Ceragon Networks Ltd. (CRNT) on Q2 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Ceragon Networks Second Quarter Earnings Call. Our presentation today will be followed by a question-and-answer session. I'd like to hand the call over to the first speaker today, Maya Lustig, Head of Investor Relations. Please go ahead.
Maya Lustig: Thank you, operator, and good morning, everyone. I am joined by Doron Arazi, Ceragon's Chief Executive Officer; and Ran Vered, Ceragon's Chief Financial Officer. 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, as amended, and the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the 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 expectations will be obtained or that any deviations therefrom will not be material. Such statements involve risks and uncertainties that may cause future results to differ materially from those anticipated.
Doron Arazi: Thank you, Maya, and good morning, everyone. Let me start by sharing how proud and delighted I am to be back as Ceragon's CEO. I feel highly energized, and I've already put a lot of things in motion, some of them I will share with you shortly. Ceragon repeated success in introducing disruptive technologies of wireless transitions. It was the case with the transition from 2G to 3G, 3G to 4G, and now, from 4G to 5G. I believe it's our tradition of innovation and our passion for technology that allows us to be ahead of the curve. We continue to invest our time, energy, and resources to transform networks across the globe, accommodating for the surge in hunger for more capacity and lower latency. In Q2 2021, given operators' 5G network development plans, our 5G orders and installations have achieved a strong momentum. Like in Q1, we achieved a number of new 5G design wins, and saw very strong bookings. Our Q2 bookings were the highest in three years, especially 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 three leading operators to deploy and improve 5G connectivity. These new orders and renewed partnerships focus on expanding 5G network reach in dense areas, as well as keeping rural areas connected and up to speed.
Ran Vered: Thank you, Doron, and good morning everyone. To help you understand the results, I will be referring mainly to non-GAAP numbers. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today's press release. Like Doron mentioned, during Q2 2021, we saw very strong bookings coming from North America, India and Europe. In fact, Q2 was the strongest in terms of bookings in the last three years. Our book-to-bill ratio was way above one. Our revenues were at a strong level and at the highest end of our projection for the quarter. During the second quarter, we continue to make further progress towards normal operations, accelerating the positive trends that began at the end of 2020. Let me now review the actual Q2 numbers with you. Revenue for the second quarter was $68.6 million up by 10% compared with Q2 last year. The increase is mainly attributed to strongest sales in North America and India. Our strongest region in terms of revenues for the quarter was India, reflecting ongoing deliveries for our main customers in the region. Our second strongest region in terms of revenues for the quarter was North America, reflecting continued strong momentum with our Tier-1 customers, other relating ISPs and smaller carriers. Europe also had a strong quarter contributing its -- continuing its positive momentum and effecting more initial revenue from 5G project. Latin America at the slightly higher quarter revenue than in previous quarter, but still lower than its normal run rate. Revenues in Africa and APAC were slightly lower than in previous quarter, reflecting the still challenging situation in both regions. We have above 10% customer in the second quarter. Gross profit for the second quarter on a non-GAAP basis was $21.6 million giving us a non-GAAP gross profit of approximately 72% compared with 26% for the second quarter of 2020. The relatively high gross profit is thanks 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 high supply chain costs. These challenges that the overall COVID-19 environment may continue to have an impact on our gross margins. As Doron mentioned, gross margin and gross profit are key metrics for us. We're looking closely on how to improve gross margins 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, as well as air freight surging costs created by COVID-19, better delivery timeline alignments with our customers, operational excellence and discipline in all aspects, increased revenue volume.
Operator: Thank you. Our first question today comes from the line of Alex Henderson Needham and Company. Alex, you can go ahead.
Alex Henderson: Can you hear me?
Doron Arazi: Yes.
Alex Henderson: Can you hear me?
Doron Arazi: Hi, Alex. We hear you loud and clear.
Alex Henderson: Perfect. Thank you very much. So first off, congratulations, great orders.
Doron Arazi: Thank you.
Alex Henderson: So, I wanted to ask a couple of questions. How many quarters in a row have you now run a book-to-bill above one, I think it's running on three or four, I guess.
Ran Vered: Yes. My recollection is probably three or four quarters with a book-to-bill above 1, but last two quarters were very significant in this .
Alex Henderson: And you said that you have seen record orders there. So, I was looking back, you did $343 million in 2018. Record orders, here, yes. So, a return towards that level at some point. So the question becomes, when I look at these large orders that you're getting, can you talk about the timeline to realization on them, because I would assume that some of these projects longer process projects, not stuff that necessarily comes in, in the back-half of the year?
