Q2 2020 Ceragon Networks Ltd Earnings Call
Good day, everyone welcome to the Ceragon networks Limited second quarter 2020 results Conference call. Today's call is being recorded and will be hosted by Mr. IRA Palti, President and CEO of surrogate networks.
Before we start I would like to note that this call includes information that constitutes forward looking statements within the meaning of the Securities Act of 1933, and the Securities Exchange Act of 934 as amended and the Safe Harbor provisions of the sick Private Securities Litigation Reform Act of 1995.
Although we believe that the expectations reflected in such forward looking statements are based upon reasonable assumptions, we can give no assurance that our XP expectations will be obtained or that any deviations. There from will not be material such statements involve risks and uncertainties that may cause results to differ materially from those anticipate.
Good these risks and uncertainties include but are not limit to.
The effects of general economic conditions, the effect of the covert 19 crisis on the global markets and on the markets in which we operate including the risk of a continued disruption to our and our customers providers.
Business partners and contractors business as a result of the outbreak and the effects of the covert 19 pandemic and such other risks and uncertainties and other factors that could affect our results as detailed in our press release that was published earlier today and as further detailed then Ceragons. Most recent annual report on form.
Form 20-F, and then sorry guns other filings with the Sears Securities and Exchange Commission.
Such forward looking statements, including as to the risks and uncertainties and other factors that could could affect our results report represent our views only as of the date. They are made and should not be plot replied upon as representing our views as of any other subsequent date such forward looking statements do not purport to be predictions.
Future events or results and there can be north churns that it will prove to be accurate ceradyne may elect to update. These forward looking statements at some point in the future, but the company specifically discount disclaims any obligation to do so Sarah guns public filings are available from the securities and exchange Commission's website at <unk>.
You W.W. dot FCC Dot Gov and May also be obtained from surgeons website at www Dot Ceragon dot com.
Also on today's call will include certain non-GAAP numbers for a reconciliation between GAAP and non-GAAP results, we see the table attached to the press release that was issued earlier today.
We'll now turn the call over to IRA Palti, President and CEO of Sir. Please go ahead Sir.
Good morning, and good afternoon, everyone joining us on the call today.
With me on the call. So they are run vivid, our chief financial officer, and well see sisler head of Investor Relations.
Before getting into the quarter I hope that you do your loved ones and co workers, a healthy and well.
I want to assure you that our top priority is ensuring the health and safety of all our employees wherever they are even as we walk to serve our customers.
It's just been three months since we first discuss the impact coping 19 that was making on our business.
In some ways, we'll smarter than we were then.
Other ways, there's still plenty of uncertainty.
But taken as a whole I believe we are in a very good shape.
As you can see from the results Q2 was better than Q1 with improved revenues margins and that's results.
All of this metrics came in better than market average projections.
With a focus on execution, we've reduced our accounts receivable and inventory and they belong to generate healthy 4 million in cash flow well also allowing us to reduce sold loans.
Our ability to deliver continues to improve bait today.
And perhaps most important oh here for the quarter were above one driven by improving business environment and a growing number five GE opportunities in other projects in many regions.
So despite the uncertainty in the markets, we have performed well and continued to move forward.
So it remains very difficult to make predictions current indications are that we are on track for returning to our normal quarterly revenue run rate of 70 to 75 million in Q3.
And we'll give the details.
In fact, and we said in May we believe that then that the effect of covert 19 will be positive for us over the long term.
Because the change in lifestyle, let these created bringing you urgency to the need for broadband four countries consumers and businesses across entire industries.
This is leading operators to accelerate their fiveg rollouts and to continue to invest in Fourg network expansions.
For the short term out whatever the outlook is harder to predict.
With the situation changing from day to day it is difficult to focus the timing of orders to forecast supply chain dumb it on mix to focus deployment schedules and therefore, our ability to execute at 100% efficiency.
