Ladies and gentlemen, thank you for standing by and welcome to the Ceragon Networks' Q2 2022 Earnings Call. Our presentation today will be followed a question-and-answer session. [Operator Instructions]. I would like to hand over the call now to our first speaker today, Ms. Maya Lustig, Investor Relations. Please go ahead..

Thank you, operator and good morning, everyone. I am joined by Doron Arazi, Ceragon's Chief Executive 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 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, anticipate, plans, or similar expression to identify as forward-looking statements. Such statements are subject to 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 maybe supplemented from time to time in Ceragon’s other filings with the SEC all of which are expressly incorporated herein by reference.

Forward-looking statements relate to the date initially made, do not purport to be predications of future events or results and there can be no assurance that they would 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 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. .

adding surcharges, improving contractual terms with our partners, redesigning our products and subsystems to improve the pace of backlog conversion and reduce production costs, replacing one of our contract manufacturers, and streamlining the shipment process with the addition of new vendors.

We are also increasing our focus on software and software upgrades as well as maintenance contract sales. It will, of course, take time until we start seeing more significant results, but I am confident that all these actions will contribute to more robust financial performance.

Lastly, I’d also like to share that we are close to hiring a strong candidate for our CFO role with recent experience in our industry. We hope to be in a position to announce our new CFO in the next few weeks. Now the financials. 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. Let me now review the actual numbers with you. Revenues for the second quarter were $70.7 million, up by 3.1% compared to $68.6 million in Q2 last year.

As I mentioned earlier, even though demand continues to be high, we are still experiencing component shortages and supply chain disruptions which impact our ability to convert our backlog to revenue.

Our strongest region in terms of revenues for the quarter was India with $21.7 million, reflecting ongoing deliveries for our main customers and in line with the strong demand we see in this region. Our second strongest region in terms of revenues was North America with revenues of $15 million, followed by Latin America with $11.4 million.

Europe was fourth with $10.9 million. We had two above 10% customers in the second quarter. Gross profit for the second quarter on a non-GAAP basis was $21.5 million, giving us a non-GAAP gross margin of 30.5% compared to 31.5% in Q2 2021, and 27.7% in Q1 2022.

Our improved gross margin in Q2 as compared to Q1 for this year was primarily due to the increased software portion, and certain reduction in our shipment costs as well as other measures taken to reduce our BOM costs. Operating expenses on a non-GAAP basis for the second quarter were $21.2 million, in line with our expectations.

Research & Development expenses for the second quarter on a non-GAAP basis were $7.5million, the same as in Q2 2021, and up from $6.8 million Q1 2022, as we projected. We expect our R&D expenses to remain relatively consistent for the remainder of the year.

Sales & Marketing expenses for the second quarter on a non-GAAP basis were $9.1 million, compared to $8.3 million in Q2 2021 and $8.5 million Q1 2022. The year-over-year increase is primarily due to a boost in sales commissions, intensified face-to-face travel expenses, as well as investments in our salespeople in North America and Latin America.

General and Administrative expenses for the second quarter on a non-GAAP basis were $4.6 million as compared to $5.2 million in Q2 2021, and $4.8 million in Q1 2022. Financial and other expenses for the second quarter on a non-GAAP basis were $2.5 million, significantly higher than our expectations.

The FOREX expenses came approximately $1 million higher than our expectations. This is primarily due to our cash balances and accounts receivable in local currencies related to services and sales of local equipment, primarily in India, APAC, and Latin America that have eroded due to the strengthening trend of the U.S. dollar during this quarter.

Going forward, subject to a stabilized FOREX environment, we expect our finance expenses to be in the range of $1.5 million to $2 million. Our tax expenses for the second quarter on a non-GAAP basis were $0.3 million. Net loss on a non-GAAP basis for the quarter was $2.5 million, or $0.03 loss per diluted share.

