Good day, everyone. Welcome to the Ceragon Networks Limited Second Quarter 2020 Results Conference Call. Today’s call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks.

Before we start, I would like to note that this call includes information that constitutes forward-looking statements within the meaning of the Securities Act of 1933 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 there from will not be material.

Such statements involve risks and uncertainties that may cause results to differ materially from those anticipated.

These risks and uncertainties include, but are not limited to the effects of general economic conditions, the effect of the COVID-19 crisis on the global markets and on the markets in which we operate, including the risk of a continued disruption to our and our customers’ providers, business partners and contractors business as a result of the outbreak and the effects of the COVID-19 pandemic and such other risks and uncertainties and other factors that could affect our results as detailed in our press release that was published earlier today and as further detailed in Ceragon’s most recent annual report on Form 20-F and in Ceragon’s other filings with the Securities and Exchange Commission.

Such forward-looking statements including as to the risks and uncertainties and other factors that could affect our results represent our views only as of the date they are made and should not be relied upon as representing our views as of any other subsequent date.

Such forward-looking statements do not purport to be predictions of future events or results. And there can be no assurance that it will prove to be accurate. Ceragon may elect to update these forward-looking statements at some point in the future, but the company specifically disclaims any obligation to do so.

Ceragon’s public filings are available from 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 results, please see the table attached to the press release that was issued earlier today. I will now turn the call over to Ira Palti, president and CEO of Ceragon. Please go ahead, sir..

Good morning and good afternoon to everyone joining us on the call today. With me on the call today are Ran Vered, our Chief Financial Officer and Osi Sessler, Head of Investor Relations. Before getting into the quarter, I hope that you, your loved ones and coworkers are healthy and well.

I want to assure you that our top priority is ensuring the health and safety of all our employees wherever they are, even as we work to serve our customers. It has been 3 months since we first discussed the impact that COVID-19 was making on our business. In some ways, we are smarter than we were then.

And in other ways, there is still plenty of uncertainty. But taken as a whole, I believe we are in a very good shape. As you can see from the results, Q2 was better than Q1, with improved revenues, margins and net results. All of these metrics came in better than market average projections.

With a focus on execution, we have reduced our accounts receivable and inventory, enabling us to generate a healthy $4 million in cash flow but also allowing us to reduce our loans. Our ability to deliver continues to improve day-to-day.

And perhaps most important, our bookings for the quarter were above one, driven by an improving business environment and a growing number of 5G opportunities and other projects in many regions. So despite the uncertainty in the market, we have performed well and continue to move forward.

Though it remains very difficult to make predictions, current indications are that we are on track for returning to our normal quarterly revenue run-rate of $70 million to $75 million in Q3. Ran will give the details.

In fact, as we said in May, we believe that the net effect of COVID-19 will be positive for us over the long term because the change in lifestyle that is created is bringing new urgency to the need for broadband for countries, consumers and businesses across entire industries.

This is leading operators to accelerate their 5G rollouts and to continue to invest in 4G network expansions. For the short term, however, the outlook is harder to predict.

With the situation changing from day to day, it is difficult to forecast the timing of orders, to forecast supply chain dynamics, to forecast deployment schedules, and therefore, our ability to execute at 100% efficiency.

In response, we have been focusing on handling the challenges that came up in our day-to-day operations and I believe we have been handling them well. First, we are doing everything in our power to keep our employees safe and healthy, including full compliance with all health directives.

Our office workers have transitioned to dividing their time between home and the office with meetings taking place mostly via collaborative video meetings. Despite the change in routine, all our departments continue to progress in line with our work plans.

We are also managing our customer interactions closely using remote tools, and this is working well. While we prefer face-to-face interactions, the new normal has had some surprising advantages, for example, the ability to take prospective customers on virtual demos through our labs and to actually carry out more customer interactions each day.

At the same time, the situation has created significant challenges for our supply chain. Many suppliers and shippers are not working at full capacity, making shipment harder to organize and more expensive. Once equipment is delivered, the installation process can take longer than planned due to changing operator work schedules and local lockdowns.

On top of this, the situation has impacted some of our customers’ network built-out plans. For example, much of Latin America, including our clients in Colombia, Peru and Mexico, went into full lockdown during the quarter. In addition, some customers are delaying capital investments and are affected by currency fluctuations.

For example, a customer in Peru froze the project for six months, while others in Latin America were affected by local reductions in revenue and currency fluctuations. This obviously led our revenue from Latin America to be lower than expected.

