Ceragon Networks Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Ceragon Networks (CRNT)

Ceragon Networks (NASDAQ:CRNT)

Q1 2013 Earnings Call

May 06, 2013 9:00 am ET


Ira Palti - Chief Executive Officer and President

Aviram Steinhart - Chief Financial Officer and Executive Vice President


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

Aalok K. Shah - D.A. Davidson & Co., Research Division


Good day, everyone. Welcome to the Ceragon Network Ltd. First Quarter 2013 Results 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 the 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; risks 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 made 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, our CFO. Today, we reported our final Q1 results, which were consistent with the preliminary figures we announced on April 8.

At that time, we explained that it has been taking longer to close deals and our Q1 bookings were low even on a seasonally adjusted basis. We also indicated that several factors are causing operators to hesitate and delay projects as long as possible, mainly, very difficult economics of adding capacity combined with a need to consider how and when to invest in implementing and extend architecture. Plus, there are issues that vary from one operator to the other.

The picture remains the same as it was a month ago, nothing has changed. Except, we are in the position to share more specific details and we have more information from the field to support what we explained during the April call.

There are a number of positive aspects to the current situations. Carriers are not canceling or reducing the scope of their planned projects. Our detailed analysis during the last month indicates that our customers will go forward with this projects, but they will do so very cautiously with a longer process and more layers of approval than in the past.

We saw something similar in the 2008, 2009 period when there was a high level of uncertainty. We believe we are not losing business and market share. In the last months, we have become aware that more of our competitors have been making similar comments and industry analysts are revising the figures downward.

There is a continual excellent response to our new product enrollment. We are currently involved in about 15 lab and field trials with various operators who are early adopters around the world. The most common reaction is, "Wow!" But the length of time from the wow reaction to issuing a purchase order is still going to be longer than we originally thought because of the factors we have talked about.

An additional part of the design is that our bookings so far in Q2 are better than the same period in Q1, as we expected they would be, but not enough of an improvement to prevent small sequential decline in the revenues in Q2.

Again, this is what we indicated on the call in April. So the near-term outlook is exactly the same. Assuming the improvement in booking is a trend that continues, we expect gradual improvement as we move through the year.

After a careful analysis to see what action we might be able to take to remove some of the obstacles, a conclusion that there are several factors and -- that are for the short-term and for the long-term broken into several reasons.

We enjoy a high market share. We are the #1 long-haul and we are the top specialist vendor in short-haul. Currently, close to 90% of our business comes from existing customers. During times of uncertainty, perhaps, the easiest for a carrier decision is to do nothing or to turn to your existing vendor relationship for things that can be postponed. In the short-term, this will hamper our ability to displace competitors and increase booking significantly, but neither are we likely to be displaced. We will use this period to continue cultivating key carrier relationship for the long-term. We have worked very hard, over more than a decade, to achieve and maintain our position as the lowest-cost vendor in the industry. Unfortunately, in the near-term, this will not help us increase our bookings because existing customer reasons for hesitating will not be overcome by price alone. Longer-term, our cost position would be a critical advantage in our ability to penetrate new customers, gain share and increase gross margin to our target level.

Our customers are doing initial evaluations under NDA of more unannounced new products in the IP-20 family, and the feedback is very encouraging. This gives us a lot of confidence in our long-term position and reinforces our determination to maintain our product development efforts through this temporary slowdown. Our customers are counting on our existing solution and the roadmap that will sustain our leadership. This is also what will enable us to gain new customer and increase market share. We have to continue to manage the company for the next several years, not the next several quarters.

It is our strong conviction that another major wave of technology change is coming. This will -- wave will be similar in magnitude to the shift from low medium capacity to high capacity or from PDH to SDH. When the small cell hype first began more than 1 year ago, we said it would take 2 years to become reality. And we still see 2014 [ph] the beginning of the new cycle. We believe the next wave will lead to further industry consolidation and that we are well positioned to benefit if we continue to build on the strong lead we have -- already have.

As we indicated on April 8, even though bookings seem to be coming back from the low level of Q1, we still have a couple of unprofitable quarters ahead. This is not something we are comfortable with, but neither that does it indicate that our business model is broken. Everything we have spoken about in the past of gaining market share, achieving top line growth, reaching gross margin in the mid-30s and creating operating leverage is still realistic, but not during 2013 as we expected before the Q1 decline in bookings.

To summarize, there's no change in the outlook since our April 8 call. The cautious spending environment that is affecting our market is likely to improve gradually during the year. This is the pattern we saw during a similar period 4 or 5 years ago. The improvement was gradual rather than abrupt and our order patterns eventually became much stronger and lead to significant increase in booking and backlog.

