Q1 2023 Ceragon Networks Ltd. Earnings Call
$4 million in revenue four cents and non-GAAP earnings per share.
And importantly.
A book to Bill above one.
These results are booking levels and the demand we are seeing are encouraging data points for us.
And the trends, especially when looking at trailing 12 month revenue and bookings confirmed the positive momentum we are experiencing.
To be clear, we have not seen the slowdown in spending softness.
Or pressures that others across the telecom industry have reported in fact demand for our solutions have continued to be strong and our sales execution in key regions has improved all while.
Our access to supply chain continues to normalize.
The trends we are seeing are encouraging.
We are cognizant of the macro environment and recognize that others in the telecom industry are speaking to softness.
Softness we have not experienced.
And volatility in customer buying patterns.
With that in mind, we want to validate the customer trends, we have experienced to date before we consider raising our full year outlook.
Doing so will give us more touch points to confirm that the demand. We are experiencing is as it seems and not being pulled forward from future periods.
Beyond the revenue line our results demonstrate the improving in your earnings power of our organization.
Our gross margins continue to expand.
Reflecting our improved execution in key markets.
Higher revenues from North America, as well as reductions in supply chain costs.
We delivered $3 $6 million and non-GAAP net income in the first quarter.
Barring any unexpected developments, we continue to believe that we will deliver positive non-GAAP net income during 2023.
With a profitable business model and solid backroom, a booking to revenue ratio that exceeds one and solutions that address key capex and Opex goes for customers around the world. We believe we are well positioned for sustained success.
Importantly, there were no significant impacts from supply chain disruption in the quarter and while we continue to carefully manage the supply chain component availability has been improving.
Our geographic diversification continues to benefit our revenue.
In the first quarter, we generated sequential and year over year revenue growth in APAC, Europe , and North America and year over year growth in India, where we generated our fourth consecutive quarter of revenue over $20 million.
In North America, we generated revenue of $26 4 million.
<unk> from $17 $2 million in the fourth quarter and from $13 $3 million in the first quarter last year.
In Europe , we believe we have room for improvement even considering the modest improvement in our revenues.
We recently installed a seasoned region head to lead our business in Europe , and we expect further improvements as this transition advances.
Our first quarter revenues reflect approximately $5 million in revenue that shifted out.
The fourth quarter of 2022 and into the first quarter of 2023 that we noted on our last quarterly call.
With that shift we would expect some normalization in the revenue cadence going forward.
This is primarily impacting North America.
The fourth quarter had lower than expected revenue from North America with some revenue shifting into the first quarter and therefore, the normalized run rate in this region is probably somewhere in between these two data points going forward.
The trend for our gross margins is also encouraging.
We delivered non-GAAP margins of 34% in the quarter driving $5 9 million in non-GAAP operating income a positive swing of $6 5 billion.
This improvement reflects higher revenues from North America, coupled with better operational execution, especially in the supply chain.
We continue to advance the productive version of our new system on a chip technology to date, our efforts are advancing according to plan and while there is much work to be done we remain on track to launch our new product line in 'twenty 'twenty four.
We believe we have first mover position.
And two to three year time to market advantage over our competitors.
With this we believe that our system on a chip powered products will drive significant demand and have a transformative impact on the industry and on our market share.
I'd now like to overview, our Q1 highlights by region, noting that on today's call and future quarterly calls we will focus primarily on activities in North America and India. The two regions that have and we expect we'll continue to have the greatest impact on our quarterly results.
In North America, the <unk> build continues to be strong.
We have continued to receive orders from major carriers with one customer driving a significant portion of our volume.
We are also participating in multiple rfps for the critical infrastructure sector and pursuing new rural broadband initiatives as well as other opportunities we are seeing in this region.
Those are driven by federal and state funding plans as well as the demand for faster networks rollout, which can be accommodated by wireless transport technology.
These initiatives remain a critical area for incremental opportunity and diversification for our business.
We are a broadband initiatives represent government priorities in the United States in general and in specific states in particular.
The process for rural broadband expansion takes time as the various federal plans take shape, but we believe we are increasingly well positioned to capitalize when these opportunities mature.
In India operators are increasingly turning to Upselling and cross selling to improve customer experience and drive engagement.
India Telcos continued to invest in <unk> technology, while beginning to deploy <unk> in certain regions.
