Ceragon Networks Ltd. (NASDAQ:CRNT) Q4 2022 Earnings Call Transcript

Ceragon Networks Ltd. (NASDAQ:CRNT) Q4 2022 Earnings Call Transcript February 13, 2023

Operator: Ladies and gentlemen, welcome to the Ceragon Networks Q4 and Full Year 2022 Earnings Call. Our presentation today will be followed by a question-and-answer session . I’d like to hand over the call now to our first speaker today, Ms. Maya Lustig, 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 Ronen Stein, Chief Financial Officer. Before we start, I would like to note that certain statements made on this call, including projected financial information and other results and the company’s future initiatives, future events, business outlook, development efforts and their potential outcome, anticipated progress and plans, results and time lines and other financial and accounting-related matters constitute 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.

Ceragon intends forward-looking terminology such as believes, expects, may, will, should, anticipates, plans or similar expressions to identify forward-looking statements. Such statements reflect only current beliefs, expectations and assumptions of Ceragon management, but actual results, performance or achievements of Ceragon may differ materially as they are subject to certain risks and uncertainties, which could cause Ceragon’s actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include, but are not limited to, those that are described in Ceragon’s most recent annual report on Form 20-F and as may be supplemented from time to time in Ceragon’s other filings with the SEC, including today’s earlier filing of the earnings press release, all of which are expressly incorporated herein by reference.

Forward-looking statements relate to the date initially made, do not purport to be predictions of future events or results, and there can be no assurance that they will prove to be accurate. And Ceragon undertakes no obligation to update them. Ceragon’s public filings are available on the Securities and Exchange Commission’s website at www.sec.gov and may also be obtained from Ceragon’s website at www.ceragon.com. Also, today’s call will include certain non-GAAP numbers. For a reconciliation between GAAP and non-GAAP, please see the table attached to the press release that was issued earlier today. I will now turn the call over to Doron. Please go ahead.

Doron Arazi: Thank you, Maya, and good morning, everyone. We had a very good 2022 in terms of the strength of our business, as reflected in our annual bookings. Our bookings to revenue ratio was well above one. We ended the year with a strong backlog. Fourth quarter bookings were softer than prior quarters, but this is similar to fourth quarter 2021, largely reflecting seasonality factors in doing business in the last quarter of the calendar year. At the inception of 2023, we are seeing again, strong demand for our products and services. Financially, the fourth quarter of 2022, despite being at the lower end of our revenue projection was a good quarter for us in many aspects. We ended the quarter with 33.1% gross margin and $3.2 million in operating profit, which reflects a growth of 113% over the fourth quarter of 2021.

When we look at the second half of 2022, we see significant improvement in our revenue levels and profitability. This we believe is mainly thanks to a combination of two factors. First, is our relentless execution of our growth strategy, and the second is the changing market dynamics, especially in supply chain, which continues to head in a good direction. Our fourth quarter 2022 revenues would have been even higher by a few million dollars were it not for a policy change by one of our leading customers regarding equipment received prior to year-end. The gap was also impacted to a lesser extent by a delay in a specific component that pushed certain equipment delivery out of fourth quarter 2022 into the first quarter of 2023. As of today, we are mostly caught up with these deliveries.

Without these two factors, our fourth quarter revenue and profit would be stronger. Throughout 2022, we made significant headway in the productization of our new system on a chip technology, and we are on track and expect to finish productization in 2023 and launch our new product line in 2024. We strongly believe this system on a chip will drive strong demand and have a transformative impact on the industry and on our market share and performance, mainly due to two to three years’ time to market advantage we expect to have over our competitors. Assuming supply chain dynamics continue to head in the right direction, together with strong business traction, diverse and growing use cases for Ceragon solutions and the new products in development, we expect to launch, we are excited about the growth opportunities we anticipate for 2023 and beyond.

I’d now like to give you an overview per region. In North America, in the fourth quarter of 2022, 5G build continues to be strong. We received first orders for the DISH 2023 deployment. We also saw significant traction in the critical infrastructure sector in certain states with multiple RFPs. We continue to invest and intensify our sales efforts and services infrastructure in the region, and we intend to continue with this investment in 2023. Our bookings were softer than our expectations as some of the orders were not received on time in Q4 2022 and were shifted to Q1 2023. Our revenues were also lower than our expectations due to the year-end policy change by one of our clients. I’m happy to report that we already caught up on a major part of the slippages.

We expect a strong first quarter in this region. India is a saturated market in terms of end customer demand, which means operators are increasingly turning to upselling and cross-selling to improve customer experience and drive engagement. Indian telcos continue to invest in 4G technology, while they start deploying 5G in different regions. They augment their network capacity with additional fiber and wireless E-band and multiband to meet the demand for high speed. Coupled with the growing affordability and availability of 5G smartphones, we expect these developments to fuel consumer adoption of 5G in 2023 and beyond. In Q4 2022, we continue to deliver our products for 4G networks as well as started delivering our E-band multi-band solution for 5G networks.