At the same time, the situation is creating opportunities, opportunities that we could not have predicted 6 months ago. We see signs of increased focus on 5G network development by operators in the U.S., Europe and the Pacific Rim together with 4G expansions with others.

These are aimed at delivering broadband for all and enhancing connectivity, the need for which has been amplified by the current situation. The quickest effect came from wireless ISPs in Europe and the U.S., who saw the need and have moved swiftly to serve the customers. This has increased our overall bookings and backlog.

The need for capacity, deployment speed and flexibility has sharpened the case for open, unbundled networks, convincing more operators to adopt a best-of-breed approach that is based on all-outdoor solutions for backhaul and front-haul. As a premier of wireless backhaul, all outdoor solutions and front-haul, this plays to our strengths.

Our technology is increasingly recognized as a key piece of 5G deployment strategies, leading to increased interest as 5G plans develop and opportunities, as well as challenges unfold.

For example, in Europe, we have been awarded several new contracts for 5G network rollouts, some with existing customers and some with new operators in countries for the northwest through the central and eastern parts of the continent.

Each of these operators takes a different approach to 5G network development and our industry-leading 5G, all-outdoor backhaul portfolio across the vast millimeter wave and microwave spectrum allows us to cater for diverse operator 5G network development plans.

Some of the operators selected our latest microwave technology, which can deliver four gigabits in a single all-outdoor device over recently regulated ultra-wide 224 megahertz channels to ensure 5G macro cell capacity over a distance. That’s 4x wider channels than commonly used in 4G.

We have a new capability to do so, thanks to our multi-core chipset technology. Other operators use our compact millimeter wave solutions over ultra-wide 2,000 megahertz channels to modernize macro cells to 5G with a 10 gigabits per second backhaul and some selective in combination of the two approaches.

In the U.S., a new wireless service provider has invited us to participate in the field trial for the wireless backhaul portion of its new 5G network. We are also in discussions with a new wireless service provider in Japan for wireless front-haul and backhaul solutions that will deliver speeds of 20 gigabits for its 5G and 4G network.

We believe that this is just the beginning with COVID highlighting the need for more cost-effective and flexible solutions. Operators in the U.S., Europe and APAC are continuing and, in some instances, accelerating the 5G projects. And more and more operators are now looking at the open network concept.

In addition, as lockdowns are released, many countries have moved toward initiating or accelerating rural 4G network expansion programs and ramping up their 4G network backbone capacity.

As an example, in sub-Sahara and Africa, we were selected by Orange Niger, a new customer for us to modernize and build an extensive wireless backbone for its newly built 4G network. And we are pursuing similar projects with others in the region.

Finally, in India, during the quarter, we returned to a good run rate of deliveries and installations for our Bharti projects. There are two more developments that are worth mentioning. In several countries, governments are providing stimulus packages to encourage telecom infrastructure investment.

Like the 10-year $20 billion RDOF, Rural Digital Opportunity Fund, launched by the FCC in the U.S. This is earmarked to close the digital divide by facilitating the deployment of high-speed broadband networks in rural America. We expect that a portion of that will be relevant to our market, resulting in projects that will benefit Ceragon.

In addition, several countries, including the UK and India, so far, have limited the use of telecom equipment and services from China. This may mean that local operators, who have been using Chinese equipment, will have to find alternatives. If so, this may work to our advantage.

From a product development point of view, we continue to make progress in the development of our next-generation wireless hauling chipset, a big step forward that will support our products for the more advanced stages of the 5G network transformation in the years to come. We now expect to reach tape-out by the end of Q1 2021.

During the quarter, some of you participated in our virtual R&D tool in which we covered our concept and differentiating technologies in depth and showed some of our progress on working versions of test chip for this new generation. By the way, we probably would not have thought about such a tool before COVID-19.

But now, we would like to offer them to all our investors. So if you did not participate, please be in contact with Osi for future tools.

As we explained during the tour, our new chipsets are key enablers for 5G backhaul and front-haul, bringing capacities that are 50x to 100x higher than 4G, driving to 100 gigabits speeds via wireless, with a focus on smart, efficient spectrum asset management to secure network growth.

This will enable much quicker introduction of services, while simpling and optimizing network and operations, opening more opportunities for 5G network development. So that’s the second quarter from my point of view. We see the risks in the short term, but big opportunities in the mid to long term.

