software content. And then projecting that into 2023, it sounds like the range that you're thinking about is 30% to 35% depending on that mix in a given quarter. I just want to clarify that for 2023. That's what you're thinking about. And I'm assuming that, that backlog of 2.5 quarters kind of reflects that range. Is that correct?

Yes. Generally speaking, that is definitely correct.

Perfect. And maybe to shift to India real quickly. Big numbers going on in that marketplace right now, $15 billion was spent on spectrum. I think they're projecting another $15 billion to $19 billion required investment to build out those 5G networks. And some of those circles are already turning on. So it's progressing pretty aggressively. I'm wondering, has the paradigm and the cost and competitive landscape completely shifted there permanently. You don't have Huawei and ZTE in there anymore. So I'm wondering 2 things. Your share is it expected to go up that you would have higher India revenues than you've had in the past-- at peak levels when they're going through the 3G and 4G build-outs. And second, as part of the gross margin. This has always been a pressured segment of geographic mix. Is it permanently higher because you don't have Huawei and ZTE in there competing for that mix?

Yes, Scott. So I would say that Huawei and ZTE do not have any significance in India for a couple of years now yet. Let's not forget, India is still a very developing economy and the price pressure is very, very high in spite of the fact that we don't see Huawei and ZTE there. So I don't think that it's going to change much. participating in the recent RFPs and bids when it boils down into margins, the margins are quite similar to the margins we have seen in the last 4 or 5 years.

And Doron, just to follow up in terms of the magnitude of peak India contribution, would you expect it to be higher through this cycle, given it feels like compressed spending cycles for the 5G build-outs?

So in terms of quantities, if I need to compare the current period as opposed to the previous era since we are talking about E-band -- primarily E-band, and we are talking about shorter distances and more use cases. I believe that the quantities will be by far bigger. And at this point, based on the current prices we see, it means that in terms of revenue, it could be a much bigger volume in terms of dollar value.

Now obviously, we'll have to look at this very carefully and see the trends. But as we see the start and the quantities discussions with the different operators. I think it's a big opportunity for increase in the business.

Perfect. And lastly, if I could, just on the currency impact, it's certainly a volatile world out there. I was wondering if you could just kind of remind us how most of your contracts are denominated -- are they denominated in U.S. dollars? And then just kind of on the expense side, how you see the currency impact going forward?

Yes. So generally speaking, the vast majority of revenue is denominated in U.S. dollars. The part of that is not -- sorry, denominated in U.S. dollars is basically very diverse because it's primarily services that we usually provide locally in the relevant local currency and some peripheral equipment that, in some cases, we buy at the country itself. So in terms of top line, our exposure exists, but it's not huge. In terms of expenses, most of our expenses are that are not, I would say, related to our activity in the different countries and regions are denominated either in U.S. dollars or in Israeli shekels. So for all the rest, we have some sort of a natural hedge, while obviously, the margin itself shrinks if the dollar strengthened.

In terms of our policy for the shekel, we usually hedge at the beginning of each and every year, all of our fixed expenses in shekel. And I do expect, given the current level of the exchange rate that in this respect, 2023, we'll see some relief in terms of pressure on our operating expenses that are denominated in shekel.

Back to you, Alex Henderson from Needham.

Great. I wanted to go back into the cost of goods sold mechanics a little bit. Can you talk a little bit about how much pressure the supply chain has put on your margins, how many basis points are you absorbing? And you did say that you're seeing a little bit lower transportation costs, but when do you think the rest of that cost might fall out? Or alternatively, are you seeing price increases by your suppliers that might mitigate that benefit in the future periods?

You to take it?

Yes, overall, we are very focused on these expenses. As mentioned, there is already a slight improvement -- which I don't want to get into the exact numbers, but there is an improvement, and we expect it to continue. Also, the shift in our -- and focus into new contract manufacturers, we expect that there will be some improvement there from this change. And overall, I don't think this is the major part of our improved gross margins. The -- of course, the mix and mix in the region and the software is the majority. So we have to execute on our strategy. But still, there will be an improvement.

I would just add one comment, Alex. First of all, shipping cost, yes, we saw prices started going down. But it's still as a rule of thumb, higher by at least 100%, then the shipment average costs we had before the pandemic started. So first of all, I'm not sure that we'll find ourselves going all the way down to where we are in terms of pricing of shipments before the pandemic. But there's still a room for improvement.

In terms of the components at this point, after a series of price increase -- we see some, I would say, relaxation. We have started hearing a lot of, I would say, discussions about the ease of the supply chain, release of bottlenecks. And we believe that if this is true, although we don't see that strong yet, I think this will also drive component costs down.