We expect this trend to continue in 2023. In Europe, we had a good quarter despite macroeconomic challenges seen in this region. We signed an agreement for a new turnkey project in Italy worth $4 million through which we replaced competition. We won the first project in partnership with a leading open RAN vendor composed of the full IP-50 family, including IP-50 FX. In general, our open network architecture solution continues to get traction as we are invited to more labs of Tier 1 operators, continue field trials with others and participate in RFQs. In APAC, 5G deployment is still unfolding, though at a different pace in different parts of the region. Australia, Japan and Korea are well advanced in 5G rollout, and those are increasing the focus into the rural regions.

Indonesia, Vietnam and several others are behind. We are well positioned primarily in Australia, where we are providing turnkey services as well as in South Korea and Japan. We continue to see traction and interest in our IP-50 product series, especially for wide band and open network use cases. In Q4 2022, we received the first significant order from one of the largest operators in APAC, which includes our IP-50 FX. We also delivered the first phase of a private network in Taiwan, which is an emerging and promising use case for us. In Latin America, the continued instability of economies and governments may delay 5G rollout, government projects and the overall expected telco business. We continue to see competition primarily driven by Chinese vendors, and we continue to focus on offering our managed services, getting very strong traction.

We also continue to focus on private networks. In Africa, business was slow in 2022, as many projects NPOs were moved to 2023. We enjoyed recurring business in managed services in Nigeria and Congo. To summarize, while 2022 was a good year overall, it could have been better were it not for our supply chain changes, especially in the first half of the year. While these challenges are less intense today than they were a month ago, they still exist and impact our operations. Despite the said challenges we reached new milestones in 2022, achieved successes in key areas of our business, advanced the productization of our new chipset and gained traction on our managed services offering. We did all that while improving our gross margins and profitability.

When we look into the future, we expect a strong 2023. Given the positive business traction and our operational momentum, we expect to continue our growth in the leading regions we operate in. We anticipate substantial growth coming from our E-band sales, especially with the new coming cost-effective product that enables covering a broader market base. We also expect that our sell-side routing and managed services businesses to increase in 2023 and beyond. Before I turn the call over to Ronen to review the financials, allow me to acknowledge our new Chief Revenue Officer, Alon Klomek. In this newly created position, Alon will oversee the entire revenue materialization from prospect to order delivery and collection. We believe that with this addition to our team, we’ll be better able to fulfill our strategic goals.

I’d also like to welcome aboard, Dima Friedman, who is joining us as Chief Operating Officer. Dima will work on further strengthening our operations. With these changes in place, our goal is to optimize our organizational structure and implement our growth strategy with further success. Ronen, over to you.

Ronen Stein: Thank you, Doron, and good morning, everyone. I will now share a detailed review of our fourth quarter and full year 2022 financial results. To help you understand the results, I will be referring mainly to our 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. Let me now review the actual numbers with you. Revenues were $75.5 million, a decrease of 3% compared to $77.8 million in Q4 2021 and 4.1% compared to $78.6 million in Q3 2022. The decrease is mainly attributed to a policy change by one of our customers regarding equipment received prior to year-end. Our strongest regions in terms of revenues for the quarter were India and North America, with $21.6 million and $17.2 million, respectively, in line with the continuous strong demand we see in these regions.

Our third strongest region in terms of revenues was Latin America with $13.2 million, followed by Europe with $10.1 million. We had two above 10% customers in the fourth quarter. Gross profit for the fourth quarter on a non-GAAP basis was $25 million, an increase of 10.7% compared to $22.6 million in Q4 2021 and a decrease of 10.6% as compared to $28 million in Q3 2022. Our non-GAAP gross margin was 33.1% compared to 29% in Q4 2021 and 35.5% in Q3 2022. When we take the trailing 12 months view, our non-GAAP gross margin was 31.8%, an increase compared to last quarter’s trailing 12 months gross margin of 30.8%. I’d like to emphasize that the majority of our business is still project-based, and we see continued lumpiness in our revenues and gross margin from quarter-to-quarter.

That said, the upward trajectory of our gross margin is very encouraging and reflects our ability to increase margins when we execute on our strategy and operational efficiencies. As for our operating expenses, research and development expenses for the fourth quarter on a non-GAAP basis were $7.9 million, up from $7.7 million in Q4 2021 and up from $7.2 million in Q3 2022. Sales and marketing expenses for the fourth quarter, on a non-GAAP basis, were $8.6 million, down from $8.7 million in Q4 2021 and up from $8.3 million in Q3 2022. General and administrative expenses for the fourth quarter, on a non-GAAP basis, were $5.4 million, up from $4.6 million in Q4 2021 and down from $6.1 million in Q3 2022. Operating profit for the fourth quarter was $3.2 million, up 113.3% compared to $1.5 million in Q4 2021 and down 50% compared to $6.4 million in Q3 2022.

When we take the trailing 12 months view, our non-GAAP operating profit was $9.3 million, a 20.8% increase compared to last quarter’s trailing 12 months operating profit of $7.7 million. Financial and other expenses for the fourth quarter on a non-GAAP basis were $2.9 million, impacted by an increase in interest rates and fluctuations in certain currencies. Our tax expenses for the fourth quarter on a non-GAAP basis were $0.5 million. Net loss on a non-GAAP basis for the fourth quarter was $0.2 million or $0 per diluted share compared to $2 million or $0.02 per diluted share in Q4 2021 and compared to $4.1 million of net income or $0.05 earning per diluted share in the previous quarter. As for our balance sheet, our cash position at the end of 2022 was $22.9 million, and our short-term loans stand at $37.5 million, leaving us with additional $12.5 million available unused facility.

Our inventory at the end of Q4 2022 was $72 million, up from $64.2 million at the end of Q3 2022. The increase is expected to reduce risks in fulfilling the demand we are witnessing mainly for our new products, including the E-band products. Our trade receivables are at $112.3 million, down from $115.9 million at the end of Q3 2022. Approximately 11% reflects a debt from a single customer for which we have recently initiated legal proceedings. While we believe we are taking effective measures in collecting this debt, we continue to closely monitor this situation. Our DSO now stands at 139 days. As for our cash flow, net cash flow used for operations and investing activities in Q4 2022 was $10.6 million, mainly related to the investment in inventory and the onetime expense related to Aviat’s hostile attempt recorded in Q3 2022.

In 2022, revenues came in shy of the lower end of our guidance. As Doron explained, specific factors were critical, including a policy change by one of our customers regarding equipment purchase prior to the year-end and to a lesser extent, a particular delay related to one specific component, which pushed deliveries from Q4 2022 to Q1 2023. Our 2023 revenue guidance of $325 million to $345 million remains unchanged as we see improvement in the supply chain and component shortages challenges and anticipate this trend to continue. We are more confident in our ability to navigate these challenges and expect to maintain our profitable growth trajectory. With that, I now open the call for your questions. Operator?

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Q&A Session

Operator: Thank you. Our first question today comes from the line of Alex Henderson from Needham. Please go ahead.

Alex Henderson: Hi, thanks. I assume I can be heard.

Doron Arazi: Yes, Alex. Good morning.

Alex Henderson: Perfect. Let’s just start off with the obvious. Can you explain what policy change occurred and how that manifests into your numbers and the component delay? Can you give us a little bit of a sense of was it just a temporary thing? Have you gotten those components in? Or are you still experiencing it?

Doron Arazi: So as we said, we already caught up with these delays that reduced our revenue for Q4 versus our original expectation. So all these revenues were already basically taken into account in Q1 after we have delivered the products. Now there were two issues. The first one is one of our big customers, we usually receive material and equipment almost until the last minute at the end of the year, at least in previous years. And this year, at a certain point, they decided to make a change and to push the expected equipment delivery into Q1. The other point was referring to a specific component that came late by a couple of weeks. And obviously, as a result of that it created a delay in our production line. We’re trying to catch up, but eventually, a few million dollars slipped into January. So generally speaking, as I said, we already caught up with these revenues.

Alex Henderson: If I were to look at the policy change, what magnitude impact did that have on the quarter? Was it $2 million to $3 million kind of number? Or what was it?

Doron Arazi: This size, more or less.

Alex Henderson: I see. So the policy change sounds like it wasn’t a policy so much as it was a timing of the desired delivery. Am I wrong in that assessment? And when somebody says I just wanted the next quarter, it’s maybe more of a timing of their spend and recognition of their cost as opposed to say, a policy implementation where it’s a change in accounting or any other element in that sort.

Doron Arazi: Yeah, when talking about policy change, what I mean is that they have kind of more focused on certain KPIs such as the level of their inventory in their warehouses at the end of the year. And as a result of that, obviously, the organization is focused on making sure that the level of inventories at the end of the year will be the minimal possible.

Alex Henderson: I see.

Doron Arazi: Eventually, from our perspective, it’s just a timing difference. I fully agree with you.

Alex Henderson: Okay, so has your visibility improved for 2023 over the course of the back half of the year?

Doron Arazi: I would say that generally speaking, our visibility has increased. Obviously, when looking on the second half of 2022, all-in-all and the booking we received, the visibility has increased.

Alex Henderson: And your gross margins have now moved up the most recent year around 33%. Is that a function of mix and therefore, that’s kind of the new range? And also as you’re starting to shift more to the U.S. and EMEA, where margins tend to be higher, is that a reasonable thought process on the new range?

Doron Arazi: Eventually, it’s a combination. And I will let Ronen give you more detailed answer.

Ronen Stein: Yes, hi, Alex. It is a combination, both of the North America improvement and also the reduction in supply chain costs, PDAs and sourcing of components, cost of.