Ceragon Networks Management Discusses Preliminary Q1 2013 Results (Transcript)

Apr. 8.13 | About: Ceragon Networks (CRNT)

Ceragon Networks (NASDAQ:CRNT)

Q1 2013 Earnings Call

April 08, 2013 9:00 am ET

Executives

Ira Palti - Chief Executive Officer and President

Aviram Steinhart - Chief Financial Officer and Executive Vice President

Analysts

Joseph Wolf - Barclays Capital, Research Division

T. Michael Walkley - Canaccord Genuity, Research Division

Matthew D. Ramsay - Canaccord Genuity, Research Division

Jason North - Jefferies & Company, Inc., Research Division

James E. Faucette - Pacific Crest Securities, Inc., Research Division

George M. Iwanyc - Oppenheimer & Co. Inc., Research Division

Operator

Good day, everyone. Welcome to the Ceragon Networks Limited Preliminary First Quarter Update Conference Call. Today's call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks; and Mr. Aviram Steinhart, CFO of Ceragon.

Today's call will include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and projections that involve a number of risks and uncertainties. There can be no assurance that future results will be achieved, and actual results could differ materially from forecasts and estimates that are important factors that could cause actual results to differ materially from forecasts and estimates. Some of the factors that could significantly impact the forward-looking statements in this include the risk of significant expenses in connection with potential contingent tax liability associated with Nera's prior operations or facilities, risks associated with unexpected changes in customer demand, risk associated with increased working capital needs and other risks and uncertainties which are discussed in greater detail in Ceragon's annual report on Form 20-F and Ceragon's other filings with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date on which they are made, and Ceragon undertakes no commitment to revise or update any forward-looking statement in order to reflect events or circumstances after the date any such statement is made. Ceragon's public filings are available from the Securities and Exchange Commission's website at www.sec.gov or may be obtained on Ceragon's website at www.ceragon.com.

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

Ira Palti

Thank you for joining us today. With me on the call is Aviram Steinhardt, our CFO. As you are aware from our announcement today, we expect our revenues for Q1 to be around $90 million, which is below the low end of our guidance. The fiscal explanation is it's taking longer than we expected to close deal and book orders. Our book-to-bill in Q1 was below 1 as the booking level was low which affected our trans business, book and ship in the quarter. The level was low even for a quarter that usually shows seasonal weakness. So what is going on? Here is what we know.

We are not losing deals that we expected to win. There are no major changes in any particular region. So far, carriers are not canceling or reducing the size of projects. And the total value of our pipeline of opportunities continues to grow. But it's taking longer for deals to close. The cautious environment we mentioned on our last call is very much what we are seeing in most regions of the world. As we have said before, the substantial decline in operator's revenue per unit of bandwidth delivered is causing them to be more cautious about releasing budget and is leading to broader reevaluation of various aspects of their business models.

Now other factors contributing to the cautious environment which are more local to specific regions like concerns over macroeconomic environment, evaluation of new technologies, network architectures and infrastructure sharing agreements, reduced pressure from aggressive competitors while also hesitating, ongoing regulatory uncertainty including pending rulings, increase in operator M&A activity with the associated uncertainty. Clearly, we underestimated the extent to which operators' caution would affect our Q1 bookings. What we can say now about Q1 shortfall is known to a bunch of individual customer-specific stories, more high-level sign off on contract required in 1 case, more technical evaluation in another, delays in budget being released in another one and so on.

Even though we know other companies are seeing the same thing, we are not happy about the situation. It is difficult for us to manage our business as effectively as we want, and we are in the process of digging deeper, account by account, to gain a better understanding of each specific obstacle we face in getting these deals closed. We hope to be able to offer more color on the situation when we announce final Q1 results on May 6, as well as discuss what action can be taken to remove obstacles and close deals more quickly. We will also discuss then the implications this has resulted during the balance of the year. Meanwhile, our working assumption is that this lengthy search [ph] process is likely to continue, causing a reduction in our revenue outlook for Q2 and the rest of the year as bookings and revenues are pushed out.

Now I'd like to turn the call over to Aviram, to make a few remarks before we open the call to your questions. Aviram?

Aviram Steinhart

Thank you, Ira. Booking during Q1 were below our expectations because we were not able to close specific deals. We do not see any change in the overall demand part by geography but it's taking longer to close deals which effectively lower the quarterly demand. The lower revenue expectations are simply a function of the low bookings level that we were planning to ship in [indiscernible] in Q1. We did not experience any further issues with acceptance procedures or other unexpected revenue-accumulation issues. We are not seeing any unusual pricing pressure.

Aside from lower than expected revenue, there was nothing unusual in the P&L. Naturally, we're seeing the volume-related impact on our gross margin, but otherwise, gross margin is in line with our expectations. Operating expenses were also in line with expectations, down from Q4 level reflecting the effect of the Q4 cost reduction initiatives. We also began a deeper analysis to try to find ways to mitigate the effect of those longer sales cycles. Hopefully, we'll be able to provide additional insight on the final result call on May 6. Meanwhile, we assume that booking will improve in Q2, but not enough to compensate for the slow start in Q1. Also usually, we book over half our orders in the final months of the quarter. Therefore, our Q4 revenue are probably going to reflect or show a further decline. We will give specific guidance for Q2 on our next call, when we have a better visibility.