In response, we win in focusing on handling the challenge if they came up you know day to day operations and I believe we have been handling them well.
First we are doing everything it out forward to keep our employees safe and healthy, including full compliance with old health directives.
Our office workers have transitioned to dividing the time between home and the office, we admit things taking place mostly via collaborative video meetings.
Despite the change in the team well all departments continued to progress in line with a walk plants.
We are also managing all customer interactions closely using remote tools and this is walking will.
One we prefer face to face interactions than you normally has had some surprising advantages.
For example, the ability to take prospective customers on virtual demos, so our labs and to actually carry out more customer interactions each day.
At the same time the situation this created significant challenges for supply chain.
Many suppliers and shippers are not walking at full capacity, making shipment harder to organize and more expensive.
Once experiment is delivered the installation process can take longer than planned due to changing operator walk schedules and local local though.
On top of this the situation has impacted somewhat customers network built out to plants.
For example.
Much of Latin America, including all clients in Colombia, and Mexico went into four lock down during the quarter.
In addition, some customers are the lane capital investments and affected by Kurt This currency fluctuations.
For example, a custom interval froze the project for six months, while others in Latin America were affected by local reductions in revenue and currency fluctuations.
This obviously led our revenue for Latin America to be lower than expected.
At the same time the situation is creating opportunities.
But do not is that we could not have predicted six months ago.
We see signs of increased focus on Fiveg network development by operators in the U.S. Europe and the Pacific Rim together with Ford you expansions with others.
This is aimed at delivering broadband for and then hadassin conductivity the need for which has been amplified by the current situation.
The quickest effect came from wireless I Sps in Europe, and the U.S. So the needs and have moved swiftly to serve the customers. This is increased overall bookings and backlog.
The need for capacity deployments speed and flexibility as sharpening the case for open unbundled networks convincing more operators to adopt best of breed approach that is based on all Aldo solutions for backhaul and frontal.
As a premier.
Oh wireless backhaul, although solutions and frontal this plays to our strengths.
Technology is increasingly recognized as a key piece of Fiveg deployment strategies, leading to increased interest as fiveg plans developed and opportunities as well as channels just unfolds.
For example in Europe, we have been awarded several new contracts for Fiveg network Rollouts.
With existing customers and some with new operators in countries for the northwest so the central and eastern parts the continent.
Each of this operators takes a different approach to Fiveg network development in our industry, leading fiveg all outdoor bekele portfolio across the vast millimeter wave and microwave spectrum allows us to cater for diverse operator Fiveg network development plans.
Some of the operators selected our latest microwave technology, which can deliver quote for gigabits in a single well outdoor device over recently regulated well to a wide 224 megahertz channels to ensure fiveg muck will settle capacity over the distance.
Yes.
That's four times why their channels and then commonly used in fourg.
We have in your capability to do so thanks to our multi core chipset technology.
Other operators use our compact millimeter wave solutions over a wide 2000 megahertz channels to modernize Mako sales to Fiveg, where the 10 gigabits per second backhaul and some select than a combination of the two approaches.
In the U.S. and new wireless service provider has invited us to participate in the field trial for the wireless backhaul portion of its new Fiveg network.
We're also in discussions with a new wireless service provider in Japan for wireless frontal and medical solutions.
Well deliver speeds well 20 gigabits for its fiveg in Fourg network.
We believe the this is just the beginning with covered highlighting the need for more cost effective and flexible solutions.
Operators in the U.S. Europe, and eight Bucks are continuing and in some instances accelerating the fiveg projects and more and more operators are now looking at the open network concept.
In addition, as Logan those are released many countries the move towards initiating accelerating well Fourg network expansion programs and the ramping up their fourg network backbone capacity.
As an example in sub Saharan Africa, we were selected by Orange, any jerre and new customer for us to modernize and build an extensive wireless backbone for its newly build Fourg network.
And we are pursuing similar projects with others in the region.
