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. [Operator Instructions] I'd like to hand the call over to the first speaker today, Maya Lustig, Head of Investor Relations. Please go ahead..

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.

These risks and uncertainties include, but are not limited to, such risks, 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 represent our views only as of the day they are made and should not be relied upon as representing our views as of any subsequent date. Such forward-looking statements do not purport to be predictions of future events or results, and there can be no assurance that they will prove to be accurate.

Ceragon may elect to update these forward-looking statements at any point in the future, but it specifically disclaims any obligation to do so. Ceragon's public filings are available on the Securities and Exchange Commission's Web site, at www.sec.gov, and may also be obtained from Ceragon's Web site, 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 Doron. Please go ahead..

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 [most] [Ph] repeated success in introducing disruptive technologies [at the cusp] [Ph] 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.

These material orders, among others, have resulted in strong Q2 booking in North America, the highest ever. I am pleased by the progress we are making in this region. Additional two leading Tier 1 operators may become new customers for us. They are evaluating our most recent IP-50 products for different network scenarios, including fronthaul.

They seem intrigued by how well our product fit into the new 5G network architecture. What's happening in North America is that operators are in fierce competition to push 5G from initial trials into the field.

Because fiber optic is either not possible or economically not viable in all use cases, more and more operators are turning to us for wireless multi-gigabit transport powered by our IP-50 series. IP-50 provides a fiber-like alternative in terms of speed, reliability, and efficiency. We are participating in several trails and initial rollouts.

In fact, 52% of our year-to-date bookings in North America are 5G-related, and we're encouraged by the significant opportunities in this region to grow and capture market share.

In India, our strongest region in terms of booking, multiple Tier 1 operators placed follow-on orders for which we will support multiple network expansion projects to help providing nationwide coverage, and prepare operators' network for 5G. With over 620 million internet users, India has the world's second largest user base.

Its data consumption is expected to grow over three-fold, to 40 gigabit per smartphone, and the numbers of users to 900 million, by 2025. There is a move towards rolling out 5G by developing 5G corridors.

Trials are planned for the second-half of 2021, 5G spectrum auction is expected in the first-half of 2022, and commercial launch by the second-half of 2022. Today, in India, Ceragon boasts around 50% market share. We are the indisputable market leader.

And as 5G rollout will further expand digital adoption, there will be a demand for higher capacity in all corners of the country, and we will be there to meet it. Indian operators are testing different E-band] [Ph] Solutions, and ours are getting a lot of traction.

I believe the combination of our market leadership position, our strong brand name, plus what's unfolding in the country will translate to more business for us. In Europe, also driven by 5G demand, we had a very positive quarter in terms of bookings. Our European 5G-related bookings accounted for 31% of all European bookings year-to-date.

In Latin America, COVID-19 continues to have greater impact than other regions, yet we also see new signs of recovery in [South Zone and India] [Ph], except for Argentina. We've been awarded several contracts by operator in Mexico, Brazil, Colombia, and Peru, to provide a wide range of technologies.

I believe these awards will generate a funnel of opportunities, and translate to new orders in the upcoming quarters. Overall, we expect to continue at the same pace in the second-half of the year. In APAC and Africa, we feel the impact of COVID-19 on most of our countries. And it seems like activity in these two regions will be slow for a while.

To summarize, I'm very please to report that, in the present moment, we have 16 5G design wins. Five were new additions to our customer base, and the rest were existing customers. Our global 5G booking increase our visibility and confidence in the market demand for the second-half of the year.

That said, global component shortages and delays in shipments may have an impact on our ability to deliver. Not only that, but also our gross margins had been adversely impacted by the increase in component and supply chain prices due to the COVID-19 environment. We are taking the necessary measures to remedy those situations.

In fact, one of our focus areas is to bring our gross margin back to 33% to 34% and even above. Ceragon is on an upward trajectory. For me, it proved to be a fantastic time to join the company and witness many years of effort come into fruition. I'm proud to say that we're highly diligent, proactive and market responsive in our efforts.