As for our balance sheet, our inventory at the end of Q2 2022 was $60.7 million, up from $58.1 million at the end of Q1 2022. The level of inventory still reflects our need to stock long lead-time and strategic items as a combined result of increased customer orders and the ongoing component shortages.

In addition, our decision to replace one of our contract manufacturers with minimum disruption to deliveries, also resulted in temporary inventory increase and impacted our cash flow and working capital.

We expect this impact to gradually decline in the coming quarters as we finish the transition period, and the new contract manufacturer is fully up to speed. We strive to keep our inventory levels lower and expect an inventory reduction as the components industry improves.

Our trade receivables are at $122.7 million, up from $120.7 million at the end of Q1 2022. Our DSOs now stand at 152 days. Our cash flow from operations and investing activities was higher than Q1 2022, and it was primarily driven by the changes we have been making to the composition of our contract manufacturers.

We have $23.6 million of cash, and we have available unused credit facility of $18.1 million. Net cash used in operating and investing activities for the second quarter was $6.3 million. Net cash provided by financing activities for the second quarter was $5.0 million.

Looking forward, we are reaffirming our 2022 revenue guidance of $300 million to $315 million, and our 2023 revenue guidance of $325 million to $345 million. Our guidance is of course subject to potential downsides and upsides as we continue to address supply chain challenges facing the industry.

Our five-year revenue target is approximately $500 million, and we also target increasing our gross margins to at least 34% to 36% over the same period. Finally, before turning to Q&A, I want to take a moment regarding Aviat’s purported offer.

As you have seen, we have issued several communications reviewing our record of engagement with them, and our commitment to serving the best interest of all Ceragon shareholders. Our position remains the same, and we do not have more to share on Aviat today. With that, I now open the call for your questions.

Operator?.

[Operator Instructions]. Our first question today comes from the line of Alex Henderson from Needham. Please go ahead. .

Great.

Can you hear me?.

Hey Alex, I can hear you very clearly..

Right. I got a couple of questions. I just wanted to get some general gauge of -- on the first is, the book-to-bill in the quarter and really I'm more interested in the half as opposed to the quarter, because it's a better gauge if you could.

How much were the orders up year-over-year and what was the book-to-bill relative to sales in the quarter, can you give us some sense of what -- where your backlog on product stands?.

Yeah, so first of all on the first half, our booking were up approximately 15% higher than the second -- the first half of 2021. In terms of backlog, we have a very strong backlog. I will give you an approximate number. We are talking about over 170 million of a backlog.

And the more important piece is that we analyze the gross margin of this backlog and it is higher than the current gross margins of 30.5%, which is obviously very important. And that's even before some of the initiatives and actions we are taking to improve our gross margin further..

Well, going back to that… Go ahead..

Just in terms of book-to-bill build ratio it's significantly above one..

Just going back to that question on the margin. Obviously you're absorbing cost components and logistics components that are abnormal.

Can you quantify, give us some gauge of the drag on revenues and OPEX associated with the supply chain challenge?.

I can give you some sort of high level magnitude. I think that we are more or less I think that we are more or less 10% lower in terms of revenue achievement versus more normal condition, even a bit higher than that. I think we could be at the range of $80 million per quarter, if not having all these challenges of the supply chain.

In terms of gross margin, as I said more than once we're talking about 3% to 4%, sometimes even 5% GAAP depends on the mix of the revenue by region and also the software element that is always added to our product revenue..

So, if you're talking about the margin on the backlog being higher than the current margin, would it be reasonable to think that as the component costs come back in that it's actually equivalent to somewhere in the 33 to 35 range, given that…?.

Yeah, I think it's a reasonable assumption subject to the success of all of our initiatives..

Okay. Going back to the shekel for a second, you guys hedged the shekel, I believe coming into the New Year around the January timeframe, you're fully protected against the shekel through the calendar year.

