Ceragon Networks Ltd.

Good day, everyone. Welcome to the Saragon Network's limited first quarter 2020 results conference call. Today's call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Saragon Networks. Today's call will include statements concerning Saragon's future prospects that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current beliefs, expectations, and assumptions of Sargon's management. For examples of forward-looking statements, please refer to the forward-looking statements paragraph in our press release that was published earlier today. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including the risk of disruption and our and our customers' business related to the outbreak of the novel coronavirus COVID-19 pandemic, coronavirus. The risk of macroeconomic downturn and slowdown of development and significant decline of business that can harm our and our customers' ability to conduct or further develop our, their business, including cancellation, suspension, or reduction in the investment in new equipment purchase, postponement or cancellation of rollout of wireless networks, postponement in the transition to 5G technologies, and the introduction of new products and capabilities, inability to deliver and perform under our contracts, disruption to our supply chain and production capacity, adverse effects on our and our customers' finance performance, cash flow, revenue and financial results, available cash and financing, and our ability to bill and collect amounts due from our customers. The risks relating to the concentration of a significant portion of Paragon's expected business in certain countries, and particularly in India, where a small number of customers are expected to represent a significant portion of our revenue, including the risks of deviations from our expectations of timing and size of orders from these customers. The risks of delay in converting design wins into revenue as well as expected revenue growth. Risks associated with any failure to meet our product development timetable and specifications to maintain our technological stance over the competitor. Risks associated with any failure to effectively compete with our wireless equipment provider. The risk that our rollout of 5G services could take longer or differently than expected. Other risks and uncertainties detailed from time to time in Saragon's annual report on Form 20F and Saragon's other filings in the Securities and Exchange Commission that represent our views only as the date they are made and should not be relied upon as representing our views as any other subsequent date. Such forward-looking statements do not propose to be predictions of future events or results and there can be no assurance that it will prove to be accurate. We do not assume any obligation to update any forward-looking statements. Sargon's public filings are available from the Securities and Exchange Commission's website at www.sec.gov or may be obtained from Sargon's website at www.sargon.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 would now like to turn the call over to Mr. Ira Palti, President and CEO of Ceregon. Please go ahead, sir.

Thank you. Good morning and good afternoon to everyone joining us on the call today. With me on the call today are Ron Vered, our Chief Financial Officer, and Ossie Sessler, Head of Investor Relations. I hope you and your family are staying healthy during these unprecedented times. During this period, our top priority is ensuring the health and safety of all our employees around the globe as we continue to serve our customers. As you are well aware, COVID-19 has turned the world upside down since our last conference call. It has changed the way we walk, shop, learn, and stay entertained literally overnight. For telecom, the impact has been dramatic. Operators are experiencing unprecedented demand for bandwidth. According to the New York Times, operators like Comcast, Vodafone, and Telefonica, and many ISPs, have never seen such a steep and sudden surge in demand. T-Mobile's US President of Technology, Neville Ray, says its mobile hotspot usage is up 60%, meaning that people frustrated by poor home broadband are moving to the cell phone as a hotspot device. Use of collaboration tools like Zoom, Teams, and WebEx is up 87%, and use of online educational tools is up 135%. The change in telecom usage that we expected to see over the period of a few years has accelerated into just weeks. Although no one knows what the long-term outcome will be, one thing is clear. Broadband connectivity with high capacity has become widely recognized as an essential utility, like electricity or water. Consumers and businesses both expect a new level of speed to support the connectivity needed for HD quality streaming, better online gaming, remote office, and virtual meeting experiences. As a result, operators throughout the world now understand the need to ramp up their capabilities, and we believe that they will compete to address the demand. This brings urgency to the need to increase the capacity of the existing network and to extend coverage into areas where it is unavailable. Wireless hauling is an important enabler of the process since it is the fastest and most flexible way for achieving these goals. In fact, many places in the world, mobile wireless is the only broadband connectivity that exists. All this urges for the acceleration of 5G which supports 10 times higher connectivity speeds, more reliable services, and greatly increased capacity as compared with 4G. We therefore believe that the current situation will serve as a catalyst for long-term 5G investment, resulting in increased demand for expanding and densifying wireless networks, as well as for building greenfield networks. are obviously trends that will walk to Seregon's advantage in the mid and long term. For the short term, however, the outlook is more complex. In support of the optimistic scenario, some service providers are accelerating their investment in both 4G and 5G. For example, AT&T announced that it has canceled a $4 billion stock buyback to keep cash available for major network investments. including nationwide 