As we and others have pointed out repeatedly, the fundamental growth drivers remain unchanged, so we expect a similar pattern in the current cycle. We have a large pipeline of potential business, including a lot of interest in our EO [ph] products. We are determined to maintain our lead, both in terms of technology and cost, and be prepared to capitalize on the upturn when it comes.

So unless something changes, we intend to carefully manage through the short-term, sustaining our investment in key areas, but maintaining tight controls in order to build long-term value.

Now I'd like to turn the call over to Aviram to discuss these matters in more detail from the financial perspective. Aviram?

Aviram Steinhart

Thank you, Ira. Our first quarter revenue was $19.9 million, a decline of about 16% sequentially, due to lower-than-expected bookings, which were unexpectedly weak during Q1.

Our GAAP gross margin of 13.5% includes $300,000 of amortization of intangible assets; $400,000 of inventory step-up; $200,000 of restructuring charges; $300,000 of charges and pre-acquisition indirect tax position; and $100,000 in stock-based compensation. Excluding those items, non-GAAP gross margin was 31.9% below Q4, primarily due to lower absorption of fixed cost because of the lower level of revenue.

First quarter GAAP operating expenses were $36.2 million. Excluding $400,000 in amortization of intangibles, $1.1 million of stock-based compensation and $2.6 million of restructuring charges, our non-GAAP operating expenses were $32.1 million compared to $33.8 million in Q4, reflecting the full effect of the cost reduction initiative implemented during Q4.

On a GAAP basis, we reported an operating loss of $8.7 million. Our non-GAAP operating loss for the first quarter was $3.4 million. Finance expenses in Q1 was $4.6 million, namely due to the one-time currency devaluation in Venezuela in the amount of $3.1 million, and tax expenses was about $800,000. Note that excluding the currency devaluation, finance expenses was about $1.4 million in Q1 -- $1.5 million or so in Q1. So if you are preparing a model, you will want to a similar rate of non-GAAP finance expenses for the balance of the year.

On a GAAP basis, we reported a net loss of $14.1 million or $0.38 per share. On a non-GAAP basis, we reported a net loss in Q1 of $5.7 million or $0.16 per share. The geographic breakout of revenue appears in the press release. APAC, where revenue tends to be lumpy, decreased in Q1 versus Q4. India, which has not opened up as yet was about the same as in Q4. Latin America continued to be the primary source of strength and remain about the same as Q4 in actual dollar, an increase of the percentage of revenue. Africa improved in both absolute and percentage terms. Europe, which has been holding up well, was weak in Q1. We had one 10% customer in Q1, a large Latin America group of affiliate customers. OEM sales accounted for 4% of total revenue.

Turning to the balance sheet. Trade receivable decreased to $129 million putting DSO at 110 days, another sequential decline. Cash flow from operating was $2.9 million and our cash and cash equivalents were $51.6 million, the same as at year-end.

As you will recall, in March, we completed a new $73.5 million of credit facility that replaced our previous credit agreement. As of March 31, we had $42.7 million in debt, leaving us with significant additional borrowing capacity.

Looking ahead to Q2. We are expecting revenue to range between $82 million to $92 million, no change from the indication we gave you in April. We arranged for the additional credit facility, recognizing that our working capital needs could be very lumpy. Although we still see significant negative operating cash flow in Q2, we expect an improvement in booking to bring us back above the revenue break-even point within a few quarters, making our cash needs quite manageable. We have enough finance flexibility to take us well into next year in the current environment. Now I'll turn the call back to Ira.

Ira Palti

As you gathered from our remarks, the picture is the same as we've described in early April. As expected, we have seen the first signs of improved bookings and we will manage carefully through some difficult quarters just as we have during past periods of uncertainty, staying focused on delivering the long-term performance that our already identified opportunities will support.

Now we'll be happy to take your questions. Operator?

Question-and-Answer Session


[Operator Instructions] And we have a question from the line of George Iwanyc from Oppenheimer.

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

With the relative strength that you're seeing in Latin America and the improvement in Africa, can you give us a sense of what's happening in those regions relative to the weakness in the rest of the world?

Ira Palti

I think that what we indicated over time is that what we see with our existing customers is they continue to deploy. The places where people continue to deploy extensively at this point is the -- were still expanding the 3G or 3G++ types of networks like what you see in Africa and Latin America. In places like Europe or where they're planning on LTE deployment, in some places in Asia Pacific, they are more hesitating within those regions. And the only place which is extensively deploying LTE at this point is at the U.S. Now that's what -- why we believe Latin America and Africa will still stay a very much focused area for us with our existing customers, who continual business with them.

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

Okay. And you mentioned that 90% of the revenue stream right now is coming from existing customers. What has been typical if you went back 1 year, 1.5 year ago? And how do you see -- maybe getting back into an area where you can either grab new customers or start displacing competitors.