Finally in India during the quarter, we returned to a good run rate of deliveries and installations for about the projects.
Now to more developments that I was mentioning.
In several countries governments are providing stimulus packages to encourage telecom infrastructure investment like the 10 year 20 billion Ardolph was Digitel opportunity fund launched by the FCC in the U.S.
He is earmarked to close the digital divide what's facilitating the deployment of high speed broadband networks in Rural America.
We expect that a portion of that will be relevant to our market, resulting in project that would benefit surrogate.
In addition, several countries, including the UK in India. So far have limited the use of telecom equipment and services from China.
This may mean that local operators, we've been using Chinese equipment will have to find alternatives. So this may walk to our advantage.
From a product development point of view, we continue to make progress in the development of our next innovation wireless holding chips that a big step forward that will support our products for the more advanced they just over the Fiveg network transformation and they used to come.
We now expect to reach tape out by the end of Q1 2021.
During the quarter. Some of you participated in our virtual R&D tour in which we covered that concept and differentiating technologies in depth and showed some of our focus on walking versions of test chips for this new generation.
By the way, we probably will not have thought about such a tool before coven 19, but now we would like to offer them to all our investors. So.
If you did not participate please beam conduct with mostly for future tours.
As we explained during the two on your chipsets are key enablers for five you backhaul and frontal bringing capacities that are 50 to 100 times higher than Fourg driving to 100 gigabit speeds via wireless where the focus on smart efficient spectrum asset management to secure.
Your network growth.
This will enable much quicker introduction of services, while simplifying and optimizing network and operations.
Opening more opportunities for Fiveg network developments.
So.
That's the second quarter from my point of view.
We see the risks in the short term, but big opportunities in the mid to long term.
Well no one knows what the next few months will look like where coping with the situation and well positioned to benefit from its opportunities.
Our results are better than expected and we expect them to continue to improve in the future due to the drivers would discuss.
With that I'd like to turn the call over to run to discuss our finance this in more details fun.
Thank you IRA.
Since you've all seen the press release I focus first on the highlights.
As it can see our revenues for the quarter was $62.4 million.
The revenue was a little divided the more or less equally important the major regions.
Demonstrating our global diversification.
North America in a buck business continue more or less normally.
Well in Europe revenues was strong during the quarter.
In alignment with the strong bookings from the region ULIN Q1.
Revenues from Africa weak for the quarter.
With two above 10% customers in the second quarter.
Oh looking for the quarter was stable. Despite this situation.
Giving us the book to Bill ratio above one.
However, there was significant difference that's between reagents.
Bookings in Europe, a buck in North America were stable.
Bookings in India weak because of the very strong bookings.
Recall that in Q1.
In Latin America.
Looking so weaker due to delays of several projects currency devaluations that caused a delay in capex investment.
And the fact that some of our customers in the region.
The oldest for Q2 and kids redeployment already Jordan Q1.
I forgot it there was strong spoken for the growth in the strongest we've seen since plentiful thing.
Mainly due to the large project with Orange County jail that you signed ULIN goodwill.
Our non-GAAP gross profit for the quarter was $16.5 million, giving us a gross margin of 26.5%.
This is a slight improvement over the first quartile.
Though still much lower than normal.
Given the relatively low revenue.
The increase in cost of sourcing and the increasing production expenses over the current environment.
Together with a focus focused on reducing inventory, a little less favorable regional and sub regional mix.
This is the level that you expected.
But not that will satisfied with.
Well unfold.
Next I'll gross margin to return to normal range once revenues starts to pick up.
Although non-GAAP operating expenses, so second quarter.
Well the $19.5 million.
About the same as the first quarter.
This is about $2 million to $3 million lower than we had been expect that before covered 19.
R&D.
Well, it's down about 400 gay.
From the first what else Twentytwenty.
Sets and marketing expenses.
Which was $8 million much lower than our standup quarterly run rate deflecting, the sharp reduction in travel accommodation expenses and valuable compensation.