We are working with operators in the market for <unk> for <unk> rollout and enhancement in selected regions as well as deploy <unk> equipment in urban areas.
Indian telcos augment their network capacity with additional fiber and wireless E band and multi band to meet demand for high speed build government has not concluded the EBIT fees yet.
Coupled with the growing affordability and availability of <unk> smartphones, we expect these developments to fuel consumer adoption of <unk> in 2023 and beyond.
In Q1, 2023, we continue to deliver our products for <unk> networks as well as delivering our E band multi band.
Solution for five <unk> networks in an increased pace.
We ended the quarter with approximately $30 million in follow on orders from tier one operators that we expect to deploy mainly over the next two quarters.
These orders include both products and services focused on upgrading existing network capabilities to five mg expanding capacity, improving rural connectivity and providing customers with reliable uninterrupted high speed experiences.
We expect this trend to continue throughout 2023.
Looking at the rest of the World in Europe , we had another good quarter benefiting from strong Q4 bookings, even as we navigate a significant organizational change and despite the ongoing macroeconomic economic challenges.
We believe there is a significant opportunity for us here with near term room for improvement under the new leadership.
In APAC, we had a good quarter in terms of bookings, primarily from Australia and Indonesia.
We see opportunities in this region as <unk> deployment is unfolding at a different pace in different parts of the region in the telecom and also in the private network domain.
In Africa, we had a significant booking from our private networks business this quarter, although the market is still soft.
To summarize conditions has been improving.
Both on the macro and the micro levels.
Demand for our solutions is strong.
Execution is improving and supply chain availability has been getting better.
Quarter to quarter variability in our financials is always a reality, but we believe the trailing 12 month trends for our business are solid and improving both from a revenue and a profitability standpoint.
Given the positive positive business traction, our significant backlog and a book to Bill.
That is above one in the first quarter, we expect our growth trajectory over time to continue importantly, we also believe that we can be profitable on a non-GAAP basis.
For the 2023 full year.
<unk> over to you.
Yeah.
Thank you the wrong and good morning, everyone.
Before I review of the quarterly results I would like to call attention to a disclosure that was included in our annual report on form 20-F that was filed earlier this morning.
This disclosure is specifically related to adapt from a single customer which was discussed on our Q4 earnings conference call. This was held in February .
Recently, there were changes in the circumstances, which reduced the probability to collect the outstanding debt in the near term only pool and as a result, we found it appropriate to record a credit loss provision of this customer's outstanding debt in Q4 of 2002.
92.
As a result.
Audited results for 2022.
Differed from the preliminary unaudited results previously announced and our operating loss on a GAAP basis is now $10 9 million Rollouts, a decrease of $12 3 million from the preliminary unaudited results.
Obviously announced with a corresponding reduction in our accounts receivables.
We would like to emphasize that we continue to take vigorous measures towards collecting the debts.
Note. This matter has no impact on our guidance for 2023.
I'd like to note on today's call when discussing our quarterly results.
The purpose for the purpose of sequential comparisons.
Our Q4 2022, G&A operating profit net income and earnings per share will include the impact of the $12 3 million.
Credit loss provision.
With that said I would like to shift to my review of the Q1 results.
As <unk> outlined this was a strong quarter for Soma.
Though it is important to keep in mind that we are a product driven business and as such.
There is inherent variability in results from quarter to quarter.
Because of this we analyzed our bookings revenue and gross margin.
As well as other key performance indicators over 12 months period.
<unk>, which we believe better reflects the underlying business trends.
In addition to help you understand the results.
We'll be referring primarily to non-GAAP financials.
For more information regarding our use of non-GAAP financial measures.
Clothing, a reconciliations of these measures will be failure to today's press release.
Let me now review the actual results.
Revenues were $83 4 million.
An increase of 18, 6% compared to $70 3 million.
In Q1 2022.
And 10, 4% compared to $75 5 million.
In Q4 2022.
When we take the trailing 12 months view.
Our revenues was $308 3 million.
An increase compared to last quarter's trailing 12 months revenue of 22 195 $2 million.
Our strongest regions in terms of revenues for the quarter, while North America, and India with $26 4 million.
And $20 million respectively.
In line with continued strong demand we see in these regions.
Our third strongest region.
In terms of revenues was Europe with $12 billion.
We had two customers.
In the first quarter that contributed more than 10% of our revenues.