Ira Palti

The number 90-plus is a little bit on the high side. But 1 year, 1.5 year ago, we would have seen above 80% of where we are doing. I think that's -- the trick there is gaining market share and moving within customers is highly dependent on the ability to use, what we call, disruptions within the market, or changes within the market and to ride those changes. The same that we have rode over the past -- the shift from PDH to an SDH, and then from low capacity to high capacity to hybrid, we believe that the shift towards small cells will be a similar opportunity for us. And we're already introducing new products, both what we announced, like the IP-20C, which causes a disruption on the capacities and ability to do 1 gig in a year in a single channel by introducing additional products into customers. What we are really seeing there, the customers say yes. It's very interesting but it's not yet turning into business. This is more of an opportunity as we proceed into -- end of this year, but mainly as we proceed into 2014, where we believe the disruption or the change in the market will give us an advantage with the new technologies we're introducing.

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

Okay. And when you look at small cells, is that largely incremental new locations and new opportunities to -- a more of a greenfield opportunity as opposed to kind of existing -- an upgrade opportunity?

Ira Palti

Both. Because when you look at small cells, they're a part of our vision for what we call 3H and -- to gain these networks and their holding. And it changes a whole network architecture in -- it's not just the small cell itself, it's the way the small cell is being integrated into the macro base stations, different technologies for small cells and other pieces of that, how do you do front holding for the macro cells? So there's a whole architecture that needs to be moved ahead to be able to do a holistic holding of the network.

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

Okay. And one -- and just one last question. Can you give us a sense of the capacity utilization and backhaul right now with the equipment that's been installed over the last 2 years? Are carriers in a position where they have ample capacity right now in the backhaul or are they going to see a bottleneck with this held-off spending right now?

Ira Palti

Operators are seeing a bottleneck in capacity and equipment, which was installed 5 and 7 years ago. With equipments that we have installed as high-capacity over the last 2 years, it's still not reaching. And we don't see a cycle of replacing that equipment very soon. But as we progress, that equipment will shift. We still see a lot of replacement. A lot of our business, both in Latin America, other places, is really in taking old equipment and upgrading it to the 250 type, megabit type of links.


[Operator Instructions] We have a question from the line of Aalok Shah.

Aalok K. Shah - D.A. Davidson & Co., Research Division

Ira, just a couple of quick questions. One of your competitors last week mentioned that the pricing environment has gotten even more worse. So I guess, I'm trying to get a sense of -- are you seeing something similar in terms of pricing? Any disruptions you've seen in the last few months as well as are you seeing the Asian competitors getting a little bit more aggressive and also, on the same timeframe?

Ira Palti

Not really. I think that we are still seeing the same level of pressure from the Asian competitors as we have seen in the past. I don't think that we have seen any significant change within the pricing. Although I should say that because of the position and our cost position in the market, we're a little bit less sensitive to the pricing pressures within the market.

Aalok K. Shah - D.A. Davidson & Co., Research Division

And then, specifically, if you can kind of walk us through the geographies as to what you think are going to be strong and weak over the next few quarters from a bookings perspective? Can you give us a sense of where maybe we should be trying to look for potential growth areas?

Ira Palti

I think we'll continue to see strength from Latin America and Africa over the next few quarters. My belief is Europe will stay flat. And my belief, Asia Pacific, which will include India, will fluctuate over the next 2 or 3 quarters. For us, U.S., which is a smaller portion, will probably grow. But the numbers for the U.S. market are still small in our overall, so they will not have a major effect on the total numbers.

Aalok K. Shah - D.A. Davidson & Co., Research Division

And Aviram, from a collection standpoint, any issues that you're seeing collecting from customers at this point?

Aviram Steinhart

No. As you saw, collection was strong. DSO went down to 110 days. So we don't see any particular -- this quarter, and we don't see any particular pressure on the payment terms at this point on the collection over the next several quarters.

Aalok K. Shah - D.A. Davidson & Co., Research Division

And then last question for Ira, just in terms of, again, just small cell opportunities. Can you walk us through what geography do you expect -- I mean, I know that North America is moving fast with small cells, as you mentioned already. But can you give us a sense of where you guys think you might be able to penetrate further with small cells?

Ira Palti

Small cells, I think will start penetrating mainly in Europe and take opportunities in Europe first. And maybe somewhat in the U.S., but not as strong. But in my belief, we will see them in our geographies first, in the U.S., and then in some places, in the Asia Pacific region.


[Operator Instructions] And no one's queuing up for question.

Ira Palti

Okay. So I'd like to thank everyone for joining us this morning. We will be at CTIA in Las Vegas, May 21 to 23, and we'll be in the booth. So if anyone wants a one-on-one, face-to-face discussion, you're invited to visit at the booth at CTIA. Thank you very much, everyone, and any further questions, please don't hesitate to call us direct. Thank you.


Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.

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