Ceragon Networks Ltd.
Q2 2014 Earnings Call Transcript

Published: 28 Jul 2014

[Operator:]

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.

[Ira Palti:]

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

[Aviram Steinhart:]

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?

[Ira Palti:]

[Technical Difficulty]

[Operator:]

Mr. Palti we can't hear you.

[Ira Palti:]

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?

[Operator:]

Okay, thank you. Ladies and gentlemen, this conference will be made available for replay after 11