Gross profit for the first quarter on a non-GAAP basis was $28 4 million, an increase of 45, 7% compared to.
$19 5 million in Q1, 2022, an increase of 13, 5% as compared to $25 million in Q4 2022.
Our non-GAAP gross margin was 34%.
Compared to 27, 7% in Q1, 2022, and 33, 1% in Q4 2022.
When we take the trailing 12 months view, our non-GAAP gross margin was 33, 4% increase compared to last quarter's trailing 12 months gross margin of 31, 8%.
This upward trajectory of our gross margin trend reflects our ability to increase margins when we execute on our strategy and operational efficiencies.
As for operating expenses.
Research and development expenses for the first quarter on a non-GAAP basis was $7 7 million.
Up from $6 8 million in Q1, 2022, and slightly lower from that $7 9 million in Q4 2022.
As a percentage of revenue R&D expenses were nine 2% in the first quarter compared to nine 6% in the first quarter of last year.
Sales and marketing expenses for the first quarter on a non-GAAP basis were $9 8 million.
Up from $8 5 million in Q1, 2022 and from $8 6 million in Q4 of 2022.
As a percentage of revenue sales and marketing expenses were 11, 8% in the first quarter.
Totaled 12, 1% in the first quarter last year.
General and administrative expenses for the first quarter on a non-GAAP basis were $5 million.
Higher slightly from $4 8 million in Q1, 2022 and down from $17 7 million in Q4 2022.
As a percentage of revenues G&A expenses were five 9% in the first quarter compared to $6 eight through the first quarter last year.
Operating profit for the first quarter was $5 9 million up approximately $6 5 million.
From the operating loss of zero point $6 million in Q1 2022 and.
And up $15 million.
From the operating loss $9 1 million in Q4 2022.
Financial and other expenses for the first quarter on a non-GAAP basis were one.
$8 million slightly less than expected due to more favorable exchange rates offset by an increase in interest expenses.
Our tax expenses for the first quarter on a non-GAAP basis, whereas 0.4 million.
Net income on a non-GAAP basis for the quarter was $3 6 million.
<unk>.
Our diluted share.
Compared to a net loss of $1 9 million.
Our <unk> per share in the first quarter last year.
The first quarter net income was up $16 2 million.
The net loss of $12 5 million.
All 15 cents per diluted shares in Q4 2022.
As for the balance sheet.
Our cash position at the end of the first quarter was $26 4 million.
And our short term loans stands at $41 9 million.
We believe we have cash and facilities that are sufficient.
Operations and working capital needs and we are not currently contemplating raising equity capital.
Our inventory at the end of Q1 2023 was $68 7 million.
<unk> from the $72 million.
At the end of December .
As we continue to better convert our backlog and monitor inventory levels.
Looking into consideration the improvements in availability of components.
Our trade receivables are at $106 million.
With no major changes compared to $100 million at the end of December .
Our DSO now stands at 119 days.
As for our cash flow.
Net cash flow used for operations and investing activities in Q1, 2023 with zero point $5 million, we expect to generate positive cash flow from operations for the full year.
Our 2023 revenue guidance of $325 million to $345 million.
Remains unchanged.
As the long shelf.
At the start of today's call.
We are encouraged by the strong results we achieved in the first quarter. However, given the macro environment. We think it is prudent to monitor the trends we are seeing before reevaluating our full year outlook.
As we see supply chain and component shortages challenges dissipate, our confidence in our outlook and ability to drive sustainable and profitable growth will increase.
With that I'll now open the call for your questions operator.
Thank you in order to ask a question. Please raise your hand, using your mobile or desktop application and wait for your name to be announced once again. Please raise your hand, using your mobile or desktop application and wait for your name to be announced.
Our first question today comes from the line of Alex Henderson of Needham. Please go ahead.
Great. Thank you so much.
And nice print guys certainly bucking the trend.
It's clearly good to see you getting some benefit from that backlog you built book.
Book to Bill above one got to love it in this environment, particularly in the first quarter would normally bookings are soft so I guess the <unk>.
Question I'd ask you here is one.
The trajectory of the back.
The supply chain over the course of the quarter, how much has it improved.
How do you see that playing out.
When you're looking at the <unk> Guide are you assuming continued improvement or at the current pace.
And to what extent, if there is upside to availability would that drive upside to the top line.
