Q2 2021 Ceragon Networks Ltd Earnings Call
Borders and installations have achieved a strong momentum like in Q1, we achieved a number of new flagship design wins, and so very strong bookings.
Our Q2 bookings were the highest in 3 years, especially in North America, Europe and India.
Our book to Bill ratio was way above 1.
In North America, we have been selected and already received initial orders by 3 leading operator to deploy and improved <unk> connectivity.
These new orders and renewed partnerships focused on expanding <unk> network reach and dense areas as well as keeping rural areas connected and up to speed.
These material orders among others have resulted in strong Q2 bookings in North America, the highest ever.
I am pleased by the progress we're making in this region additional 2 leading tier 1 operator may become new customers for us.
They are evaluating our most recent IP 50 products for different networks and are those including Franco <unk>.
They seem intrigued by now sorry by how well our product fit into the new <unk> network architecture.
What's happening in North America is that operators are in fierce competition to push <unk> from initial trials into the field.
Because fiber optic is either on a possible or economically not viable in all use cases more and more operators are turning to us for wireless multi gigabit transport powered by our IP 50 theory.
I think <unk> provides a fiber like alternative in terms of speed reliability and efficiency.
We are participating in several trials and initial rollouts and in fact, 52% of our year to date and booking in North America, our <unk> related and we are encouraged by the significant opportunities in this region to grow and capture market share.
In India, our strongest region in terms of bookings.
Multiple tier 1 operators placed follow on orders.
Through which we will support multiple network expansion project to help providing nationwide coverage and prepare for operator network for <unk>.
With over 620 billion Internet users, India is the world's second largest user base.
Data consumption is expected to grow over 3.4% to 40 gigabit per smartphone and the number of users to $900 million by 2025.
There is a move towards rolling out 5 G by developing fungi corridors.
Trials are planned for the second half of 2021.
<unk> spectrum auction is expected in the first half of 2020, 2 and commercial launch by the second half of 2020.2.
Today, and India, Ceragon, bolster and 50% market share.
We are the indisputable market leader.
And at 5 <unk> rollout will further expand digital adoption there will be a demand for higher capacity in all corners of the country and we will be there to meet it.
Indian operators are testing different EBIT solutions, and ours are getting a lot of traction.
I believe the combination of our market leadership position, our strong brand name plus what's unfolding in the country will translate to more business for us.
In Europe also driven by <unk> demand, we had a very positive quarter in terms of bookings.
Our European <unk> related bookings accounted for 31% of all European bookings year to date.
And Latin America, COVID-19 continues to have greater impact and other regions. Yet we also see new science of recovery and south call and Andy and except for Argentina.
And we've been awarded several contracts by operator in Mexico, Brazil, Colombia, and Peru to provide a wide range of technologies.
I believe these awards will generate the funnel of opportunities and translate to new orders in the upcoming quarters.
Overall, we expect to continue at the same pace in the second half of the year.
In APAC and Africa, we feel the impact of COVID-19 on most of our countries and it seemed that activity in these 2 regions will be slow for a while.
To summarize I'm very pleased to report that in the present moment, we have $16.5 <unk> design wins.
5 were new additions to our customer base and the rest of our existing customers.
Our global price book, and it creates our visibility and confidence in the market demand for the second half of the year that said global component shortages and delays in shipments may have an impact on our ability to deliver.
Not only that but also our gross margin has been adversely impacted.
By the increase and components and supply chain prices due to the COVID-19 environment.
We are taking the necessary measures to remedy both situations in fact, 1 of our focus areas is to bring our gross margin back to 33% to 34% and even above.
Ceragon is on an upward trajectory for.
For me it's.
And it proved to be a fantastic time to rejoin the company and witness many years of effort come into into fruition.
I am proud to say that we are highly diligent and proactive and market responsive and our efforts.
