Ceragon Networks Likely to Continue Upward Trend

Ceragon Networks (CRNT) is an Israeli company which specializes in a niche area of wireless networking. The company provides gear to cellular companies around the world and this gear addresses needs in the backhaul portion of the network. This is the portion that runs from the typical cellular tower to the main switch where network traffic connects to the municipalities infrastructure. In the past, this backhaul has typically been wired, but Ceragon has provided solutions to make this process wireless thereby saving the cellular companies a significant amount of money as well as making the process easier.

Although the company is based in Israel, international markets are driving the firms growth as CRNT truly operates on a global scale. The company sees Asia, Africa and India as geographical areas with significant need for their products. As emerging countries in this area become introduced to communication technology, many are bypassing the wired infrastructure and choosing to operate exclusively as wireless cities. This creates a large pool of potential customers for Ceragon who is finding partnerships to help it develop relationships to drive sales.

While new emerging municipalities provide excellent opportunities to deploy equipment for construction of networks, established markets and mature networks also pose a potential glut of sales. That is because many current networks are becoming overwhelmed with increasing data traffic that the network is not able to support. Operators have little choice but to lay new copper wire which is an expensive endeavor, or deploy technology that Ceragon sells to ease the additional load. So CRNT finds itself expanding both on the emerging market front, as well as digging into entrenched markets offering a better solution.

Analysts have lately become less positive on the stock. One of the key complaints is that the company could face stiff competition as other firms attempt to duplicate the products offered. There is a battlefield on the intellectual properties front and CRNT is currently involved in a disagreement over a patent that NEC owns. CRNT has offered a settlement proposal to NEC to relieve them of further litigation, but has yet to hear whether the proposal will be accepted. Further competition will likely have an effect on margins which could in turn cause investors to place a lower valuation on the company.

Still growth remains very strong and there is a large market for many to compete and still be profitable. CRNT’s book to bill ratio has been positive which gives the company reasonable visibility into the next few quarters. The second half should be one of increasing profitability but the questions have begun to arise as to how well they will be able to sustain the momentum into 2008. The stock has pulled back over the last week as the company registered to sell 6 million shares. It is unclear when the shares will actually hit the market but once that transaction is complete, it is likely the stock will continue its upward trend.

Disclosure: Author has a long position in CRNT

Comments

[chiggins]

You completely miss the Wimax play here. They will most likely get big contracts with Sprint in 4G...every other carrier will scramble into this space too. Companies are launching satellite next year to help cover North America and Europe with the carriers. Echostar and Dish are selling reselling Wimax to their customers also.