While no one knows what the next few months will look like, we are coping well with the situation and well positioned to benefit from its opportunities. Our results are better than expected and we expect them to continue to improve in the future due to the drivers we discussed.

With that, I would like to turn the call over to Ran to discuss our finances in more details.

Ran?.

Thank you, Ira. Since you have all seen the press release, I’ll focus first on the highlights. As you can see, our revenues for the quarter were $62.4 million. The revenues were divided more or less equally across the major regions, demonstrating our global diversification. In North America and APAC, business continued more or less normally.

While in Europe, revenues were strong during the quarter, in alignment with the strong bookings from the region during Q1. Revenues from Africa were weak for the quarter, with two above 10% customer in the second quarter. Our bookings for the quarter, was stable despite the situation, giving us a book-to-bill ratio above one.

However, there were significant differences between regions. Bookings in Europe, APAC and North America were stable. Bookings in India were weak because of the very strong bookings we recorded in Q1.

In Latin America, bookings were weaker due to delays of several projects, currency devaluations that caused a delay in CapEx investment and the fact that some of our customers in the region placed their orders for Q2 and Q3 deployment already during Q1.

Africa had very strong booking for the quarter, the strongest we have seen since 2014, mainly due to the large project with Orange Niger that we signed during the quarter. Our non-GAAP gross profit for the quarter was $16.5 million giving us a gross margin of 26.5%.

This is a slight improvement over the first quarter, though still much lower than normal.

Given the relatively low revenues, the increase in cost of sourcing and the increased supply chain expenses of the current environment, together with our focus on reusing inventory, our less favorable regional and sub-regional mix, this is the level that we expected, but not that we are satisfied with.

Going forward, we expect our gross margin to return to normal range once revenues, starts to pickup. Our non-GAAP operating expenses for the second quarter were $19.5 million, about the same as the first quarter. This is about $2 million to $3 million lower than we had been expecting before COVID-19.

R&D was down about $400,000 from the first quarter of 2020. Sales and marketing expenses, which were $8 million much lower than our standard quarterly run-rate, reflecting the sharp reduction in travel, accommodation expenses and variable compensation. G&A, which was $4.8 million, was actually about $0.5 million higher than the first quarter of 2020.

For Q3, we expect OpEx to increase to a level of $20.5 million to $21.5 million, mainly due to the increased R&D investment in the final stages of the chip development that is planned for the quarter. Financial expenses and other expenses were back to the normal expected level. Tax expenses for the quarter were low at $0.5 million.

On a non-GAAP basis, net loss improved from Q1 to $4.9 million comparable to first quarter or $0.06 per diluted share. Our GAAP net loss was $5.5 million or $0.07 per diluted share.

Turning to the balance sheet, we worked intensively throughout the quarter to improve our stability and working capital, and you can see our success in almost every parameter. We reduced our inventory by another $6 million during the quarter, and we are now at approximately $54 million, down $20 million from our peak a year ago.

Our focus on collections has reduced our receivables to $97.5 million, down $21 million since the beginning of the year. Our DSOs now stands at 136 days. We have returned $13 million in loans, a step that reduced our financing expenses while increasing our stability.

The net result of all of this is that we generated $4 million positive cash flow from operations and investing activities for the quarter. In parallel, we extended our credit line from a consortium of banks for another year while raising our credit line from $40 million to $50 million.

This is a vote of confidence in our prospects and financial responsibility. We continue to invest in our major development programs to ensure that our future road map supports our design win efforts, sustaining our positioning as the strongest company in wireless hauling and the key to generating future revenues.

While the short-term maybe lumpy and hard to predict, we believe that long-term trends are working in our favor and that it will benefit when markets return to the new normal.

Current indications led us to believe that we are returning to our normal $70 million to $75 million average quarterly run rate for the third quarter and expect that we will remain at that level for the fourth quarter.

However, with COVID-19 still having a clear impact on our supply chain and installations and the situation far from resolved, there are many unknowns that could affect the timing of revenues changing the indicators that we see today. Meanwhile, we continue with our work to improve our financial stability and to strengthen our operations.

So that’s the second quarter. I would like now to open the call for your questions.

Operator?.

Thank you. [Operator Instructions] Your first question comes from the line of Alex Henderson. Please go ahead..

Hey, guys. So nice quarter. Thanks for the detail on the guide. I was hoping you could give us a little bit more granularity around the gross margin commentary. Clearly, returning to normal levels, somewhere in the 30% to 35% range is a nice improvement.