Our principal objective or to expand our total addressable market and reinforce our solutions and the go to for wireless transport. This is a good time for Ceragon to achieve these objectives for 3 key reasons first for.
<unk> is much more complex than previous generations.
Growth traffic will demand and certification of the network.
This would mean backhaul expansions and upgrades to support high capacity and low latency.
A full scale <unk> rollout is expected to be costly to operate those yet.
It is also inevitable.
According to GSM estimate operate on total cost of ownership for backhaul will increase on average by a range of 16% to 42% annually.
And also based on Abi Research for February 2021, the wireless portion of the holding market is not expected to change significantly in the upcoming years still comprising around 60% of the backhaul market.
Second in parallel to fight the opener on architecture is growing globally and in fact, according to GSM may to date 73 operators from for.
And 38 markets have either already deployed or committed to opening on deployments.
Briefly opener on establishes desegregation for hardware and software and leading to vendor neutral component selection.
This plays to our advantage as more operator may shift from single and planned vendor strategy to best of breed increasing opportunities for specialists like us in.
In addition, as 5 day Densification continues more and more operators will deploy millimeter wave solutions for front haul such as our IP 50.
This growth opportunity is not only supported by heavy reading survey from July 2020, but also reflected in the interest in our IP 50, and therefore, we believe open and 1 will boost opportunities for us as a market leading specialist.
Third and.
Very excited about the strides we have made and closing new managed services deals.
As announced at the beginning of July we are awarded with multiyear managed services agreement by a leading networks service provider in the U S.
This service provider is using our radio and units as well as our competitors.
The fact that this provider.
Is using favorable to manage and improve the performance of their entire wireless transport is a statement sorry, a testament to our differentiated service capabilities and market strength.
Our managed services provide network monitoring and optimization troubleshooting and upgrade to simplify and enhance the customer journey on the wireless transport network.
These services represent organic and natural evolution of the work we have done with numerous operators and the strong software tools, we have developed.
It is my intention to strengthen and term managed services into a significant recurring revenue source for ceragon in the coming years.
I believe the demand for such services will grow as networks become more and more complex.
For these 3 main reasons, we expect our total addressable market to grow for.
For us.
This is the first time in many years, where our market growth is expected.
Our readiness to monetize on the growing <unk> opportunities is not enough.
As I said earlier innovation technology passion and long term thinking is our DNA.
Our flat sheet product the Multicore, all outdoor radio has been and market changing technological breakthrough since its launch in 2013.
Our new system on a chip whose tape out is rescheduled towards later this year will be the next big breakthrough.
This new chip is built to provide reliable fiber like support for the new era. Each represents a new approach and our industry as it is a system on a chip.
We believe it will be the most robust chip.
Space and we take our time to ensure it will function flawlessly.
It handles all microwave as well and millimeter wave band, including the deepened.
It will be the very first in the market to achieve this.
It will have impressively high capacity offering <unk> octa core with 16 times more capacity for flow.
Order of platform and <unk> energy.
Not only that.
But also since we have incorporated certain system elements into it.
It is planned to be significantly more cost efficient to reduce our yield and our inventory and to improve our delivery lead times.
<unk> is expected to be with us for a long time longer than previous wireless generations and.
And overtime data consumption will only increase.
Our chipset has been designed for these changes in mind.
Offering and capacity evolution that will meet the connectivity requirements of the future.
I would now like to turn the call over to Ron to discuss our financials for the quarter Ron.
Thank you there on and good morning, everyone.
So as to understand the results and we'll be refining and mainly to non-GAAP numbers.
For more information regarding our use of non-GAAP financial measures, including reconciliations for these measures. We refer you to today's press release.
And <unk> Ron mentioned during Q2.2021.
We saw very strong bookings comment for North America, India and Europe in fact.
Q2 was the strongest in terms of bookings in the last 3 years.
Our book to Bill ratio was way above 1.
Our revenues relative strong level and at the highest end of our projections for the quarter.