5G rollouts. T-Mobile, having completed its merger with Sprint, announced that they are moving quickly to fill the nationwide 5G, and there are many other examples. At the same time, there are significant challenges. All aspects of supply chain are walking slower, and our industry has been affected on the operational level along with the rest of the world economy as it faces the risk of a global recession. And no one knows how to predict the timing of the recovery. While operators want to accelerate their investment, the cash they have available may be less than planned due to two major factors. The fact that they have had to consume a higher portion of the budgets early in the year to cope with capacity shortages in networks in rush mode, reducing the resources available for spending during the rest of the year on 5G network deployments, and the reduction of revenues from enterprise accounts whose employees are on leave or are closed, and the change in local currency versus US dollars, which makes investments more expensive in some regions. This could clearly have a negative impact on Ceregon for the short to mid-term. For the long term, however, we believe the market is headed for accelerated 5G development, and we expect to emerge as leaders in the growing market. For now, I would like to make the following points. We are currently experiencing high demand for our products from certain operators, including both existing customers and new customers. demand was especially strong toward the end of the first quarter. This demand has so far translated into very strong bookings. During the first quarter, our book-to-bill ratio was well above one, reflecting significant new orders from Tier 1 operators in India, Asia Pacific, the US, and Latin America. Just last week, we announced a new order from Airtel, one of our large customers in India, indicating and end of last year's slowdown in this important region. We are seeing an acceleration of projects within our customer base, including North America, Europe, and India, and we are reaching out to existing customers offering to help them increase capacity to resolve capacity bottlenecks. This is giving them an increased appreciation for the flexibility that our technology provides. Nonetheless, the situation has brought us up against significant challenges in the short term. The pandemic may delay the placing of orders by our customers, in addition to impacting our ability to translate booking into revenues. Many of our suppliers are working at reduced capacity and sourcing substitution is often slow and expensive. Shipments are taking longer to complete and installations are taking longer to perform. We have been walking around the clock to resolve the challenges, to ensure that our employees and customers are safe, and to keep the company resilient and agile. We have remained fully operational, transitioning into a new mode of operation, and supporting our customers, our business continuity program. Even though most of our employees have been walking partially or fully from home, it has been business as usual. We recently completed on time a significant R&D release on full remote, and we maintained a continuous PR and market presence, and we are proud to have been able to have achieved such strong quarter from a booking perspective despite having no face-to-face meetings. But revenues can't be recognized until the equipment is delivered, and when we sell with installation services, we can't bill and recognize until the equipment is installed and operational. This was the main reason for our low revenues and gross margin for the first quarter. As Ron will explain in more detail, as it looks now, we expect the impact to continue in Q2, but to a lesser extent. For the longer term, however, while still early to make detailed predictions, we currently believe that markets will return to a new normal in the third and fourth quarter. We expect to take our fair share and hopefully more of accelerated long-term network investments. Turning to our recent business and financial performance, I'll just note that our first quarter results were in line with the update we provided on April 6th. We are pleased we have progressed in almost all regions. demonstrating our continued progress in winning new 5G design wins and substantial projects for expanding and densifying 4G networks. This is another demonstration of our technology leadership and our global capabilities. India. India has returned to activity after last year's slowdown. We just announced a major new contract with Airtel India, a customer for more than a decade. and India's largest telecommunication company for a project to increase its 4G network capacity in urban areas to expand its coverage in rural regions and to prepare for its future evolution to 5G. As the country's telecom market wakes up, we are taking market share, a testament to our strong network rollout capabilities, which allow us to deploy hundreds of sites every month. North America. In the US, we have begun benefiting from the merger of T-Mobile and Sprint, both long-term customers, which was completed on April 1st. As you recall last year, they both cut back on the orders during the merger process. But right before the close of the merger, they expedited an order with us, and we expect to continue supplying them with 4G and 5G wireless backhaul equipment for the network rollouts. In addition, Following a new 5G design win, we have been working intensively with the lab of another T1 US service provider to integrate our products into the network blueprint. Once completed, we expect the step to lead to IP20 and IP50 orders during the second half of the year. Europe. In Europe, while we had a weak revenue, we had our highest Q1 booking in six years. This reflects the fact the service providers, operators, and ISPs in a number of countries, including Italy and Spain, are turning to us to help provide bandwidth to the lockdown populations and to enable emergency projects. Africa. Africa was weak, both from revenue and booking perspective. LATAM. In Latin America, we continued executing on 4G expansion projects for Tier 1 Pan-Latam operator across