But can you give us some sense of how much of the pressure was a function of geographic mix and how much of the pressure at 26.5% was a function of COVID-related cost to expediting and related expenses? And to what extent you think that that latter COVID-related stuff falls out as we go through the third quarter and fourth quarter? I mean, is it reasonable to think that the mix shifts back and the combination of that – those two can get you up toward the middle of that pack or is it more toward the lower end of the gross margin range? How should we be thinking about it? Thanks..

Hi. Alex, it’s Ran. Thanks for the question. So as you saw – as you say, it’s really a mixture of all of that. So it’s a mixture of more India in our revenue, which is really the geographical mix. It’s also a matter of the low revenue of the product taking into effect into account that we have some fixed costs built in, in our cost of revenue.

And as I also mentioned, the impact of COVID-19, at this point, when we are looking at Q3 and Q4, and assuming the quarterly average run rate, we do forecast it to be in the range that we used to have between 30% to 35%, but probably at the lower end of the gross margin.

We do not see – we do still have COVID impact on supply chain, on shipments, on the cost to install that still has a toll on our operations. But at this level of revenue, we do expect it to get back to the 30% to 35%, again, probably at the low end of the range..

You broke up a little bit when you were talking about the OpEx number.

I think I heard you say the third quarter OpEx was expected to be in the $20.5 million to $21.5 million, is that right?.

That is correct, Alex, and mainly because of ramping up R&D, mainly for the new chip development..

Right. And then you said that you expect financial expenses to good return to normal.

Can you define what normal looks like?.

So actually, I think that Q2 was normal. If you are looking on 2019, our average was $1.5 million. I would say that it’s also very dependent on the exchange rate impact.

But given the – taking into account the fact that we reduced our loans because we had a strong positive cash flow in the first half of the year, so our interest is probably going to be down, but I cannot expect the FX rate. I would still forecast a normal rate of $1.4 million, $1.5 million. What happened in Q1 was really a one-timer..

I see. So it’s compared to the Q1 that you are referring to. That’s helpful..

Yes, exactly, exactly..

And then you made a comment about a U.S. field trial.

Was that the same as the Tier 1 win that you had earlier or is that something different?.

No, that’s something different. We are – still in that Q1, we are referring to earlier, which is a current Tier 1. We are still in their labs. And this is a new account, a new 5G operator in the U.S., which we are – invited to participate in the field trials..

Great I will see the floor. Thanks..

Thank you, Alex..

Your next question comes from the line of George Iwanyc. Please go ahead. George Iwanyc. Your line is open. Please go ahead..

Can you hear me?.

Good morning, George..

Hi, good morning..

Yes, George. Good morning..

Can you give us a sense of what the linearity was like during the quarter? Did it improve? And is it continuing to improve at this point from month to month? And then if we are back in the normal kind of 70% to 75% range, how do you feel seasonality kind of kicks in from here?.

Quarter was not linear and very hard to focus linearity moving forward. We have various degrees across the quarter depending on the regions. I would, if I intend to characterize in the quarter, it was back-end loaded on some of the activities.

Moving forward, my belief, we are returning at least in Q3 to a more normal linear, while linearity in quarters were never linear, but more linear than in Q2.

But very hard to predict, and especially that – and I think I said it a few times on the comments, situations locally in different places around the world changes on a daily basis based on authorities, regulation. We might move in and out of lockdowns on deployments, on ability to deliver. Sometimes it’s also on the supply chain.

And this is very, very hard to predict at this point because we are dependent on a whole list of many suppliers. Some of them we do carry inventories of parts some of them is more just in time. So it’s very hard to predict the linearity at this point.

Longer, in general, on the other hand, I see a significant improvement in the sense that the number of surprises that we see was much, much lower than in Q1 and as the quarter progressed towards June, less and less surprises. And I think that in – moving into this quarter, which is Q3, July was even less surprises from that perspective..

Thank you. And then following up on the North America trends so, you do have the new customers that you are working with there.

Can you give us a sense of what’s happening with your existing customers, with T-Mobile and Sprint and how everything is starting to unfold there?.

At this point, the only thing I can say is that TMO and Sprint are continuing to be customers. We do see orders, but it’s lower levels. I think they are very much focused to this point on integrating their two organizations.