Doron Arazi: . So, I think that I will separate it into two buckets. The first one, and you are correct, some of them is projects that will last for more than one year. And in second-half -- it's second time for us to convert bookings into revenue. Of course, it's improved from the quarter -- for next quarter. This is why felt comfortable on the visibility for the reminder of 2021. The second piece, and which is a challenge for us, is the which I talked at good length in my prepared remarks. And this is something that is still putting . We are seeing the signs of improvement. And this is, by the way, why we're able to do better than Q2 than we initially thought, because we were able to get some of the materials to put , we will see some of the relief from that. Still, we are not out of the woods there. There is still a challenge for us. But again, we feel more comfortable on that.
Alex Henderson: Yes.
Ran Vered: Alex, just to add to Doron's comment, the issue of the component shortage is still there. That's not a thing that is over yet. And we see the light at the end of the tunnel, and we see an improvement. But, obviously, as a result of that we are kind of setting expectations with our customers in terms of a time line. And this is why you see a slower recognition opposed to booking. We believe that we will be able to catch up, but also a significant portion of this catch-up will happen actually in 2022. We'll not be able to catch up with all this backlog during this year, and we'll have a nice backlog to start 2022.
Alex Henderson: Two quick questions, and then I'll leave the floor. Can you talk a little bit about what's going on with your ability to gain share out of the Huawei install base, and their ability to ship products. And then the second one, it does sound like the system on a chip product was -- the tape-down was pushed out a little bit. Can you talk a little bit about why that occurred and what that implies? Thanks.
Doron Arazi: Yes, sure. Huawei. I think there is no major change in what we have seen in the last couple of quarters regarding Huawei. They are being, so to speak, banned in most of the same countries. In the U.S., obviously, we don't -- we hardly see there or we actually don't see them at all. We see them a little bit in Latin America, they are still -- they are there. And in Africa, and obviously in some of the countries in APAC, but generally speaking, at least in the markets we are trying to , we don't see them that much. And that, obviously, opens up bigger opportunities for us. In terms of the chip, this is, as I said on the script statement, this is probably the most robust chip ever in the wireless transport. It's a 28 nano chip, very complex. We did huge progress by also putting in some system parts into. And, obviously, the biggest or the higher the complexity is the more careful we are in testing it, checking it, and making sure that once we go for the initial production it is, I would say, almost bulletproof. It's very critical, because if you go to production, and after three, four months of initial production, this chip comes out faulty, you go back much longer. And this is why our preference is to invest in testing it, making sure that all the bugs that we found are kind of . And it will take us a little bit more time.
Alex Henderson: Thank you.
Operator: Thank you, Alex. Our next question today is coming from the line of George Iwanyc. George, please go ahead and unmute yourself.
George Iwanyc: Hi, can you hear me?
Doron Arazi: Hi, George.
Ran Vered: Hi, George.
George Iwanyc: Hi. Thank you for taking my questions. And, Doron, congratulations on the new role.
Doron Arazi: Thank you, George.
George Iwanyc: So, looking at the managed services announcement, that's an interesting new opportunity. How do you view that unfolding? What type of opportunities do you see globally for that? And what kind of impact does that have on the operating margin?
Ran Vered: Yes, so, I need to go back for a second to kind of give you a much bigger background. Actually, within the company, with some of our more trusted account of customers, we have developed a very strong operation computability, so to speak, over time. And, in fact, in one of our bigger operators' customers in Latin America, we have been providing there, I would say, full network operation that starts with, obviously, maintenance, optimization, advanced maintenance to accommodate for things that might be faulty, and then optimization. And, by the way, it was not only on our products, it was also a competition's products. And we were even able to take part in the fiber part of this particular operator. So, we have developed these capabilities, and in parallel we have developed also software solutions that automate, and that provide a lot of, so to speak, manual work substitute to actually operating the flawlessly. At this point, with what we believe is going to develop in 5G, we believe that more and more operators, especially the smaller one, the Tier 2s will need that kind of service, because it will be very difficult for them to handle a much more complex transport network. And the idea is to really focus on this part of developing business, and to provide more and more services in this area. And I think it also create two major advantages. One is what I would call customer . Just for the sake of example, this particular customer, after three months, has decided to explore opportunity of upgrade current transport network into something that is more current. And, obviously, we are the first in line to provide with this upgrade. So, stickiness is a very important piece. And the other piece is we want to generate a bigger revenue in our business. I think it creates . I think it will be easier to explain to the capital market, how to say, less fluctuations, although this is the type of the business. So, actually, we want to achieve these two goals by exploring this opportunity that we believe becomes more and more imminent as we move forward with the 5G implementation.