During the second quarter, we continued to make further progress towards normal operations accelerating the positive trend that began at the end of 2020.
Let me and I'll review, the actual Q on Q2 numbers with you.
Revenues for the second quarter was $68.6 million up like 10% comparable for Q2 last year.
The increase is mainly attributed to stronger sales in North America and India.
Our strongest region in terms of revenue for the quarter was India, reflecting ongoing deliveries for our main customers in the region.
Our second strongest regions of revenues for the for them was North America, reflecting continued strong momentum with our tier 1 customers and other leading Isps and smaller carriers.
Europe is up.
Also had a strong quarter contributing its profit continued its positive momentum and reflected more initial revenue for <unk> projects.
Latin America, and slightly higher quarterly revenue than previous quarter, but still lower than its normal run rate.
Revenues in Africa, and APAC were slightly lower than previous quarter, reflecting the still challenging situation in most regions.
We had 2 above 10% customer.
And in the second quarter.
Gross profit for the second quarter on a non-GAAP basis.
$21.6 million Givens us and non-GAAP gross profit of approximately 32% compared with 26% for the second quarter on 'twenty.
The relatively high gross profit tends to a favorable customer mix positively affecting the gross margin this quarter.
It's a great development for us.
That said there are still challenges associated with component shortages and highest attach on cost.
These challenges that the other on COVID-19 environment May continue to have an impact on our gross margin.
As Don mentioned gross margin and gross profit.
Key metrics for us.
And we're looking closely on how to improve gross margin for the long term and bring it to the level of 33% to 34% and above.
We see few elements that contribute to that.
Reduced level of component shortages.
Released bottlenecks and shipments vast fee as well as effort search and costs created by COVID-19.
Better delivery timeline alignments with our customers.
Operational excellence and discipline in all aspects and increased revenue volume.
Operating expenses for non-GAAP basis for the second quarter of $21 million.
Likely higher than our expectations.
Research and development expenses for the second quarter on a non-GAAP basis.
$7.5 million and increase from $6.8 million and Q2.2020.
And mainly due to a continued effort with our chip development.
These expenses will continue to stay high and we will reach tape out towards the second half of 2021.
Seth and market and that for the second quarter on a non-GAAP basis was $8.3 million.
Slight increase for $8 million for Q2, 2020, but still reflecting the reduced rather and that has come with COVID-19.
We expect to gradually increase our sales and marketing expenses towards the end of the year as markets open and post pandemic.
General and administrative expenses for the second quarter on a non-GAAP basis was $5.2 million.
And increased from $4.8 million and Q2.2020.
And Q2.2021 with the write off related to 2 of our customers experiencing financial difficulties.
Financial and other expenses for the second quarter on a non-GAAP basis were $1.4 million in alignment with our expectations.
Our tax expenses for the quarter on a non-GAAP basis.
Zero for $4 million lowered and in Q2.2020 and in line with docs and patients.
Net loss on a non-GAAP basis for the quarter was $1.2 million.
On 1 cent per diluted share.
On a GAAP basis net loss was $1.7 million for 2 cents per diluted share.
During this quarter, we had several 1 time events impacted the roof. The reconciliation between GAAP and non-GAAP.
The major ones.
A paycheck protection program loan forgiveness, and the retirement compensation package of our former CEO.
Our inventory for the quarter was $50.52 $3 million down from $53.6 million in Q2.2020.
Our trade receivables and our $174 million up from $97.5 million in Q2.2020.
Our DSO now stands at 139 days.
Net cash used in operating activities for the second quarter was $3 million.
Net cash used this quarter for investing activities was $1.7 million.
Looking ahead, our strong bookings and Q2, which was significantly better than expected and <unk>.
And with a very healthy backlog and Q3 funnel.
And reflect increasing business activity, mainly in North America, India and Europe.
And happy to report today that we are more confident about our revenue growth and 2021 and expect it to be at the higher and of our annual revenue guidance, which is between $275 million to $295 million.
More than that.
C. A bright light ahead of us to return to profitability in the second half of the year.
While the current component shortages and we feel create fluctuations in our quarterly revenues and a and impacts on the timing for deliveries.
We remain confident in our mid and long term business opportunities and deliveries.
With that and.
And I'll open the call for questions operator.
Thank you as a reminder, and order to ask a question and need to raise your hand using zoom and.
Desktop and mobile application.
Wait for your name and the amount and make sure to on these results.
Non becomes available.
Our first question today comes from the line of Alex Henderson, Alex is on mute yourself on Goa.
And.
And you hear me.
Alright.
And you hear me hi.
Hi, Alex.
And clear <unk>.
Thank you very much.
So.
First off congratulations great orders.
Thank you.
So I wanted to ask a couple of questions on how many quarters in a row.
Have you now run a book to Bill above 1 and I think it's running on 3 or 4 on it yes.
Yes.
And my recollection.
It's probably 3 or 4 quarters.
And book to Bill of about 1, but the last 2 quarters, whereas various significantly in this value.
And you said, you're still record orders and so I was looking back you did $343 million.
<unk> 2018.
Record orders here suggests.
A return towards that level at some point so the question becomes.
When I look at these large orders that youre getting.
Can you talk about the timeline to realization on them.
Because I would assume that some of these projects are longer on our process projects non stop that necessarily comes in and the back half of the year.
On to take it on and so I think Alex.
And we separated into 2 buckets.
The first 1 and you are correct some of them.
And is projects that will last for more than a 1 year and it's taking us a second time for us to convert the bookings into revenue of course, it's improved our visibility.
For the quarter for the next quarter and this is why felt comfortable.
And on the visibility for the remainder of 2021.
The second piece and.
And.
And on which is a challenge for US is this is the component shortages, which I'll talk.
A put to them in my prepared remarks, and this is something that is still a pumping sample of us. Although we're seeing the signs of improvement and this is by the way.
Why was able to do better and Q2 than we initially thought.
I thought the cost of our ABL.
And to get some for the materials to put a handle that and we'll see some of the relief on that.
Still we are not out of the woods, there and there is still a.
The challenge for.
For us, but again, we're feeling more comfortable on that.
Thanks Chuck.
On <unk> to add to <unk> comment.
The issue of the component shortages is still there let's not.
Think that it's over and yet we see the light at the end of the tunnel and we see and improvement.
But obviously as a result of that we are kind of setting expectations with our customers.
And in terms of timeline and this is why you see a slower on a recognition as opposed to booking we believe that we will be able to catch up but also a significant portion of this catch up will be will help and actually in 2022, we will not add.
<unk> able to catch up with all this backlog.
During this year and we'll have a nice backlog to start 2022.
2 quick questions and then I'll cede the floor can you talk a little bit about what's going on with your ability to gain share out of the Huawei installed base and there.
And their ability to ship products and then the second 1 it does sound like the system on a chip product was.
The takedown was pushed out a little bit can you talk a little bit about.
And why that occurred and what that implies.
Yeah sure so let's start with <unk>.
Thank.
There is no major change in what we have seen in the last couple of quarters regarding Huawei.
There are vein and so to speak banned in most of the same countries in the U S. Obviously, we don't we hardly fit and where we actually don't see them at all.
We see them a little bit and <unk>.
Latin America.
They are still.
Taylor and.
And in Africa, and obviously in some of the countries and APAC.
But <unk>.
Generally speaking.
And at least per the markets, we are trying to focus on and attack.
We don't see them that much and that obviously opens up bigger opportunities.
And for Us in terms of the chip.
This is as I said on the on the script on my statement. This is probably the most robust chip.
Ever and the wireless transport.
Is.
28, nano chip very complex.
And did the huge.
Progress by also putting in some.
System parts.
Intuit.
And obviously the biggest on their highest the complexity is the more careful we are in the testing it checking it and making sure that once we go for the Asia production.
It is.
I would say almost bulletproof.
It's very critical because if you go to production and after 3.4 months of initial production.
<unk> comes out.
40.
You go back much longer and this is why our preference is to invest more in testing it.
Making sure that all the bugs that we have found are kind of the highest value.
And if you take us a little bit more time.
Thank you.
Thank you Alex our net.
Question today is coming from the volume of George I wanted George We'll go ahead and on mute yourself.
Can you hear me.
Hi, Joe Hi, George.
Thank you for taking my questions and draw and congratulations on your new raw.
Thank you though.
Looking at the managed services announcement, that's an interesting and new opportunity.
How do you view that unfolding and what type of opportunities do you see globally for that and what kind of impacted that have on the operating model.
Yeah, So I need to go bad.
For a second to kind of give you a much bigger.
Bedroom actually.
And within the company.
And with some of our more attractive.
Accounts and customers.
We have developed.
Very strong operation credit capability, and so to speak over time and in fact and 1 of our.
And bigger operators customers.
In Latin America, we have been and providing with the I would say for.
And network operation that starts with obviously.
Maintenance optimization.
Ed.
So to speak.
And <unk>.
Advanced maintenance too.
To accommodate for.
Thanks.
That might be faulty and optimization and by the way it was not only on our products and also.
And so on a competition product and we were even able to take part in managing the fiber.
And part of this of this particular operator, so we have developed these capabilities and in parallel we have developed on so our software solutions that automate and they provide a lot of so to speak.
Manual work substitute.
And to actually operating the system and flawlessly.
At this point with what we believe is going to develop and 5 G.
We believe that more and more operators, especially the smaller 1 the tier twos.
We'll need that kind of service because it will be very difficult for them.
To handle.
And much more complex.
Transport network and the idea is to really focus.
And on this and part of developing business and to provide more and more.
Services.
Uh huh.
And this.
In this area and I think it also creates 2 major advantages 1 is what I would call customer stickiness and just for the sake of example, this particular customer after 3 months.
And decided to explore and opportunity of upgrade.
Here's our current.
Transport network into something that is more current and Akshay and obviously we are the first in line.
2 to provide with this upwards so stickiness is.
And very important piece and the other piece is.
And we want to generate a bigger piece of recurring revenue in our business I think it creates a higher stabilization I think it will be easier to explain to the capital market.
I would say less fluctuations. Although this is the type of the business. So actually we want to achieve these 2 board by exploring these opportunities that we believe becomes more and more imminent.
And we move forward with the <unk> implementation.
And dry and following up on that.
And so it sounds like for Berry.
<unk> addition.
And with you coming back and <unk> seen other other growth levers that you'd like to explore or new opportunities that youre getting as far as maybe expanding that and further.
First of all the short answer is yes.
The long answer is that at this point.
I prefer not to comment.
First of all I need to to kind of deep dive into some of the additional opportunities for <unk>.
To ensure that these are viable opportunities and to try and quantify.
What it will.
And paid.
To kind of monetize on them, but.
Generally speaking.
Let's not forget this company is an expert.
And in.
Developing.
Modern chipset now has become an expert and also developing system on a chip it's also expert and developing.
RFID sales or radio chipset and this is a huge advantage that Mike.
And for up for other areas or for agenda adjacent areas the.
The other thing is that we know best.
The transport network, and we can leverage that.
To become a.
A bigger player also in the optimization of networks that will become also almost dead on.
I would say a prerequisite in the area of <unk>.
5 G and in the area era story of overrun.
Thank you for that and maybe switching to you on.
And when you look at your supply chain constraints right now it seems like it you're confident and showing growth and the second half of the year.
And how loose or how quickly is it loosening up do you expect it to be.
Pretty much resolved by the end of the year.
And when you look at that.
Are you also expecting that to continue to increase your opex on the R&D side.
And I see a little bit about uplift on the marketing side.
Hi, George So first of all for.
And Martin and other sources.
Issue.
We started to see.
Loosened up this is on.
As for why we feel confident and.
And more confident about.
And the growth and the second half of the EBITDA, because we do see.
Some areas of improvement in that sense, although we're not yet and <unk>.
Finished with the issue we see some areas across the board of steel.
On a shortage.
Issues and this is why we say that.
Yeah.
Although we still feel comfortable and even more comfortable this quarter about resolving some of the issues. It's still a net there.
And of concern to us and this is why at this point.
<unk>.
And as an issue.
For the Opex I don't expect anything dramatic yes, there may be a.
And some.
And uplift and the R&D, but this is mainly because.
As Ron mentioned, we will continue.
To invest.
On the tape out for the chipset and this.
And is an area of focus for us.
And we're not going to stop it and secondly on the Opex is assessed and marketing we do plan to do some ramp up.
Especially on the travel side, and we do see some more and relaxation on Covid and system.
Yeah.
And perhaps some interest and debt overall.
And don't expect it.
And overall to be a higher Ed and 1 way we are and.
In Q2.
And just a last question on the gross margin I know you're hopeful to get back to that 33.30 for 35% range.
Feel that that sounds like more of a 2022 type of ramp and just given that uncertainty on the gross margin side kind of flattish near term results, it's more likely yes.
Yes. This is Phil.
So you are correct and.
And we do hope that this is going to be the 2020 trajectory.
Still a long way ahead of us and.
And.
There are still challenges and.
And I already mentioned in their fee a freight and air freight.
And I don't think that for some of these issues are going to be resolved in 2022 as some of.
The things that we're seeing by the way.
And speaking about depth contour and resolve in 2024.
But we do see and we're going to invest a lot.
On operational excellence and resilience.
For fleet is is of course going to be interest on the revenue and some of the material and Sean suggests.
And that's a 1.2 and and back to normality are going to improve to debt on.
And as well.
Just to add to this point.
The 33% to 34% and above is a kind of long term goals.
There are things that are in our control and there we are going to continue and push for being much more efficient and actually buy that.
Driving our margins up there are things that are not in our control.
And actually as Ron mentioned the.
The most important ones with the I would say heavy lifting wants in terms of their burden on our on our growth margin, which are the freight cost that has increased dramatically and so and also the.
Component prices we're.
And we're doing various things.
And that can so to speak is the pain for us but.
It will take a time and this is why at this point, we need to look at the 33% to 40 for the long term growth.
And so just following up on that draw on.
I was 1 of the things you are able to do at least maintain pricing I know this is not high and at market pricing and at times down or can you increase the pass along some of those costs.
I would say the following.
Every day.
I D.
For improving our margin is on the table and it's being discussed meticulously.
I would say that in some areas it's easier in some areas.
<unk>.
More difficult.
I think that day.
A big part of our customers understand.
And that this is a global.
Crisis that.
Is driving this post and creative and it's not a particular vendor issue and therefore.
I tend to believe that it will be slightly more tolerant to a discussion about various ways.
And so that they will take at least the.
And part.
Of this burden.
Lastly, our looking for the Golden line. So that we eventually don't lose business and continue with this so to speak trend of the last.
And 2 quarters.
And which we ramp up our green business dramatically.
Alright, Thank you very much.
Thank you George on and you have no further questions in queue.
So ceragon and successfully innovated on part value generation transitions, we thank Brian and this tradition and remain committed to it we're prepared to meet the new <unk> era with.
State of the art technology, excellent and services and confidence.
Im also pleased to share with you that Ron and I are traveling to the U S. Next week to enjoy face to face interactions with our inventory and analyst finally.
We look forward to seeing you there have a good day everyone.
Ladies and gentlemen, and that concludes our call for today. Thank you very much for joining.