Our principal objectives are to expand our total addressable market, and reinforce our solutions as the go to for wireless transport. This is a good time for Ceragon to achieve these objectives for three key reasons. First, 5G is much more complex than previous generations, to grow traffic with demand densification of the network.

This will mean backhaul expansions and upgrade to support high capacity and lower latency. A full scale 5G rollout is expected to be costly to operators yes, it's also inevitable. According to the GSMA estimate, operators total cost of ownership for backhaul will increase on average by a range of 16% to 42% annually.

Also based on ABI Research for February 2021, the wireless portion of the wholly market is not expected to change significantly in the upcoming years, still comprising around 60% of the backhaul market. Second, in parallel to 5G, the OpenRAN architecture is going global.

In fact, according to GSMA, today 73 operators from 38 markets have either already deployed or committed to OpenRAN deployments. Briefly, OpenRAN establishes disaggregation for hardware and software leading to vendor neutral component selection.

This plays to our advantage as more operators may shift from single end-to-end vendor strategy to best-of-breed increasing opportunities for specialists like us. In addition, as 5G densification continues, more and more operators will deploy millimeter-wave solutions for front-haul such as our IP-50E.

This portable opportunity is not only supported by heavy rating surveys from July 2020, but also reflected in the interest in our IP-50E. Therefore, we believe OpenRAN will boost opportunities for us as the market leading specialists. Third, I'm very excited about the strides we've made in closing new managed services deals.

As announced at the beginning of July, we're awarded with Multiyear Managed Services agreement by leading network service providers in the U.S. This service provider is using our radio units as well as competitors.

The fact that this provider is using Ceragon to manage and improve the performance of their entire wireless transport is a statement -- sorry, a testament to our differentiated service capabilities and market strength.

Our managed services provide network monitoring and optimization, troubleshooting and upgrade to simplify and enhance the customer journey on the wireless transport network. These services represent organic and natural evolution of the work we have done with numerous operators and the strong software tools we have developed.

It is my intention to strengthen and turn managed services into a significant recurring revenue source for Ceragon in the coming years as I believe the demand for such services will grow as networks become more and more complex. For these three main reasons, we expect our total addressable market to grow.

For us this is the first time in many years where a market growth is expected. Our readiness to monetize on the growing 5G opportunities is not enough. As I said earlier, innovation, technology passion and long-term thinking is our DNA.

Our flagship product, the multi-core all-outdoor radio has been a market changing technological breakthrough since its launch in 2013. Our new system-on-chip whose tape-out is rescheduled towards later this year will be the next big breakthrough. This new chip is build to provide reliable fiber-like support for the new era.

It represents a new approach in our industry as it is a system on a chip. We believe it will be the most robust chip space and we take our time to ensure it will function flawlessly. It handles all microwave as well as millimeter wave band, including the D-band. It will be the very first in the market to achieve this.

It will have impressively high capacity offering 5G octacore with 16 times more capacity for [indiscernible] energy. Not only that, but also since we have incorporated certain system elements into it, it is planned to be significantly more cost efficient to reduce our yield and our inventory and to improve our delivery lead times.

5G is expected to be with us for a long time, longer than previous wireless generations. And over time, data consumption will only increase. Our chipset has been designed for these changes in mind, offering a capacity evolution that will meet the connectivity requirements of the future.

I would now like to turn the call over to Ran to discuss our financials for the reporter.

Ran?.

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, [indiscernible] 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.

Operating expenses on a non-GAAP basis for the second quarter was $21 million, slightly higher than our expectations. Research and development expenses for the second quarter on a non-GAAP basis were $7.5 million, an increase from $6.8 million in Q2 2020 mainly due to continued effort with our chip development.