Now we'll be able to take questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Mr. Joseph Wolf of Barclays.

Joseph Wolf - Barclays Capital, Research Division

I guess my question is with the delays and a longer deal cycle, were there any deals that got pushed out and just didn't make it in the first quarter or was there something that you felt happening throughout the first quarter and so do you have revenue shortfall -- is something that you've been anticipating for a while just in terms of timing? And then, I guess, my second question related to this is you mentioned that there's no change in the geographic strengths or weaknesses, but I'm wondering if there was any geography where this pushing out or delaying or lengthening of the sales cycle is not exactly -- is not happening?

Ira Palti

I'll start with the first part of the question. Yes, we are seeing delays in all across and I'll touch geographies in a second. I can give specific reasons for each one of them, but if you look at all of it, it is at the back end of it, we're seeing people being cautious, taking the time in making stuff happen, which effectively reduces the quarterly demand. The overall demand, we haven't been seen declining, but the quarterly demand is being stretched out, and effectively, it's being done, and our expectation that, that lengthening of sales cycle will continue at least into Q2 and probably a little bit further on. You asked about specific geographies where we see this happening? We saw it mainly happening in the Asia Pacific region and Africa, and to lower extent, in European regions, with a much lesser extent in Latin America and the U.S. market.

Joseph Wolf - Barclays Capital, Research Division

And I guess, just as a follow up, were there any deals that were close to closing and just got extended out because the customer didn't care and had already closed or is that not with the...

Ira Palti

No, the customers did not close the deals. As we said, we did not lose any of those deals. They did not close. The customer -- did they already close...

Joseph Wolf - Barclays Capital, Research Division

I meant that we -- now that we've gotten into the second quarter, have we seen any demand in the first week [ph].

Ira Palti

Yes, but minor ones. No, it's not that quick.

Operator

Our next question will come from the line of Mr. Mike Walkley of Canaccord Genuity.

T. Michael Walkley - Canaccord Genuity, Research Division

Just on your -- on the revenue for Q2, did I understand you -- given the deals that closed during the quarter, basically flat, maybe a little down, and do you still expect a stronger second half of the year or is it too early to tell now?

Ira Palti

It's too early to tell now. I think we said, we indicated, we'll give a better further outlook for the year when we'll do our May 6 final results call. By then, I'll probably have a better picture.

T. Michael Walkley - Canaccord Genuity, Research Division

Okay. And then just given what looks like a lower sales level at least for the first half of the year, any updated view on OpEx's $32 million to $33 million still the right way to think about it or are you going to have to maybe look to lower that level again?

Ira Palti

That's the right way to look at the OpEx level. As I indicated, we see a strong pipeline on the table, so we have decided, at this point, not to take action in further lowering the OpEx levels. We will be staying in that range, probably closer to the lower end of that range.

Matthew D. Ramsay - Canaccord Genuity, Research Division

Okay. Great. And then, Ira, just last question for me and I'll pass it on. So you're still sticking, my guess, with the R&D on your next-generation platform, and it appeared you had pretty good traffic at Mobile World Congress. Any updated color just on customer conversations about your new platform for next year?

Ira Palti

Yes, we've seen very good traction from the new products for this year. But as I think I indicated on the last call, we did not expect the revenues from the new products to be any significant for this year as those cycles are even longer with approval and inserting them into customer networks. We see the good traction, we got additional orders on some of the new products. But this is not part of the story of today.

Operator

Our next question will come from the line of Mr. Jason North of Jefferies.

Jason North - Jefferies & Company, Inc., Research Division

A quick follow-up on the -- you implied that on the May 6, you'd give further results, there might be some cost reduction efforts but it seems like you're still staying with the overall OpEx levels, can you just discuss what kind of possible initiatives and even timing of implementation we could see?

Ira Palti

I think that I did not indicate a change in the OpEx levels on the May 6 call. Okay. Mike asked if we are staying at the $32 million to $33 million range? I said, yes, we'll be in that range, probably at the lower edge of that range.

Jason North - Jefferies & Company, Inc., Research Division

Okay. It seemed in your prepared comments that you were implying that you were going to look at some cost issues there, does it lower or...

Ira Palti

Oh, no. Okay, what we are doing at this point and doing very extensively is finding and looking at ways to shorten the sales cycle and resolving some of the hesitation issues and the cautious environment. Some things I can't -- we cannot influence, but there are things which we can influence as we work on the sales cycle and the processes with the customers. And we will indicate some of those as we will talk on our May 6 call.

Operator

Our next question will come from the line of Mr. James Faucette of Pacific Trust (sic) [Crest].