If you were to look at the shekel where it is today, which is where you will reset on December 31st looking out into 2023, what would be the impact of the shekel relative to your cost structure?.

I think it would easily hedge between $0.01 to $0.02 to our EPS..

It seems like a small number given the 15% to 20% swing in the exchange rate, can you explain why that wouldn't be larger impact on your OPEX?.

First of all let's not forget I was talking about EPS and obviously you have also the impact of the financial expenses that are actually also being hedged in our balance sheet. So all in all, I think $0.01 to $0.02 on our EPS is reasonable. Yes, it could be higher..

Just going back to the point though, aren't your financial balance sheet exposure constructed in a period that would be paid out before year end given the DSO timeline, I would think that you would be paid out by year end, therefore that shouldn't impact 2023, right?.

Yes, that's correct. But, I'm looking at Q3 sorry, Q2 numbers and we actually had an opportunity to enjoy the weakening shekel against the U.S. dollar. But the fact that we are also hedging our balance sheet has actually negatively impacted our numbers.

All in all the hedge on our expenses, primarily salary and other fixed expenses in shekel is indeed hedged for a full year. And the balance sheet is basically hedged on between monthly to quarterly basis..

But, but again, that's a headwind to 2022. It falls out in 2023 because you pay out all of those, you get paid that stuff before year end. Therefore, assuming your future at the current level, that shouldn't be a factor, right, I mean, it sounds like that should be a positive dear EPS in 2023, not a negative, can you -- [Multiple Speakers].

Hold on, hold on. Just ignore the financial services side of it, ignore the balance sheet.

What is the impact on just the OPEX, if we use this exchange rate versus what you’re experiencing in 2022, in 2023, how big a positive is it because it's a -- should be a pretty material positive to your expenses, right?.

Yes. If you're talking only on the operating numbers, indeed, it's going to be a couple of millions for the whole year. .

Great. That's what I was looking for. Thank you very much. Yeah, I'll see the floor..

Thank you, Alex..

Thank you. Our next question comes from the line of George Iwanyc from Oppenheimer. Please go ahead..

Hi, George..

Thank you for taking my questions Doron.

When you look at your 2023 and your five-year targets, can you give us a sense of how that's made up, like how much of that is coming from existing business, how much is coming from market share gains, and how much is coming from your new initiatives?.

So in terms of five-year horizon, in terms of our core business, we expect a growth of a mid-single-digit percentage, which is slightly above the expectations of the industry growth.

And on top of that, we expect a very significant growth in managed services and in the cell site router domain that will bring us to a CAGR of approximately 10% or a little shy of 10%..

Okay.

When you look at the competitive environment, can you give us a sense of like the momentum you're seeing in North America, what's driving that, how do you feel about competition on a global basis?.

So let's start with North America. We are very, very satisfied with our performance in North America and not only by the recent orders we've been receiving from one of the three tier one operators in this region.

We are actually making additional steps in gaining more business from other operators with our unique solutions that can also fit into the concept of open run. And therefore we believe that this trajectory of taking very nice business in the tier one operators in North America will continue. We are also taking market share in tier two and tier three.

Part of it is on account of existing competitors and actually beyond the growth that is reflected in this market due to the 5G rollout. When looking at the worldwide, I think that we see a very similar trajectory, but I would say that it is a bit still behind in terms of turning into orders.

Just to give you an example with our IP-50FX, this virtual indoor unit, we're getting a lot of traction in Europe, but also in other regions such as APAC.

It doesn't turn into solid orders yet, but we are in a very advanced phases where we are showing different architectures and concepts of deployment that can save for the big operators a lot of money and improve their TCO dramatically. Obviously in India, the spectrum bid was just finished.

And we are in multiple discussions with all of our existing customers of starting to provide with E-band solutions in accordance with their need. So all in all, we see a very strong traction to our products.

Obviously the competition is there, it's not that it is evaporated, but I think once again, our superior technology and the mindset of serving the customer's needs is giving us many opportunities sometimes ahead of the competition..