Gene, a which was $4.8 million was actually about half a million higher.
Then the first quarter of Twentytwenty.
For Q3, we expect Opex to increased the level of $20.5 million to $21.5 million, mainly due to the increased R&D investment in the finest they just have the chip development that is planned for the quarter.
Financial expenses and other expenses well back to the normally expect that level.
Tax expenses for the quarter, well below it half a million dollars.
On a non-GAAP basis, Netlist improved from Q1 to $4.9 million compared to the first quartile or six cents diluted share.
Our GAAP net loss was $5.5 million or seven cents that they did show.
Turning to the balance sheet, we walk intensively throughout the quarter to employ a stability and working capital and you can see our success in the more almost every parameter.
Well, there just our inventory by another $6 million during the quarter.
Well now at approximately $54 million.
Down $20 million off.
From all the peak either go.
Oh focused on collections as we just our receivables to $97.5 million.
Down $21 million since the beginning of the.
Although these cells now stands at 100 itself between 26 days.
We have returned $13 million in loans.
That does it just our financing expenses, while increasing our stability.
The net result.
If all of these.
Is it to generate that $4 million positive cash flow from operations and investing activities for the quarter.
In parallel we extended the okay, Oh credit line from a consortium of banks for another deal, while raising though that decline for $40 million $50 million.
This is a vote of confidence in our prospects and financial responsibility.
We continue to invest in our major development programs to show the Dol future oil mop supports our design win efforts.
Sustaining all positioning as the strongest company in wireless holing.
And it keeps the generating future revenue.
Well the show them, maybe lumpy and how to predict.
We believe that long term trends I walk in in our favor and that will benefit when markets return to then you'll know model.
Current indications lead us to believe that to actually telling well know my $70 million to $75 million other that quarterly run rate for the second quarter and expect that we will remain at that level for the first call for the fourth quarter.
Oh event with Covidien 19, still having a clear the impact on our supply chain and installations and the situation fall from his old.
There are many unknowns that could affect the timing of revenues.
Changing the indicators that you see today.
Meanwhile, we continue with the I'll walk to improve our financial stability and to strengthen our operations.
So that's the second quarter I.
I would like now to open the call follow up questions operator.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command if you're using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question. Please press one then zero at this time and one moment. Please for your first question.
Your first question comes from the line of Alex Henderson. Please go ahead.
Hey, guys.
So.
Nice quarter.
Thanks for the detail on the guide I was hoping you can give us a little bit more granularity around the gross margin commentary.
Clearly returning to normal levels somewhere in the 30 to 35 range is.
A nice improvement, but can you give us some sense of how much of the pressure was a function of geographic mix and how much of the pressure at 26 five was a function of coven related.
Cost to expediting and.
And related.
Expenses.
And to what extent, you think that that latter covet related stuff falls out as we go through the third quarter fourth quarter I mean is it reasonable to think.
But the mix shifts back and the combination of that those two can get you up towards the middle of that pack or is it.
Is it more towards the lower end of the gross margin rain, how should we be thinking about it. Thanks.
Hi, Alex it's Ron tend to look question.
So as you.
As you saw as you say, it's really a mixture of.
A follow up there so it's a mixture of more in yeah, you know revenue and which is really the geographical mix. It's also a.
In Mato off the low revenue of the product is taking into effect at all into account that with some a fixed cost built in in our all a cost of revenues.
And as as well as I also mentioned the impact of covered 19 at this point and when we're really looking up and Alton Q3 in Q4.
And assuming that quarterly average run rate.
We do focus seems to be in the range that we used to have between 70 to 75, but probably at the low range of the golf.
Our Jean.
We do not see a dual steen air cover the impact on supply chain on shipments on the cost to install that still has a toll on our operations.
Yeah, but at this level of revenue, we do expect it to get back add to the set up it's a 35% again, probably it at the low end of the range.
You broke up a little bit when you were talking about the Opex number I think I heard you say this third quarter Opex was.
Expected to be in.
20.5 to 21.5 is that right.
That is correct on X and mainly because a friend been ops are indeed.
And mainly fall at the new chip development.
And then you said you expect financial expenses to return to normal for fine.
Time, what normal looks like.
So actually I think that say Q2 was normally fuel if you're looking on 2019, our average was $1.5 million.
I would say that day, it's it's also very dependent on the exchange rates.
Impacts, but given a taking into account the fact that you reduced.
Hey alone because wed as strong as positive cash flow.
In the first half of all of the so all interest is probably going to be down but they cannot.
Expect the ethics air rates I would still a focused.
And now have a normal rate of 1.4 million dollar at $1.5 billion. What happened in Q1 was really a onetime there.
So its compared to the Q1 that you're referring to that that's helpful.
And then yeah come back.
The U.S. field trials.
Was that the same as the.
Tier one.
When that you'd had.
Earlier or is that something different.
No that's something different.
We are assuming that tier one way referred to earlier.
Earlier, which is a common tier one we're still in their labs.
And the.
This is a new accounts I knew fiveg operator in the U.S., which we are and invited to participate in the field trials.
Great I'll cede the floor. Thanks.
Hi, Alex <unk>.
Question comes from the line of George I want it. Please go ahead.
George I want to take your line is open. Please go ahead.
Can you hear me.
Hello, Good morning, George.
Good morning, George.
Can you give us a sense than what linearity was like during the quarter.
Good and improving is it continuing approve at this point per month month, and then we are back in the normal and at 70 to 75 range, how do you feel seasonality and it kicks in from here.
[noise] Walter was not a linear and very hard to forecast linearity moving forward.
We and.
Yes.
Various degrees across the quarter, depending on the regions.
I would if I went tend to cover can survive in the quarter. Its was backend loaded some on the activities.
Moving forward might believe we're returning at least in Q3, two or more normally now I'm, well and inheriting quarters, we'll never linear but more linear them in a Q2.
Thats very hard to predict and especially that then I think that's that a few times on the comments.
Situations locally in the friends or places around the world changes on daily basis based on the authorities.
Regulation, we might move in and out of Lockdowns on deployments on the ability to deliver a sometimes it's also.
Supply chain.
And this is very very hard to predict or at this point.
Because we are dependent on the whole list of many suppliers.
Some of them are.
We do carry inventories of parts some of them is more just in time.
So it's very hard to predict the linearity at this point.
Longer in general on the other hand, I see a significant improvement.
The sense that the number of surprises that we see there's a lot from was much much lower than in Q1.
And as the pro and as the quarter progressed.
Towards.
June a less and less supply is listen I think that in a moving into this quarter, which is Q3 July was even less surprise us from that perspective.
Thank you and then.
Following up on the North America trends. So you do have the the new.
Customers that you're working with there can you give a sense of what's happening with your existing customers now with.
T mobile on sprint now how everything is starting to unfold there.
And this point so.
The only thing I can say is that.
The more in sprint or continuing to be customers, we do see orders, but at some lower levels I think the very much focus to this point.
On integrating the two organization that's remember they did the merge and then start integration the writing to cope with 19 them, which didnt make it quicker.
From that perspective, but I think they're very much focus there and making a lot of progress.
We do expect to see them a significant customers back call, sometimes probably towards the end of this year.
At this point.
So a lot of that improving bookings trends that you're seeing North America urban normalizing as from the west activity.
It's came mainly from that perspective it yes.
Smaller with and that if it is some smaller operators and the lots of it is with and I said on my comments, we see a lots of with activities both in Europe and the U.S.
And then just one more regional question.
And then one modeling question.
India perspective, how.
Sustainable do you feel that the demand environment. It is there and I'd like what what are you budgeting.
Maybe for the rest of there.
I think at this point stable demand, mainly from and customer for this year, which is a bharti.
For the rest of the year, we know the deployment plans they have mainly for fourg.
Across India, and my belief they'll stay at those levels probably.
Into willing to second half of next year.
Well the caveat to that India on the revenue perspective is highly dependent on deployments and India is 700 close different this VIX and did you districts has its own look down policy and.
I know the teams map with where the Greens and yellows, then will slow down and what's not where we can deploy and not deploy a across the region. So the our fluctuations in there but from an event perspective, it's there.
Longer term my believe we will see and probably not the beginning of next year.
Also fiveg coming onboard and.
Making sure that's it's there.
The two things that are are happening in India is also a Chinese telecom equipment is a band at this point, although two hour effect, we've been able to push the Chinese out from some of our accounts so by using a better technology, a long time ago.
And I do expect that India at some point during next year.
And we'll also do the fiveg auctions and delivery of bump.
And then just modeling question when you look at Opex and that that 20.5. It I want my tight range when you get to the tape out in the beginning of next year does opex start to pull back on the R&D side or does it you do you anticipate it.
It's staying flat at that point.
Oh, we do expect that R&D will pull back significantly on that point.
Because most of the increase is all sorts of subcontractors and activities outside the company.
And not internal headcount, which support.
Oh the tape out.
Thank you very much.
I actually launch.
Next we'll go back to the line of Alex Henderson. Please go ahead.
Thanks.
I was hoping you could talk little bit about the.
Yes, you're making on.
Partnering with other people relative to your chipsets and what you're seeing in terms of competition in the chipset market.
And whether there's any change that you're seeing.
From.
Max linear in particular.
Okay. So first Oh walking on our technologies on the chipset is part of that with anything and continuing to work very closely with them.
Different technologies and part of it is or the chips that.
In there.
And we are in discussions with others.
[noise] with ups and downs are like any discussions that we're having and details if something will come out would probably announce up until that point I don't want to refer to you know.
Different discussions.
And at this point, we abuse still believe that we're way ahead from anything from anyone else or at this point, especially millimeter.
Microwave Ah chipsets.
Moving forward.
Okay.
Is there.
Any sense of.
What the timeline for this new chipset.
To actually get into a finished product when do you expect to.
The chip design that you're talking about taping down to actually be in the next gen product.
Usually from tape out the for chipsets and Nexgen products is sometimes usually around.
12 months.
So it would be roughly when though it's the beginning of the beginning of 20 to 22.
Beginning may 20 to 22.
All right and then going back to.
The U.S. market, you've got a lot of.
Central there.
Margins are higher.
You are seeing strength in Europe, Europe margins tend to be higher you're talking about fiveg fiveg tends to have more features and be higher end speeds.
Africa has historically actually been a higher margin.
Area.
I get into two you've got some weakness in.
Some other geographies, but it sounds like the mix should be shifting back to.
Hey, better mix.
2021 than what you're looking at now is that reasonable assessment.
I think that's a reasonable assessment.
Very good there's a reasonable assessment, that's what we are targeting.
Great I'll cede the floor. Thanks.
Thank you Alex.
Your next question comes from the line of Gunther Karger. Please go ahead.
Yes, good morning.
I don't have a question I won't comment.
I want to.
And I will say four cents he has come a war.
That's been a significant improvement in communications are telling the world what you're doing so also thank you very much.
Thank you are going to in the name of course issue here when the room with me.
There's a big smile on their face.
Yeah.
If there are any additional questions. Please press one than zero.
And at this time there are no further questions.
Ah Thank you.
Well there you'll have it we operating well and then uncertain reality.
Looking to position the company to benefit both from short term opportunities and long term market growth.
Second quarter was an improvement over the first and we expect even better for Q3 and beyond.
Thanks for joining us here.
And we would be happy to see you on next to virtual R&D tour.
As at least for the short term, we probably won't meet face to face.
Virtually would love to see Olivia Thank you and a good day.
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