Ceragon Networks Limited (NASDAQ:CRNT)
Q2 2014 Earnings Conference Call
July 28, 2014 09:00 a.m. ET
Ira Palti – President & Chief Executive Officer
Aviram Steinhart – Chief Financial Officer & Executive Vice President
Good day, everyone. Welcome to the Ceragon Networks Limited Second Quarter 2014 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 statements concerning Ceragon's future prospects that are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including risks associated with increased working capital needs, risks associated with the ability of Ceragon’s to meet its liquidity needs, risks associated with the ability of Ceragon’s successfully completed pronounced follow-on public share offering, the risks that sales of Ceragon’s new IP-20 products will not meet expectations, risks associated with doing business in Latin America, including currency export controls and recent economic concerns, risks relating to the concentration of our business in developing nations, the risk of significant expenses in connection with potential contingent tax liability associated with Nera's prior operations or facilities, 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, and represent our views only as of the date they are made, and should not be relied upon as representing our views as of any subsequent date. We do not assume any obligation to update any forward-looking statements.
Please note that since the company is commencing a public offering today, it has been advised by counsel that unlike its usual process it is inappropriate to feel questions during the call.
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.
Thank you for joining us today. With me on the call is Aviram Steinhart our CFO.
We are pleased to report that the second quarter bookings showed a continuation of the strong trends that began in Q1. Our bookings in the first half of the 2014 support our believe that we will see a second pickup in revenue. We believe this pickup will mark the beginning of the substantial upper trend in revenues followed by a return to profitability with substantial operating level.
This is based on three primary factor, subscriber growth and the expansion of data usage in emerging markets, the acceleration and expansion of healthy deployment globally and the penetration of our new IP-20 platform.
We originally assumed the overall improvement in demand would be fairly gradual and we assumed that IP-20 would account for a significant portion of bookings only in the second half of the year. In both cases our assumptions were too conservative. Our bookings in Q1 were 19% above the average quarterly bookings in 2013 and in Q2 bookings were 30% above the quarterly average in 2013. IP-20 represented 39% of total bookings during the first six months of 2014.
On the other hand we expected three large projects to move faster than they are currently moving which caused us to make different about their geographic mix of our revenue. Aside from timing the overall developments on this project have been positive from our perspective.
During the first half of 2014 our three largest customers together have generated more than a 100 million in orders, with more orders already received in the second half of 2014. One of these customers is a new customer during the last year.
With business picking up faster with larger orders than we anticipated, we must focus on ensuring that we have the necessary working capital and financial flexibility in the short term so that we don’t hamper our ability to respond to customers or have an issue with our long covenants. As a result we’re moving forward immediately to raise additional equity.
Now, we have tangible evidence in the form of firm orders that the pickup is real. Furthermore, we believe we are on the cast of a multi-year investment cycle related to a technology flicking – inflection point.
LTE is deriving the shift to all IP networks with ultra high capacity. We believe that we can take advantage of this technology inflection point to gain market share. So, we’re focused on capitalizing on our current position with IP-20 platform.
We completed the restructuring in Q4 and the full impact is reflected in our Q2 OpEx. As revenue grow, OpEx should increase only modestly because we believe our current organization can support an increase in the quarterly revenue run rate to as much as $120 million before we need to significantly ratchet up operating expenses. Generating open leverage is an important part of our story and the long term operating targets remains the same. 35% gross margins and 10% operating profit.
Turning to the results of Q2: Our revenues returned to the $90 million level as expected and we dealt successfully with issues that caused a hiccup in Q1. We completed the negotiation with our large African customer, they have reduced the size of existing receivable balance and we were successful in getting improved terms for new business going forward. We believe that the relationship remains strong and they’re currently placing additional small orders.
We continued to ramp up our production capabilities for the IP-20 platform during Q2. And more than doubled the number of links we could ship with the increasing level of ongoing for IP-20, we will continue ramping manufacturing capacity during the second half.
Looking at Q2 by region, we saw a pickup in revenues in Africa. As we have noted in the past business in Africa tends to be lumpy, but we expect this region to be an overall upper trend from both modernization and expansion project. Airtel which is one of the 3Q1 customers that I mentioned earlier serves 20 countries across both Asia and Africa and most of the current long hold deployment is going on in Africa.
In Q2, we also saw another sequential increase from India driven mainly by Reliance Jio, an operator that it taking a lot of attention, as they deploy a very large Greenfield LTE network. We were selected as a primary microwave backhaul vendor for this project. We received our first order in Q4 followed by additional orders in Q1 and in Q2. Based on the information we have, we believe that we are supplying close to 80% of the links that have been ordered for this project so far.
We do not know if the split will remain 80:20, but we are confident that we will continue to supply the majority of the equipment for this project. The other operators in India are beginning to move forward with their own modernization project. Our revenues from India in the second quarter reached $15.8 million which is a highest level we have seen during the past three years.
We have been doing business in India for very long time and six of the seven largest mobile operators are Ceragon customers. We’re such a strong presence and the very positive reaction to our IP-20 platform, we expect to retain or even increase our market share as the Indian market continues to grow.
Latin America is likely to remain a source of substantial business particularly in Brazil the Telefónica Vivo. Now, that the World Cup is over we expect to see orders from our key customers, (inaudible) expansion project leading up for the Olympic games.