James E. Faucette - Pacific Crest Securities, Inc., Research Division

Just a couple of follow-up questions on your sense of the perceived cautiousness, do you think this is the kind of thing that is likely to be permanent and persist even well beyond the first half of this year in terms of this lengthening cycles of sales and deployment? First. And second, can you -- I know that you've said that in every case, it's been a little different, and you're attributing to basic cautiousness, but I'm just wondering if there are -- if you've been able to isolate or identify some of the bigger issues that may be weighing on carriers wanting to act and move a little more slowly?

Ira Palti

Okay. I think that's when -- and that's what I did in the comments. If I look at what's weighing on the carriers is that if I look at it from a different perspective as -- there's a substantial decline in revenue per unit of bandwidth. They are having a pressure on the revenue from a lot of the data, and trying to figure out how do they resolve that and build the data models. There's some places, the macroeconomy, some places are really saying okay, we're going for LTE, but we are really going for LTE advance and we're going for small sales and for new architecture and what kind of infrastructure do we need -- infrastructure sharing agreements. That hesitation also is something like endemic in some places where, okay, no one is aggressive, so the others are holding back for a while. And then there are more local stuff like M&A and ongoing. All of that sits in the background where a lot of the operators are asking themselves, where do we invest, how do we invest to really make money. Flows did not stop the market, and the market did not -- the market is there, it's a healthy market, but it's slower because it makes the decision processes a little bit slower and stretches out stuff. Does that help?

Jason North - Jefferies & Company, Inc., Research Division

Yes, that's great. And then, I guess, the question, just kind of leading onto that -- those. As you think about your business, and I know you're indicating that here in the first half you expect that to persist, do you see a path to kind of a resumption of normal pace of deals and deal closure or do you think that this is going to be more permanent and long lasting?

Ira Palti

I do expect it to resume. We do have a very strong and healthy pipeline, it's much larger than we went into Q1, and it's a stronger pipeline. And knowing from experience, in fact, those changes and the hesitation and things are -- things which shift very, very quickly, both in and out within different operators. Mixing that with Q1 being a little bit seasonally low, and it was lower than seasonally low on the cycle this quarter. Our expectations is that we'll see a little bit better resumption for the rest of the year with revenues taking a little bit longer to follow.

Operator

[Operator Instructions] And our next question will come from the line of Mr. Sheldon Levin, a private investor.

Unknown Attendee

I'd like to know about the profit situation on the bottom line, what are the projections now comparison to the beginning of the year?

Ira Palti

Again?

Aviram Steinhart

At this point, we gave a guidance for non-GAAP and GAAP EPS. And we will give a complete P&L and the schedule associated with it on the May 6 call. And it's going to be we do not change or change the projection for the P&L for 2013.

Unknown Attendee

So you're standing by your projection for the year?

Aviram Steinhart

As I said, at this point, we are looking at -- as Ira had mentioned in his discussion, there's a change in the sales cycles, which influenced Q1 booking, which influenced Q1 revenue, which will also have some influence, as we mentioned, the call in Q2. At this point, we have -- it will have an impact. At this time, we're evaluating the overall impact and we'll discuss it on the May 6 call when we give -- we have a better visibility and complete the analysis of the sales cycle influence on the overall P&L.

Operator

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

George M. Iwanyc - Oppenheimer & Co. Inc., Research Division

Ira, you mentioned that the pricing environment has held relatively steady. If 2013 ends up being a year where we see maybe a little bit of market contraction, do you anticipate the competitive environment getting to a point where pricing and competitors get a little bit more desperate and aggressive looking for share gain?

Ira Palti

I think the comment I have is that I've seen the competitors being desperate and doing pricing pressures also in 2012 and 2011. I don't think that environment changed, and I don't expect it to change going forward. [indiscernible] with pricing pressure and others and I think that we're touching topics here, but I think that's our low-cost production, the lowest cost of product and being very focused on design to cost is helping us in those environments.

George M. Iwanyc - Oppenheimer & Co. Inc., Research Division

Okay. And just can you follow up on the margin comments, you said that they're kind of holding into an area that you would expect, is that relative to the revenue pressure that you're seeing, so some pressure on the margin line would be there but still looking for mid-30s when revenue recovers?

Ira Palti

As we said on the call, that we don't see any price pressure that is taking the gross margin down. The -- even influence with the volume, of course, that we would pay, that once we go back to the volume that we said on the projection for the year, we should go to this level, the level of approximately $90 million revenue, the gross margin definitely will be lower as a result of the fees part of the expenses in the cost of goods sold.

Operator

And there are no further questions in the queue at this time. Gentlemen of the panel, please continue.

Ira Palti

Okay. I'd like to thank everyone for joining us today. if you have follow-on questions or you want to discuss it on one-on-one with me and Aviram, you are more than welcome. And I hope to talk to all of you again with more information as we discuss our final result on May 6. Thanks very much for joining.

Operator

Ladies and gentlemen, this does concludes our conference call for today. On behalf of today's panel, I'd like to thank you for your participation, and thank you for using AT&T. Have a wonderful day. You may now disconnect.

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