So I mean, are we talking a couple of hundred basis points of pressure from supply chain due to these issues, it sounds like at least 100 basis points on shipping and probably a couple of hundred basis points on supply chain. So if those start to improve and I would assume that given the macro conditions, that's highly probable. And you have a mix shift to 5G, which is higher margins. And you have a mix shift to more software, which is higher margins. And you have a mix shift to U.S., which is higher margins. Explain to me why you would give a range of 30% to 35% when you're currently running around 35%. It seems awfully conservative. And it is the single most question that I'm getting. I've gotten half a dozen e-mails -- why is it such a broad range? I get you've been 30% to 35% historically, but the dynamics don't suggest a return to those levels. So why throw out a 30% number when it seems like a draconian back off on margins to deliver that?

Well, Alex, I think, fortunately to you, you don't manage the business. And I'm facing the challenges on a daily basis. And I'm facing the challenges were a chip that cost us $70 in the past went up to $140 now. And all the noise about the ease of the supply chain and the bottlenecks maybe other companies are already enjoying it. I'm not enjoying it yet, at least not in the magnitude that I feel comfortable to say that we are out of the woods now. I don't think you listen to my question very carefully. I said my answer, sorry. I said that 30% is probably the bottom, and I expect that our gross margins on a quarterly basis will vary between slightly above 30% and 35%, which means it's not generally speaking, the full range.

With all due respect, Doron, the idea that your supply chain isn't going to get improved at all. It seems draconian, and it's a pretty large number. And you're already at the upper end of that band. I get it that you have volatility. But the band, I would think, given the mix, given the U.S., given the software mix should always produce some improvement, 5G is a higher-margin product for you. The U.S. is a higher-margin geography and software is a higher-margin geography and you managed to produce margins that are at the upper end of the band, even though you've been absorbing the worst of the supply chain. So therefore, it's logical to assume the supply chain will improve as well.

So I just think you might want to give us a little bit more clarity. On the full year, do you think that the margins are likely to be towards the upper end of the band as opposed to in the middle of that band because right now, you're suggesting 32.5% is out of the norm, and that's what we're going to do, the norm, but that's not what the business model would suggest to me?

So if you are talking about full year, let's take 2023. I am in a, I would say, in a level of confidence that is much higher that we can probably end up this year with margins that are higher than the mid of the range.

Well, let's take it over to the sales and marketing side for a second. The shekel is down, what, 20-some-odd percent from where it started the year when you hedged it. Clearly, you're going to get a significant benefit from that. Does that not translate into improved margins at the operating level given those characteristics, particularly if your revenue accelerates from the 3% you just posted as a result of a gradual improvement in supply chain and this massive backlog you have?

On the other hand, let's not forget our success in North America doesn't come for free, and it's not a miracle. We are investing, and we intend to continue to invest in order to achieve these numbers and to keep and even increase the portion of North America in our business. So I need to be very cautious. We are before concluding our AOP for 2023. And I take all these factors and all these elements into the account. And my intention is to run this company for success in the long run, taking into account all the different variables. And therefore, I'm not willing to assume at this point anything about OpEx improvement until we finalize our AOP.

One last question, then I'll cede the floor. -- one of our companies who (inaudible) to service providers on a global basis just blew up and gave a steep decline in their outlook for demand from the service providers that started to erode in September, and the result is that they lowered their guidance for telecom service providers by 20% going into the seasonally stronger normal fourth quarter. Have you seen any change in the service provider spending intentions for this area, given the strategic criticality of it? And is there a risk that you could see orders start to roll over on the other side of the equation?

What we see is, as of now, is that at least in North America and in India, the business continues to be very strong. We did not get any signals from these regions about any sort of slowdown. Now as I mentioned in the script, in Europe, we've started seeing some slowdown. And in Asia and also in Africa, I think that the business is not very high at this point. And it's hard for me to see it going down further.

So all in all, I think that the message about service providers, seizing or slowing down dramatically the investment has not come to us yet, but we are looking very, very carefully to see whether this trend is starting.

That concludes our question-and-answer session for today. Please proceed to closing remarks.

The third quarter had us reached new milestones and achieved substantial success in key areas of our business. Our bookings and backlog continued to strengthen, and our initiative to improve gross margin proved highly effective. All of that, plus our progress in our long-term strategy execution signals that we are headed in the right direction. As global demand for faster speeds, network upgrades and expanded services increases and as supply chain issues improve, we look to the future with rising confidence. I look forward to updating you further on our next call. Have a good day everyone.

Goodbye.