George Iwanyc: And Doron, following up on that, yes, that sounds like a very positive addition, but with you coming back, have you seen other growth levers that you'd like to explore or new opportunities that you're guiding as far as maybe expanding the TAM further?
Doron Arazi: First of all, the short answer is yes. The long answer is that at this point I would prefer not to comment, because first of all, I need to kind of deep-dive into some of the additional opportunities to ensure that these are viable opportunities, and to try and quantify what it will contain to kind of monetize on them. But generally speaking, let's not forget, this company is an expert in developing modern chipset. Now has become an expert in also developing system-on-chip. It's also expert in developing a RFICs or radio frequency chipsets. And this is a huge advantage that might be used for other areas or for adjacent areas. The other thing is that we have the best transport network, and we can leverage that to become a bigger player also in the optimization of network that will become also, or I would say, prerequisite in the area of 5G, and in the era of overrun.
George Iwanyc: Thank you for that. And maybe switching to you, Ran, when you look at your supply chain trends right now, it seems like that you're confident in showing growth in the second-half of the year. How quickly they're loosening up? And do you expect it to be pretty much resolved by the end of the year? And when you look at that, are you also looking to continue to increase your OpEx on the R&D side on the marketing side?
Ran Vered: I'll answer. So, first of all, the material shortage issue, we're starting to see a losing up, this is also why we feel confident and more confident about growth in the second-half of the year, because we do see -- some areas of improvement, in that sense, although we're not yet finished with the issues. We see some areas across the board, but still shortage issues. And this is why we're saying that, although we feel comfortable, and even more comfortable this quarter, but resolving some of the issues, it's still a matter or a concern to us, and this is why at this point we'll issue. As to the OpEx, I don't expect anything dramatic, yes, there is may be some update in , but this is mainly because - as Doron mentioned, we will continue to invest on the tape of the chipset. This is an area of focus. And we're not going to stop it. And the second layer on the OpEx is the certain marketing we do plan to do some ramp up, especially on the travel side. We do see some more of a relaxation on COVID, and see some products coming through. Overall, I don't expect it overall to be a higher than what we had in Q2.
George Iwanyc: And just a last question, on the gross margin, that sounds like more of a 2022 type of ramp and just given the uncertainty on the gross margin side, kind of flat is near-term results is more likely.
Doron Arazi: Yes, this is -- sorry, not correct. And we do hope this is going to be the 2020 trajectory. There is still long way ahead of us. There are still challenges every year, I mentioned, in sea freight and air freight. And I don't think that some of these issues are going to be resolved in 2022. Some of the things that we're seeing, by the way, speaking about that are going to resolve in 2024, but we do see, and we're going to get lot of operational excellence and resilience, which is of course going to be a increase of the revenue. In some of the material shortages, that's going to end, and back to normality are going to prove to that as well. Just to add to this point, the 33% to 34% and above is kind of long-term goal. There are things that are in our control, and there we're going to continue to push for being much more efficient, and actually by that, driving our margins up. There are things that are not in our control, and they actually Ran mentioned that the most important ones or the I would say heavy lifting ones in terms of their burden are on our gross margin, which are the freight cost that has increased dramatically. And also the component prices, we're doing various things that can so to speak is different for us. But it will take us time, and this is why at this point we need to look at the 33% to 34% as the long-term goal.
George Iwanyc: So, just following up on to that, Doron, as one of the things you're able to do at least maintain pricing, I know this is normally a market that's pricing trends down, or can you increase and pass on some of those costs?
Doron Arazi: I would say the following. Every ID for improving our function is on the table and is being discussed meticulously. I would say that in some areas, it's easier in some areas, it's more difficult. I think that it require part of our customers understand that this is a global crisis that is driving this ingredient. And it's not a particular vendor issue and therefore, I tend to believe that it will be slightly more tolerant to discussion about various ways, so that they will take at least a part of this burden. And obviously looking for the golden line so that we eventually don't lose business and continue with this, so to speak a trend of the last two quarters in which we ramp-up our wheel business dramatically.
George Iwanyc: All right, thank you very much.
Operator: Thank you, George. Doron, you have no further questions.
Doron Arazi: Thank you. So, Ceragon has successfully innovated on backhaul wireless generation transitions. We take pride in this tradition and remain committed to it. We're prepared to meet the new 5G era with state-of-the-art technology, excellent services and confidence. I'm also pleased to share with you that Ran and I are traveling to the U.S. next week to enjoy face-to-face interactions with our investors in August. Finally, we look forward to seeing you there. Have a good day everyone.
Operator: Ladies and gentlemen, that concludes our call for today. Thank you very much for joining.
Maya Lustig: Goodbye.