These expenses will continue to stay high until we reach tape-out towards the second-half of 2021. Sales and marketing expenses for the second quarter on a non-GAAP basis were $8.3 million, a slight increase from $8 million in Q2 2020, but still reflecting the reduced travel that has come with COVID-19.

We expect to gradually increase our sales and marketing expenses towards the end of the year as markets open post-pandemic. General and administrative expenses for the second quarter on a non-GAAP basis was $5.2 million, an increase of $4.8 million in Q2 2020.

In Q2 2021, we had a write-off related to two of our customers excluding financial difficulties. Financial and other expenses for the second quarter on a non-GAAP basis were $1.4 million in line with our expectations. Our tax expenses for the quarter on a non-GAAP basis were $0.12 million lower than in Q2 2020 and in line with our expectations.

Net loss on a non-GAAP basis for the quarter was $1.2 million or $0.01 per diluted share. On a GAAP basis net loss was $1.7 million or $0.02 per diluted share.

During this quarter with several one-time events impacting the reconciliation between GAAP and non-GAAP, the measure was Paycheck Protection program loan forgiveness and the retirement compensation package of our former CEO. Our inventory for the quarter was $52.3 million down from $53.6 million in Q2 2020.

Our trade receivables are now at $107.4 million, up from $97.5 million in Q2 2020. Our DSO [technical difficulty] -- 139 days. Net cash used in operating activities for the second quarter was $3 million. Net cash used this quarter for investing activities was $1.7 million.

Looking ahead, our strong bookings in Q2 which were significantly better than expected along with a very healthy backlog in Q3 funnel reflecting increasing business activity mainly [technical difficulty] India and Europe.

I am happy to report today that we are more confident about our revenue growth in 2021 and expect it to be at a higher end of our annual revenue guidance, which is between $275 million and $295 million. More than that, we see a bright light ahead of us to return profitability in the second-half of the year.

While the current component shortage may still create fluctuations in our quarterly revenues and have an impact on the timelines of our deliveries, we remain confident in our mid and long-term business opportunities and deliveries. With that I now open the call for your questions.

Operator?.

Thank you. [Operator Instructions] Our first question today comes from the line of Alex Henderson Needham and Company. Alex, you can go ahead..

Can you hear me?.

Yes..

Can you hear me?.

Hi, Alex. We hear you loud and clear..

Perfect. Thank you very much. So first off, congratulations, great orders..

Thank you..

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..

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 [indiscernible]..

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?.

[Indiscernible]. 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 [technical difficulty] 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 [technical difficulty] which I talked at good length in my prepared remarks. And this is something that is still putting [technical difficulty]. 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 [technical difficulty], 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..

[Technical difficulty] Yes..

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..

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..

Yes, sure. [Technical difficulty] 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 [push, on an attack] [Ph], 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 [technical difficulty]. And it will take us a little bit more time..

Thank you..

Thank you, Alex. Our next question today is coming from the line of George Iwanyc. George, please go ahead and unmute yourself..

Hi, can you hear me?.

Hi, George..

Hi, George..

Hi. Thank you for taking my questions. And, Doron, congratulations on the new role..

Thank you, George..

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?.

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, [indiscernible] 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 [matching] [Ph] 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 [indiscernible] 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 [indiscernible].

Just for the sake of example, this particular customer, after three months, has decided to explore opportunity of upgrade [technical difficulty] 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 [technical difficulty] revenue in our business. I think it creates [authorization] [Ph]. 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..

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?.

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..

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 [technical difficulty] on the marketing side?.

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 [indiscernible] issue.

As to the OpEx, I don't expect anything dramatic, yes, there is may be some update in [indiscernible], 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..

And just a last question, on the gross margin, [technical difficulty] 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..

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, [indiscernible] 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..

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?.

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..

All right, thank you very much..

Thank you, George. Doron, you have no further questions..

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..

Ladies and gentlemen, that concludes our call for today. Thank you very much for joining..

Goodbye..