Even with more business in countries such as Peru, Columbia and Bolivia, Latin America is likely to be relatively flat compared to 2013 because of the shift away from Venezuela and Argentina where doing business has become too difficult due to regulatory issues or currency problem.
Lastly, there are three, there are large projects pending in the developed market. Most notably Sprint in the U.S., the Intercom and MegaFon in Russia and Vodafone in Western Europe. We believe that we are well positioned to be a vendor, for example Sprint is looking for ultrahigh capacity capabilities and our IP-20 platform can deliver 1 gig to each site in the air whereas competitors can only achieve this using compression technology.
Aside from the large projects, we expect our business in North America to increase due to more business from alternative carriers, expansion of existing customers network and growth from vertical market.
We’ve been getting questions about China due the much publicized LTE built out led by China mobile. We’ve a presence in China, our business is increasing there and we expect to get our share going forward. But, it’s important to keep this is alternative in perspective. Although China is a very large country with a large population of mobile users until very recently all back haul has been done during fiber. Although laying fiber has become more difficult and there is a small amount of microwave in the few provinces, we expect most of it to be awarded to Chinese vendors. So, realistically this is not a big market opportunity currently nor is it likely to become one in the near future.
A final point before I turn the call to Aviram. Our visibility is improving, during the last strong investment cycle a few years ago, it was not unusual to have a backlog that equaled about two quarters of revenue, even as quarterly revenue continued to grow.
After a few quarters of declining backlog in 2013, I’m pleased to say that our backlog is building again and we’ve returned to a backlog of about two quarters of revenue, but not to the extent that we need to be concerned about meeting customer delivery requirements.
I can also say that we’ve a larger number of opportunities in our current pipeline of potential business than during the last two years. Also today we’ve the scale and the global reach to address larger opportunities then we’re able to during the last major investment cycle in our industry.
Now, I’d like to turn the call over to Aviram to discuss the financial details. Aviram?
Thank you, Ira. I’ll go through some of the details of our Q2 revenue results and provide some comments on the outlook for the current quarter. Our second quarter revenues were $19.4 million slightly above the midpoint of our guidance range. Our GAAP gross margin was 26.3%. Non-GAAP gross margin was 27%. The sequential improvement in gross margins related to the higher revenue level, but continued to be reflected a geographical mix skewed towards India.
The non-GAAP figure excludes $300,000 of amortization of intangible assets, $200,000 of exchanges in pre-acquisition indirect tax positions, $40,000 of restructuring related expenses and $60,000 in a stock-based compensation. Second quarter GAAP operating expenses were $12 million. Non-GAAP operating expenses were $27 million compared to $27.3 million in Q1 reflecting the full effect of our restructuring measures.
The non-GAAP operating expenses exclude $16.8 million of other income related to the Eltek settlements, $600,000 of restructuring related expenses, $200,000 in amortization of intangibles and $1 million of stock-based compensation. On a GAAP basis, we reported an operating income of $11.8 million. Our non-GAAP operating loss for the second quarter was $2.6 million.
Finance expenses in Q2 was $2.2 million. Tax expenses was about $1.6 million in the second quarter. Non-GAAP tax expenses were $300,000 excluding $1.3 million of non-cash tax adjustments. On a on a Non-GAAP basis, we reported a net income in Q2 of $8 million or $0.15 per share. On a non-GAAP basis we reported a net loss in Q2 of $5 million or $0.10 per share. The geographic breakout of revenue appears in the press release. Revenues in both India and Africa showed larger sequential increase while revenue in other regions were up more modestly. We had two 10% customers in Q2, one in Africa and one in India. Our OEM sales accounted for about 7% of total revenues in Q2.
Turning to the balance sheet, trade receivables increased to 146 million from 130 million in Q1 putting DSO at 165 days. At the end of Q1 we had $13.5 million in cash and we received approximately $15.2 million in cash from Eltek settlement, nets of the settlement related legal fees and NERA’s acquisition (inaudible) which increased our cash to about $45.7 million. We ended Q2 with $36.4 million which means we used a little over $9 million during Q2. As Ira said, we plan to add cash to the balance sheet through an equity offering.
Turning to the guidance, we expect revenue in the third quarter to range between $90 million to $100 million. With the improvement in revenue we expect the gross margin to improve in Q3, but unlikely to exceed 30% given that the revenues will continue to be skewed towards India. We believe we can exit the year at a quarterly run rate of between $105 million to $115 million in revenues with improving gross margin.
It is difficult to predict the timing or magnitude of business from Q1 project where final decision is still pending. But, we continue to assume a more favorable geographical mix and steadily improving manufacturing efficiency for the new product in 2015.
Now I’ll turn the call back to Ira, Ira?
Mr. Palti we can't hear you.
As the operator mentioned in the beginning of this call as the company is commencing a public offering of shares today, we’ve been advised by counsel that unfortunately, unlike our usual process it is inappropriate for us to field questions during this call. We look forward to continuing our normal dialogue with regard to our third quarter results. Thank you. Operator?
Okay, thank you. Ladies and gentlemen, this conference will be made available for replay after 11:00 a.m. today through August 28 at midnight. You may access AT&T Executive replay system at any time by dialing 1 (800) 475-6701 entering the access code 330547. International participants dial (320) 365-3844 and again that excess is 330547. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.
[No formal Q&A session for this event]
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