Let’s remember, they did the merge and then started integration into COVID-19, which didn’t make it quicker from that perspective. But I think they are very much focused there and making a lot of progress. We do expect to see them as significant customers back sometimes, probably toward the end of this year at this point..

So a lot of that improving bookings trends that you are seeing in North America have been normalizing is from the WISP activity?.

It came mainly from the WISP activity. Yes. Smaller WISP activities, some smaller operators, and a lot of it is WISP. And I said in my comments, we see a lot of WISP activities, both in Europe and the U.S..

Alright.

And then just one more regional question and then one modeling question, from an India perspective, how sustainable do you feel the demand environment is there and kind of like what are you budgeting maybe for the rest of the year?.

I think at this point, stable demand, mainly from our main customer for this year, which is Bharti.

For the rest of the year, we know the deployment plans they have mainly for 4G across India and my believe, they will stay at those levels probably into – well into second half of next year with a caveat that India on the revenue perspective is highly dependent on deployments. And India is 700-plus different districts.

And each district has its own lockdown policy. And I know the team’s map with red, greens and yellows and what’s locked down and what’s not, where we can deploy and not deploy across the region. So there are fluctuations in there. But from demand perspective, it’s there.

Longer term, my believe, we will see and probably not the beginning of next year, also 5G coming on board and making sure that it’s there. The two things that are happening in India is also Chinese telecom equipment is banned at this point.

Although to our effect, we have been able to push the Chinese out from some of our accounts by using a better technology a long time ago. And I do expect that India, at some point during next year, will also do the 5G auctions and delivery outbound..

Okay.

And then just a modeling question, when you look at OpEx in that $20.5 million to $21.5 million range, when you get to the take out in the beginning of next year, does OpEx start to pull back on the R&D side or does it – did you anticipate it kind of to staying flat at that point?.

We do expect that R&D will pull back significantly at that point. Because most of the increase is all sorts of subcontractors and activities outside the company, not internal headcount, which supports the tape-out..

Thank you very much..

Next, we’ll go back to the line of Alex Henderson. Please go ahead..

Thanks.

I was hoping you could talk a little bit about the progress you are making on partnering with other people relative to your chipsets and what you are seeing in terms of competition in the chipset market and whether there is any change that you are seeing from MaxLinear in particular?.

Okay. So first, we are working on our technologies and the chipset is part of that with NEC and continuing to work very closely with them on different technologies and part of it is the chipset in there.

And we are in discussions with others, with ups and downs, like any discussions that we are having, and details, if something will come out, we’ll probably announce. Up until that point, I don’t want to refer to different discussions.

And at this point, we still believe that we are way ahead from anything from anyone else at this point, especially millimeter and microwave chipsets moving forward..

I see.

And is there any sense of what the time line for this new chipset to actually get into a finished product? When do you expect the chip design that you are talking about taping down to actually be in the next-gen product?.

Usually, from tape-out of a chipset to next-gen products is sometimes usually around 12 months..

So it would be roughly when?.

So it’s the beginning of 2022, beginning mid-2022..

Alright. And then going back to the U.S. market, you’ve got a lot of potential there. Margins are higher. You are seeing strength in Europe. Europe margins tend to be higher. You are just talking about 5G, 5G tends to have more features and be at higher-end speeds. Africa has historically actually been a higher-margin area.

I get it that you have got some weakness in some other geographies, but it sounds like the mix should be shifting back to a better mix in 2021 than what you are just looking at now.

Is that a reasonable assessment?.

I think it’s a reasonable assessment. It is a reasonable assessment. That’s what we are targeting..

Great. I’ll see the floor. Thanks..

Thank you, Alex..

Your next question comes from the line of Gunther Karger. Please go ahead..

Yes, good morning. I don’t have a question. I have a comment. I want to commend Osi for since she has come aboard, there has been a significant improvement in communications, telling the world what you are doing. So Osi, thank you very much..

Thank you, Gunther, in the name of Osi. She is here in the room with me. There is a big smile on her face..

[Operator instructions] And at this time, there are no further questions..

Thank you. So there you have it. We are operating well in an uncertain reality, working to position the company to benefit both from short-term opportunities and long-term market growth. Second quarter was an improvement over the first, and we expect even better for Q3 and beyond.

Thanks for joining us here, and we would be happy to see you on next virtual R&D tour as at least for the short term, we probably want to meet face-to-face virtually, would love to see all of you. Thank you, and a good day..

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect..