Q3 2020 Ceragon Networks Ltd Earnings Call
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For me, but feel public I'm wonderful available.
Good day, everyone and welcome to the share gotten networks limited third quarter 2020 results conference call.
Today's call is being recorded and will be hosted by Mr. IRA Palti press.
President and CEO of their God 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 1990 933, and the Securities Exchange Act of 1934 as amended and the Safe Harbor provisions of the private Securities Litigation Reform Act of 19.
95.
Although we believe that the expectations reflected in such forward looking statements.
Based upon reasonable assumptions, we can give no assurance that our expectations will be obtained or that any deviations. Therefore, we'll be well not be material.
Such statements involve risks and uncertainties that may cause future results to differ materially from those anticipated.
These risks and uncertainties include but are not limited to the effects of general economic conditions.
The effect of COVID-19 crisis on the global markets and on the markets in which we operate including the risk of like.
Continued disruption.
Two our and our customers' providers.
Business partners and contractors business and operations as a result of a cold, but 19 pandemic.
And such other risk and so cheese and other factors that could affect our results as detailed in our press release that was published earlier today and that's for the detailed answer God's most recent annual report on form 20-F.
And in <unk> other filings with the <unk> Securities and Exchange Commission.
Such forward looking statements include as to the risk uncertainties and other factors that could affect our results represent our views only as of the date that they are made and should not be relied upon as representing our.
Use.
As of any subsequent date.
Such forward looking statements do not purport to be predictions of future events or results.
And there can be no assurance that they will prove to be accurate.
Sure Guy May elect to update these forward looking statements at some point in the future, but the company specifically claims this.
Disclaims any obligation to do so.
Except as maybe required by law.
So your guidance public filings are available from Securities and Exchange Commission website at Www Dot F.D.C. Dot Gov.
It may also be obtained from Sarah Gobs website at Www Dot <unk> Dot com.
Also today's call will include certain non-GAAP numbers.
For a reconciliation between GAAP and non-GAAP results. Please see the table attached to the press release that was issued earlier today.
I would now turn the call over to Mr. IRA Palti, President and CEO of Paragon. Please go ahead Sir.
Thank you.
Good morning, and good afternoon to everyone joining us on the call today.
With me on the call today are one vivid Oh, Chief Financial Officer, and also Cisler head of Investor Relations.
Before getting into the quarter I hope that you your loved ones. Your coworkers are healthy and while you're at sort of our goal the hell for safety or four employees continues to be a top priority.
Managing well in the new normal with all departments continuing at full speed.
As you can free from the results Q3 was a stronger period for favorable.
Our revenues were 70.6 million nearly back to pre corporate levels and our gross margin was above 33%. The highest it has been in more than a year.
This combined with lower operating expenses gave us a profitable quarter in line with our focused.
Our performance reflects a market where the stronger than ever need to increase network capacity.
The wall goals increasingly online to shop walk and socialize.
It also reflects the complexity and operating difficulty of coffee.
What you feel strongly with us.
The need for broadband is driving urgency for building, new Fiveg networks, expanding fourg networks, and extending I guess be service.
Into additional areas.
As operate this execute on five do you plan a key consideration is being able to deploy the network faster well controlling overall cost and this has led to a complete change in the way networks are built.
Many operators are now embracing and open that <unk> architecture in which both Ron and corn, that's <unk> domains shift towards cloud native software centric paradigm opened them on an open cool.
Well this approach they talk shift from tightly integrated hardware and software to disaggregate that model that enables operators to create.
Virtual.
Software based network functions. This.
This makes it much easier to adopt to constantly changing requirements.
We that's where we're going to play a key enabler role in this process with the new classification meant designed specifically for the opened <unk> environment.
We have recently released our new IP 50 platform, an open solution architecture for wireless backhaul midsole and form told.
As part of the development process, we achieved several exciting technological breakthrough the OLED. So it's a recognition last week, but the telecom in for project tape community as one of the leading platforms for open wireless holding.
They also recognize the Oregon is the only solution provider that offered both technology and products for all components of the open wireless holding architecture.
Although this industry shift has been coming for several years it is intensifying though.
Operators, making sure the shift or looking for best in class offerings for each network domain and this is leading them to struggle.
This is a testament to our strategy of providing best in class technology solutions, which drive higher customer value for winning market share.
This market dynamics are creating a strong tailwind for fiveg airports around the globe.
We are very busy Fiveg network design wins and fuel sees processes as well as with activities around the release of our new Fiveg products.
We are participating in various stages or the five de selection process for operators throughout the world each with the potential to lead to a very large multi yourselves.
This all long term airports that began with the design wins.
Progress towards fuel sees or proof of concepts with small initial shipments and finally as we believe we will see volume shipments and deployments.
On the appeal free front, we're preparing for appeal see within emerging Greenfield service provider in North America. It.
It will test the wide coverage five g.'s solution with Gigabits backhaul to support its up and coming Fiveg rollout.
We are also preparing for a field trial with one of the Pacific Rim, leading open network operators following a very successful left to right.
Solution will provide them with 20 Gigabits Fived you made whole capacity you meet the millimeter wave spectrum.
We have also seen an increased number of design wins, including multiple recent awards from service providers in Europe, and North America preparing to transition to Fiveg.
Now looking to upgrade the backhaul installed base with minimal hardwood changes and all solutions takes care of it was simple swap for <unk> as well as by providing a set of new radios in microwave and millimeter wave bands, which seamlessly integrates with our installed base.
We have begun shipping our newly released I P 50, C. in Europe to support a number of ongoing Fiveg network Rollouts.
The IP 50, C. is an innovative all outdoor quote curious solution for bringing fiveg onto macro cells. It.
It provides an extreme fiveg backhaul network capacities in microwave spectrum, while ensuring that network reliability and availability if.
It is unique in its support of operations in channels that are taught to four times the wider than our competitors can provide.
Eight gigabits, India, where the smallest footprint.
This is the requirement for five Jean Marc will sales achieving double to quadruple increase in capacity.
Operators understand the immense benefits and already acting in a number of countries to realize this fantastic network development approach to Fiveg.
And we are proceeding with regulatory low being with regular does worldwide to open up 224, Mega how channels uniquely supported biotechnology, which allow the extreme five cubicle capacities that are required for this market.
By the way the operators about preparing for Fiveg I'm, taking a variety of rights to get there.
Some are opting for fiber first deployments in densely populated area. So.
Following later as the second stage with microwave deployments in less dense in all areas.
And with phone totaling red units in the dense urban areas.
Other us going ahead first with upgrades to be ready for Fiveg quickly when the time comps.
Therefore, our development activities are designed to make us the go to supplier for every variation well the five geopolitical muthee, allowing customers to transform the network at their pace and they have their own fashion.
This is positioning us ideally and uniquely.
Leader of holding Fiveg technology.
As to Fourg, we continued to benefit from large expedited operated projects to increase network reach in markets, where fourg is currently lacking whether because of increased demand or in adequate coverage.
Some of this project for the operators already sitting in the back haul infrastructure, there's the required for Fiveg.
In Africa, we were awarded the Big Fourg older from Orange and easier and continued shipments to other operators for ongoing fourg upgrade and expansion projects.
In India, we continue to achieving a good delivery and installation the run rate for all bought the projects. Despite covered there were constraints given a strong revenues for both products and services.
And then a buck we delivered very strongly in southeast Asia, where multiple operators are ramping up their fourg networks.
In contrast, our business in Latam was very weak during the quarter due to corporate wonderful.
One of our largest customers across the region that remains in the Capex freeze and other clients are coping with supply chain delays.
We believe the situation is improving somewhat in Latam and the budgets for 2021 that will begin opening up already by the end of this year.
The last market I'd like to discuss is the ice b market, which is benefiting strongly from the long time lines of Fourg and Fiveg Rollouts.
Given the message of new demand for bandwidth stemming from corporate to stay at home directives large population areas have been left with insufficient Broadbent I espies, both national and regional and been rushing into field and demand, especially in North America and to some extent in Europe and we fulfill.
That'd be man, both directly and via some of our channels.
So to summarize.
Demand for next door capacity has increased dramatically leading to more five design wins, some of which have already translated into small orders.
Continued large scale fourg expansion projects.
Increased high speed demand.
At the same time significant variability and uncertainty remains regarding the timing of blending purchasing network rollout supply anxious factors as covered dynamics move according to their own rhythms across the world.
We remain extremely focused on execution in this uncertain environment progressing on track with the IP 50 platform development and moving strongly ahead with new five two design wins PEO sees and oldest.
I'll stop here and turn the call over to Ron to discuss our finances in more details Ron.
Thank you IRA.
Since you've all seen the press release on focus on the highlights.
As you can see Q3 was a good quarter from a financial point of view.
Our revenues was $70.6 million up 13% compared with the second quarter.
And 26% compared to the first quarter was 2020.
They were down just 2% compared with the self quotable slumping 19.
The revenues Lagon from region to region in.
In Latin would that affect the coffee has had on local business operations and that'll be the airplanes.
Our strongest revenue lift from India.
Second ongoing deliveries fold that full body project and a buck.
Revenues from North America, and Europe, well in line with expectations.
Second continued progress with ongoing projects.
Early ice fees and small fived you projects in Europe.
Africa had an exceptionally strong quarter, reflecting shipments for the Orange and jumped project, we announced in August.
And as I have discussed let them at the very weak, we'll do it but just and project frozen in the face of course COVID-19.
We had one above 10% customer in the second quarter.
In contrast to revenues.
Book to Bill ratio for the quarter was below one.
This resulted from the fact that some of our customers booked through the oldest elderly it in the u.
Together with very low bookings across Latin America.
Bookings in a buck or actually stronger in booking seen North America, Europe, and India will stay but.
Oh, Oh accumulated book to Bill ratio for the nine months video is above one.
Gross profit for the quarter on a non-GAAP basis was $23.6 million, giving us a gross margin of 73.5%.
This is our highest gross margin in the novelty.
Compared with 26.5% last quarter and starting at 2.2% for the cell quartile of Splunk in 19.
It reflects the Delmar fall revenue stood at Loma range together.
Together with approximately $1 million in.
In both tax relief that you recall that during the quarter.
Excluding this relief the gross margin what Steve has been about 72% similar.
Similar to Q3 last year.
And stronger.
Then it has been in the last three quarters.
On the non-GAAP operating expenses for the self quote them well in that $19.9 million.
Approximately three on liftgate higher than they were in Q2, but down compared with free coffee and I'll get chance.
R&D was $7.3 million hefty meeting I am than Q2.
The increased due mainly to a progress into the final stages will fall chip development as planned.
In contrast, I'll spend some marketing expenses declined again during the quarter.
$7.8 million.
This is down about 18% from Q3 last year.
They would use travel and variable compensation that have come with coffee.
Gee NAV for the quarter was $4.8 million in line with our expectations.
For Q4, the expectation is for Opex to increase to 11 off 20.5 million to $22 million.
Well she's more benign, though no one thought there.
In general our operating expenses are higher for Q4, then for other quarters effective higher variable compensation. In addition.
We expect to continue accelerating our investment in cheap R&D during the fourth quarter.
Resulting in further increase of the R&D line.
Financial expenses and other expenses will be lower than the normal expected 11 during the quarter and tax expenses for the quarter was low at.
200 gig.
Oh focused execution, which led to strong revenue it high gross margin and controlled Opex.
Finally lower taxes.
Give us strong net income.
On a non-GAAP basis, but the $2.3 million net wall Street, all three cents that'll dilute the channel.
On a GAAP basis, we posted a net profit of $1.6 million or two cents.
The chair.
Turning to balance sheet, we continued walking too well studied being woken copy thought and you can see our success in many parameters.
Well did you store inventories by another $2 million during the quarter.
Now with approximately 52 million dollar.
$22 million from our peak five quarters ago.
Our recent events that are now it's $108.4 million.
$10 million since the beginning of the.
I want to be so now stand at 152 days.
For Q3, we had $4.5 million negative cash flow from operating and investing activities.
But for the nine months period.
$1.5 million in positive cash flow.
In addition, we reduced our loans during the quarter, helping to strengthen our balance sheets.
Despite the loss of don't Sunshine, just we continue on schedule with our operations.
Well focused execution, we have been able to convert a large portion of our backlog development, which will benefit us going unfold.
And we continued on track with our major development programs.
We'll show that all future roadmap supports our design win efforts.
Well I think I'll get positioning and the strongest company in wireless hauling and the capital generating future revenues.
Looking forward, we expect to see significant over it did look these activities.
Alongside continued uncertainty.
Even though all that stuff into a second they'll sell blade with extensive locked down so obviously.
Obviously impact our customers enough.
For this reason well, taking a cautious approach to our projections for Q fall.
The beats right why doesn't range than usual $60 million to $75 million.
$69 million to $75 million.
With that I will now open the call for your questions.
Operator.
Thank you and ladies and gentlemen, if you wish to ask a question. Please press one and then zero on your Touchtone phone once.
Once again for questions or comments press, one and then zero on your Touchtone phone.
Our first question will come from the line of Alex Henderson. Your line is open.
Thank you very much.
No other questions, if like Hey, if I could so.
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They.
Range of guidance I assume that the 69, assuming there's no.
Further shutdowns and.
A worsening of yogurt environment can you talk a little bit about what's what.
What you're assuming at the low end of the band and what you're assuming at the high end of the band.
When we look at that low end of the ban we do assume some shutdowns mainly in Europe and other places and that any luck off things won't open up on during the quarter at the high end with.
That's all.
In all places where the where.
I would say some lock down or we would.
Start seeing some was somewhat relieved to see in those areas.
But it's very hard let's remember the different large differences between.
[noise] deployments revenue shipments revenue and bookings and covered then lockdowns affected by the way they usually affect the bookings more on.
Then the revenues and the deployment I'm because those in most places around the world. This.
This can continue even under local loans.
I'm, sorry, you're saying it detects the bookings more in it but it does continue during lifetime income trajectory I would think the bookings would be more stable than the revenues under that scenario and the ability to install.
Yes, but because of the way, we see sometimes the decision making within the operators.
Slows down significantly under lock down some of the decision, making while projects that are in place.
In most places around the world the logged on to the such that so we can at this point in store.
It can install ship or in school.
Okay. So.
It sounds like then at the lower end of the band you would expect your book to Bill be can be below one would it be reasonable to assume at the higher end of the band that you would expect your book to bill to be above one.
Probably at one.
Well.
With respect to the you know the 21 environment.
Obviously.
There's been a lot of pressure this year and it's clearly.
Clearly going to be a questioning whether we get vaccines and all that sort of stuff.
Clearly a lot of unknowns, but it also seems like with you but to go above one through the first nine months with a reasonable probability of some improvement in Fiveg deployment next year.
And continued to see strength in the new products that you would be seeing a better environment and better response team to your products in that year. It can you talk a little bit about what you're thinking about for the whole year I'm, obviously, not looking for guidance, it's way premature for that but.
Some some tonality too it would be very helpful. Thank you.
Okay.
So if you're looking to 2020 one at zero because every I'll start with a comment very very hard to forecast.
And we have done this exercise here internally because you know you were planning it's it's a budget time, it's a lot of stuff.
So from a budgeting perspective, we are.
Focusing first and foremost internally on the activities, we want to do in Twentytwenty, one internally with customers markets and what we want to go.
And then playing around with the numbers on the backend at this point I still see very high variability on the numbers and if I take what I would say the low ranges are for if I add up the low range is that I'm getting from some of the regions and some of the activities and the high end as I'm getting.
With almost all.