Right.

And Doron, how do you feel about pricing, are you able to pass through any of the costs from either a one-time basis on the shipping side or having constructive discussions on the overall supply chain challenges you're having with your customers?.

So, so it eventually, it's a combination. First of all, we issued a letter of surcharge towards the end of Q2 to all of our customers. And obviously as good partners we are in dialogue with them. So far, the initial signs are very positive.

Customers are receptive to the situation, understand that this is a strategic partnership that should last long, and the fact that they are very satisfied with our products and with our innovation gives us some sort of a benefit to discuss this situation calmly.

In addition, obviously in new RFPs, as well as in specific deals we are discussing higher prices based on the current macro environment, especially looking into the increase in the shipping costs and obviously the component price increase that increased our bond [ph]. So all in all, it's not an easy process.

Our customers are usually very, very big and their buying power is by far stronger than our selling power.

But I think that due to our success in demonstrating time and again that our products are in most cases better with higher technology and higher capabilities is giving us some sort of a tailwind to discuss this situation calmly with the customers that tend to understand and to accommodate at least part of our requests..

Okay.

And my last question, just on the OPEX side, do you feel you've made all the hiring that you have to on the sales side and you're at a headcount level that you're comfortable with right now or do you need to add any more people in any areas?.

At this point based on our plans for 2022 I think we're in good shape.

I would just mention in North America, once again, seeing the huge demand and trying to basically capitalize on it, we have even slightly increased our salesforce there beyond our budget plan, because we see the very strong demand and a very positive trend in this North America region..

Thank you..

Thank you. Our next question comes from the line of Alex Henderson from Needham. Please go ahead..

Great, thanks.

I actually have two different tangents of questions I wanted to ask about the -- first one is, as you've been talking to your customers given the macro conditions, have you seen any hesitancy, have you seen any pullback, have you seen any change in the number of signatures needed for closing deals, have you seen any stretching of duration, any impact on the macro front that's showing up in your pipeline?.

The short answer is no, not at this time. Obviously we are watching this thing very carefully because obviously things might change. It looks to me that the digitization and the 5G rollout, especially in those places and customers that decided to start moving forward is continuing.

And at this point it's even beyond, so to speak initial recession signals we have seen in many parts of the world. But we are very cautious and watching that carefully..

The second one is really on the Aviat situation. Obviously it's fluid, obviously there's been a lot of tit to tat on the PR side of the equation.

How should we characterize the ongoing negotiations and discussions with them, is it just in the public press or are you actually still having a back channel conversation with them, is it something that is predicated only on getting the sale -- the shareholder vote done on the Board seats at this point, or is there more ongoing conversation that we should be anticipating that is showing some progress? And how would you describe their willingness to contemplate that three and a quarter plus kind of a category on price that they had put out earlier, obviously, if they were comfortable with three and a quarter in November, one would think they would be even more so given how strong your backlog is built?.

Alex, first of all that was a very long question and I'm trying to adopt the very good culture and DNA of the Americans to not interrupt it. But I do need to apologize. As I mentioned in my prepared remarks, we are here to discuss our business and earning results. And we ask that you keep your questions focused on these topics.

We will not be commenting further on Aviat at this time. I apologize, Alex..

That's fine. Thanks for listening. Thanks..

You have no further questions, please proceed..

Thank you. In closing, I’d like to reiterate that we are effectively executing our growth strategy. The initiatives we have taken and the tough decisions we have been making to improve our financial performance have begun to bear positive signs.

We will continue to implement measures aiming to mitigate the impact of the ongoing supply chain disruptions and component shortages. Like with any large well-established company, this was not the first storm we have faced, and I doubt that it will be the last.

With strong market and technology drivers, skillful people, and a robust growth strategy, we remain confident about our short and long-term business potential. I look forward to updating you further on our next call. Have a good day everyone..