And the guide.
I think that.
What we have seen in Q1.
Is that I would say very close to getting back to normal.
And still a little gap I don't think that this gap.
May create the biggest swings in revenue.
But generally speaking if we did $83 $4 million in a single quarter in terms of capacity.
Option capacity, we can do more if this is a required in terms of demand and timeline.
Required by our customers.
So that obviously raises the question are your customers changing their perception of availability.
Maybe you're saying.
Kind of like that another quarter out ordered.
Six months ago, but I needed.
And maybe another quarter out.
<unk> things or alternatively are they still clamoring for the delivery.
So far we have not.
Countered.
The first example that you mentioned, which is the delays coming or being asked by our customers actually in certain areas and there are even asking us to expedite and to even reach a level of.
And of the pace.
That is.
Beyond what we have known India even in.
<unk>, we generated $90 million per quarter, and obviously, we need to adjust to that but generally speaking we don't see it.
Slow down so far in terms of customers asked to deliver.
So the last question and then I'll cede the floor and come back into queue.
If youre looking at.
And improvement in supply availability and that generally means that orders can come in and be shipped out sooner.
I E duration is coming in.
Would you expect that to.
Cause somewhat of a reduction in orders or do you think that you're insulated because of these are big projects driven and therefore, it's really a derived demand on the timing more than its.
Something thats specific to the delivery timing.
So generally speaking our plan for 2023.
Is to increase.
Our booking numbers.
Beyond the increase in the revenue.
Obviously compared to 2022.
Would that mean.
That it will.
Convert into higher base of revenue each could be but at this point, we assume that the plan is where it is and we assume a slight increase in our backlog at the end of 2023.
Super I'll step back in the line. Thanks.
Thank you. Our next question comes from the line of Romo deal until <unk>.
<unk> capital. Please go ahead.
Yes, good morning. Thanks.
You've talked in the last several quarters about the progress you've made with private networks, particularly in North America and I'm wondering if you can just chat about the opportunities that youre seeing in Asia Africa, and the little more detail and perhaps potential in Europe as well. Thank you.
In terms of private network, we're seeing also opportunities other than in North America U S. You started with.
I would say that we see that in a in a couple of segments.
One of the segments is the defense segment and other segment that is very strong is the energy segment.
And obviously there are other.
Sigma such as health.
<unk> safety.
And so forth. So we see that in different places in different continents, and obviously its our intention based on our strategy to pursue these opportunities vigorously because we believe that they will give us more stability and higher margins.
On the road.
Okay. Thanks very much.
Sure.
Thank you.
As a reminder, in order to ask a question. Please raise your hand, using your mobile or desktop application and wait for your name to be announced.
Our next question comes from the line of Alex Henderson.
Floor is open go ahead.
Great.
So.
Going back into the mechanics of all.
Ordering.
<unk>.
When you look at your pipeline.
Do you think it's.
Evenly spread over the next three quarters.
Do you think that.
Given the very large orders you had.
Seasonally in the first quarter.
Suggest that.
The orders rates are more back half loaded.
How do you care, how would you characterize the pipeline at this point.
So, let's say you know our business and you know that while we usually can see.
The opportunities.
Ahead of the timeline and the exact timing and which orders will come.
As always.
More difficult for us to envision.
At this point.
We expect.
To continue with the level of bookings we've seen in Q1.
At least for the upcoming quarter or even two quarters.
But this is always subject to decisions that are being made in many cases on the estimated so what we've seen in the first quarter is what at this point, we assume we will continue to see on average.
In the quarters to come with one with one caveat that as we experienced in the last couple of years as some seasonality in terms of booking in Q4, it might come as well and by the way. This is one of the reasons that.
That we decided not to raise our guidance yet because we do want to make sure that what we have seen in Q1 and what we expect to see in Q2 at all or indeed the trend.
And it's not suddenly.
The kind.
Kind of.
The reduction of weakness that that comes on account of the fact that we had stronger bookings in the first part of the year, Yes, well said.
Well expressed.
Looking at the.
The outlook here.
Clearly there is differences in geographies.
Can you can you talk about the pipeline relative to.
The expansion in the U S. How much of it's being driven by that high margin arena.
And the expansion in EMEA, which is pretty similar and Conversely, how much of it is more.
Slanted towards the lower margin, India and markets.
I would I would.
Say generally speaking that our plan and the.
The current forecast.
Is that eventually North America in 2023.
Obviously in terms of revenue, but also in booking will have a bigger portion.
Our business of our revenue.
As opposed to 2022 and that also.
Keep us more optimistic about improvement in our gross margins.
In Europe , it really depends on how things will move forward with the new leadership, if were able to increase our market share in Europe . This could also help us.
Slightly with improving our gross margins I do not expect any major change.
Change in.
In Asia or rest of Asia, other than India, and in Latin America, and Africa and the current assumption is that it's going to continue to be a relatively smaller portion of our business.
Going back to the India market.
Are you seeing a shift to higher margin products. They are as a result of the move towards five <unk> finally, starting to kick in a little bit.
Which obviously drives the higher capacity higher software functionality.
Can you talk a little bit about that.
Yes.
The dynamics of this market.
<unk> has always been on the one hand.
Looking for the latest and greatest technology, but at the same token leverage theyre leveraging their buying power to reduce.
Prices are significantly recently.
We've seen more competitors.
Trying to penetrate.
Into India because of the huge opportunity and that although we are coming with new technology.
Is continuing to put a lot of pressure on prices. So the bottom line I don't expect a significant improvement in gross margins in India at least not in the near term.
So increased competition offsetting a mix shift to higher margin higher functionality product, which.
Otherwise would've carried higher margin understand the last question I have with the sales and marketing was a little bit stiffer than we had modeled.
Now overall, you, obviously beat us on top topline and Bottomline, but sales and marketing was a little steeper or is that a function of the timing of.
Our realization of orders a realization of revenues accruals.
For us.
Or the success or is it.
Is that just a continuation of the investment in North America, and where are you on driving the productivity on the North American sales and marketing investments.
Thanks.
So it was it was a mix of two things one.
W C and other marketing and sales and marketing events that we had in the quarter.
Coupled with the fact that we have built.
See our organization and re aligned with.
Some of our investments.
Within the regions and that increased the cost.
We should not expect.
We have provided also a range of percentages from revenues. So I think that we will.
A little bit as well.
Okay, I'm going to step back in queue, operator, but if there's no other in queue I would like to ask one more question.
Feel free to proceed.
Great. Thanks.
No.
Can you talk a little bit about the.
100 gig product the progression on that.
The chips, there and when do you expect to be the time to market what are your hearing from the.
The customers how important is the 100 gig product and in terms of the decision making process.
The customers putting themselves in Q4.
<unk>.
One what's the impact.
And how is the progress.
First of all the progress as I said down the prepared comments the progress is.
Is in line with with our plan.
<unk>.
I'd say that we are in the lost their minds of.
Testing and making sure that they're there.
The chip is indeed.
Functional in in terms of our expectations and the functionality.
This is a lengthy process of testing because.
Eventually to very robust cheap.
So you need to do a lot of their test, but so far we're moving in the in the right direction.
In terms of interest.
We see a dip.
Different use cases, new use cases.
Coming from.
Operators around the world in which we.
We believe that our chip.
We have a great advantage.
In terms of the product, we can deliver or the solutions, we can deliver to.
These use cases.
It's early to quantify when and.
What would be the pace of traction in terms of.
Commercial orders.
But so far.
Operators are quite intrigued.
Bye.
Capacity.
<unk>.
There are also some new use cases, we did not even think of.
That this cheap will put us.
Ahead of the competition.
With the right.
Kind of the next generation of our project.
Products.
So going back into the to the broader question.
What exactly do you think youll actually have orders in hand forward and when do you actually think youll be shipping revenue from it.
If it's a small amount of revenue.
Alex you are pulling me by my tongue.
Got it.
Very difficult to.
Two.
<unk>.
Kind of assess.
Hey.
I would say that I would not expect.
Getting orders before.
End of 2024 that would be my guess at this point.
Great. Thank you so much.
You have no further questions. Please proceed.
So to close.
This was a strong start.
To the year for us.
We delivered strong revenue and significantly improved.
Profitability.
Ability, we are well positioned to achieve self sustained cash flows.
As we execute our growth and diversification strategies, we expect that the new system on a chip based product line to lounge in 2024 will give us a durable competitive advantage, we're increasingly excited about ceragon as opportunities.
Look forward to updating you further on our next call.
Bye.
Yeah.