Particularly high range.
Oh, we do expect that under the conditions do improve and they expect it to improve we'll probably we'll see a bit to your view.
And.
Twentytwenty into next year and that's based on exactly the same or comments that you made a little bit to Fiveg design wins in some places opening up for some of the markets continued deployment of Fourg, which will end up with a year, which is better than 2020.
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Great and one in a prominent from probably.
And we need to judges that those on a quarterly basis, probably at or above the run rate of the.
Current quarter or some of those that kind, which is as we said we believe this quarter was a little bit more towards the norm.
So over that timeframe would you expect your book to bill to gradually improve as the momentum builds and he's looking out yes through the period into 22 23 I just think that's a good question on the the print I was little surprised to hear you say that the gross margin you Lynn.
Backed by a tax adjustment.
But normally what I would assume happens and does that happen again can you explain that a little bit and whether that's something that's going to happen again or what what what's going on I will let Dave on a one on one of her but I'll, let Ron explained.
Hi, Alex it's Ron and thanks for the question. So it's more of a one off.
Some kind of a fun import.
Embarked access that live in Latin America added supervision following.
Many years ago and now.
With some a regular regulatory changes and we seem to get it back and this is just a one time at $1 million nothing.
Okay, well there the gross margin was up by 1.5%.
I see so theres no change in the tax rate going forward and therefore, no permanent benefit to it.
Correct correct, it's one it's onetime item.
All right I don't want to be it takes I'm going to let the what the next day.
Washington Thanks.
Thank you.
Our next question comes from the line of their Karger and your line is open.
One one.
And I don't want to be a little bit.
Good question. Thanks.
Thank you.
Our next question comes from the line.
Yeah.
Yes.
Hello Hello.
Hello can you hear me.
Yes, so first of all congratulations on an excellent report.
And secondly, yes they are.
The second is the question.
Do you have any.
Hi.
Hey, Hey.
Uh huh.
Yeah. The question is that.
We have a we have a delay here.
What I wanted to ask is this as constrained.
Constrained regarding.
Supplies given they go then international colon situation.
Yes.
We haven't.
Yeah.
Right.
Regarding supplies.
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Situation.
[noise] [noise] [noise].
[noise] [noise] and one moment please.
[noise] [noise] one moment.
Thank you would you like to respond.
Okay. So I'll respond going there on you asked about.
Supply chain issues in general the supply chain is open at this point, we do not see significant issues around the supply chain. Although we do have a once in a while here and there are issues with some parts and operators, but not significant the place where it's.
More significant is that some of our supply chain is via air.
And air shipments is still very very expensive right now where shipments will give given the high very high priority for medical supplies and other things.
And it costs, a little bit more we do see an increase in supply chain cost within our gross margin because over the course of it.
As it happens.
Thank you and for any other questions or comments press, one and then zero on your Touchtone phone.
And we will go to a follow up.
Alex Henderson.
And your line is open.
Great. Thank you very much so.
A couple of things that I wanted to talk to the situation in India. Obviously, there's been some challenges associated with inflation, there's been some challenges associated with getting qualifications does sound like some of that's a.
Starting to bleed off and it also sounds like there's tremendous increase in traffic as I understand it the traffic growth in India has been running at 70% plus in each of this year and last year.
And considering they didn't spend very much in 19 and were unable to spend much over the first two or three quarters of 20.
Can you talk about what kind of demand pent up demand you might see there and how do you see that bottleneck or breaking.
Okay. So in India I need to talk into two things. One is some time towards a beginning of August a lot of the constraints in India on operating because of the Lockdowns were lifted and since that time we.
Oh say running full speed, we were planning on that we're running full speed both in delivery of equipment.
And delivery in the field than doing installations.
I do not see a well.
What you would call it pent up demand because.
In India, mainly and I'll talk about some of the operators, but mainly both Geo and bought the continued moving ahead with their plans even under covered there where it's fully operational.
We saw both saw the relevant bookings and we so the relevant orders and the minute. The everything was lifted up we got the huge pressure to help and do the deployment I do expect this to continue.
At the current run rates probably into first or maybe all of <unk> next year as really as they build up their network, there's a certain speed out there.
The only big question Mark is a customer of ours, which we haven't worked with for a while which is a vodafone in India, which is going under significant changes.
And there you would say the is the pent up demand because they have not been investing in the network for quite a while.
And we're still waiting to see what would they do.
And how would they run their business all moving forward.
Can you talk a little bit about the implications of the walk away a man a that's going on there and whether that changes the.
No the demand characteristics, particularly in Vodafone, which I believe was that predominantly a.
Wow way shop.
Vodafone was with predominantly at Hawesville shop.
But.
And my guess because of the limitations and then they'll they'll have to choose other vendors.
And I think we are in a good position running position, there, but let's wait and see.
Until they make their decisions I think they have issues before that.
You have to do with their financing and getting the financing in place and then I think we're in a good running position there.
Good can you talk about what the share of wallet has historically been in the in your category in that geography.
In India, the sure while we was somewhere around the 20% to 25%.
So you think can pick up the EPS was there.
Yeah.
Yes, but we took some of that you're already embarking.
In doing it.
And.
So there is things that needs to be picked up as well.
Okay I got the gist of that thank you.
Going to the North American market. The there's been some discussion about are you getting.
Some trials with the tier ones or.
With the team in addition, a T mobile slash sprint situation coming back on screen no no that's close.
You talked a bit about what you're thinking a is in that geography.
And in the U.S. market or we need to look at a few things one as I mentioned on the call are wearing plc is where the greenfield operator for the Fiveg network.
And Peel Caesars.
There are we did talk about the tier one and trials, we are still in discussions with them and lab all trials the equipment and.
And this is progressing slower.
We wanted but its progressing.
And of the other things that we see in there is that again.
With the core of it it's slowing down decision making.
It's much harder and I think I mentioned that both on the fiveg or less on the Fourg.
When people need to do a lot of planning and all the employees are working from home thing, So doable and I see a lot of progress, but some of the things a little bit slower in there one of the things that we saw we did expect.
Two more in sprint to move much quicker this year and I think that making very significant very good progress around what we see.
The very little viewpoint that we have on their integration integration of their networks, but its still slower than what we expected at the beginning of the year before that.
Oh I didn't get the gist of that then that all makes sense.
Well relative to you know the chip side of the business or can you talk about your partnership are there and whether that's a.
The expanded what are you seeing from the competition in response to.
Losing money while away and.
And.
One of their Pat.
<unk> other pacrim key customers or so are you in a position now where you think your you'll see.
Oh emerging markets geared ships start to develop or.
You know the competitive advantage that you see on those ships are accelerating as a result of the lack of Oh available.
Merchant chip or with higher characteristics.
As much as we know today, there's no walk and no plans.
For a merchant chips that are out there from anyone and that's to the best of our knowledge.
This point.
We do see and we continue to do with as you know.
We had a JV or with anyway.
Any C, which is using those technologies.
Out there and we continue to walk very closely with them.
And they will tell other people join Oh.
Our efforts around that or not.
So no change in status to in that environment.
No change in status at this point and the environment.
Got it well, let me stop there and chip is any other questions in queue.
Thank you and with that.
Speakers I'd like to turn it back over to you.
Okay. So as we don't have an on the other questions I like to put a few comments around closing remark.
Despite today's uncertain environment I think we are operating well very focused on operating.
Taking advantage of both the short term trends.
And positioned to benefit strongly from the longer term opportunities as we move into a 2021 and beyond.
I'd also like to thank all of you for your interest or being with us.
And for those who are interested we will be holding the next virtual R&D tours. So you can contact all see and we'll schedule it out there.
I'd like to thank you and good day and for our friends.
In the U.S., so happy voting.
Thank you think.
Thank you and ladies and gentlemen that does conclude your conference call for today. Thank you for your participation for using <unk> Executive Teleconference Service you may now disconnect.
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