several countries, including Argentina, Brazil, Colombia, and more. Unfortunately, we've experienced delay with a large project in Peru and Colombia due to the region's very strict lockdown measures. Asia Pacific. In Australia, we received a follow-under from Tier 1 service provider against the 5G design win that we secured last year. Other 4G-related projects with operators in the region have progressed during the quarter, and we expect Asia to continue to expand its 4G during 2020. And in Japan, we are working with a 5G mobile operator with a goal of securing the future business. So, as you can see, despite the uncertainty, the crisis has brought us many new opportunities while supporting our long-term strategy. This gives us room for optimism. I'd like to end with a discussion of our readiness as a company to take advantage of the opportunities. From a product and technology point of view, we are ideally positioned to address the 5G opportunity. Our existing platforms continue to stand out in the market for the technology leadership, flexibility, and speed. In parallel, we are on track with our development of our next-generation wireless hauling chipset for the more advanced stages of the 5G network transformation. It will allow us to provide even higher 5G network capacity, driving to 100 gigabit speeds, with a focus on smart, efficient spectrum asset management with far more flexibility for deployment of 5G networks. From a financial point of view, as Ron will explain, we believe we're in an excellent shape to ride out the current crisis and to take advantage of the opportunities that come with a recovery. Even though this was an extremely challenging quarter, we remain strong and cash positive. Our customers are primarily large, where the top tier operators with broadband services are increasingly recognized as essential utilities. or large companies like utilities and public service organization with significant basis of customers and subscribers. All are likely to continue investing in their infrastructure. So, although no one knows what the next few months will look like, we believe that momentum will continue to build for Ceregon. Now, I'd like to turn the call over to Ran to discuss our finances in more detail. Ran?

Thank you, Ira. Since we've all seen the press release, I'll focus on the highlights. As we indicated in the update we provided in April 6, our revenues for the quarter were lower than originally expected, approximately $56 million, in line with what we shared. This reflects the normal seasonality of the first quarter, compounded by delays in the pace of network rollouts and shipments, as lockdowns and other COVID-19-related measures caused a slowdown in the ability of our customers to execute on their network expansion plans. Originally, India was our strongest market, accounting for about 25% of our revenues. This, together with strong bookings, demonstrates that India has returned as an important focus market, despite the fact that hundreds of installations become impossible to carry out due to the lockdown. India was followed by APAC, which continued with a normal level of revenues despite COVID-19. The US, Europe, Latin America and Africa all had weak revenues compared with previous quarters due to delays in our ongoing projects compounded by normal Q1 seasonality. we had three above 10% customers in the first quarter. Our bookings for the quarter were very strong, with the book-to-bill ratio well above one. This demonstrates the strong positive momentum that has been developing since the beginning of the year, including the return of India as a major source of business, continued strong activities in Latin America Europe, and Asia-Pacific, and the steady quarter that we had in the U.S. countered somewhat by weak water in Africa. In general, many of our customers have accelerated the pace of existing projects to address the sudden increase in demand of capacity. Our non-cap gross profit for the quarter was $14 million, giving us a gross margin of 25.1%. This is the lowest it has been in many years, reflecting the low revenues as compared to our fixed costs, compounded by a less favorable geographical and customer mix and increased sorting and supply chain costs. Our expectation is that once the volume of our revenues picks up, our gross margin will return to a normal range. Our non-GAAP operating expenses for the first quarter were $19.6 million, which is below our plan. R&D continued at its normal level as we continued to move forward with the development of our new chipset and IP15 platform. Sales and marketing were lower than their normal run rate, reflecting lower variable compensation and lower travel expenses, due to travel limitations of the corona environment. G&A expenses remained at their normal level. Financial expenses and other expenses were lower than their normal expected level. We do expect them to return to the regular level in Q2. Given the current environment, we expect OPEX to continue around this level for the second quarter. and then probably to rise gradually back to the normal rate of $21 to $22 million per quarter. Tax expenses for the quarter were low at a bit less than $400K. On a long-term basis, net loss was $6.7 million, or $0.08 per diluted share. Our gap net loss was $6.9 million, or $0.09 per diluted share. Turning to the balance sheet, we are pleased to remain cash flow positive despite the low revenues. Our cash balance is up by $20 million, reflecting the combination of $1.9 million of free cash generated from our operating and investing activities, together with the $18 million draw from our revolving credit facility that we carry out as a precautionary measure. we aim to reduce our short-term loans in Q2. Our receivables decreased to $104.2 million, giving us the so of 140 days. This reflects our successful ongoing collection effort, and we will continue to put a major focus on it. Similarly, our inventories decreased by another $2.5 million, reflecting our continuous effort to reduce them to the levels we had in 2018. We are continuing with this effort to optimize our inventories in this challenging period. Turning to the near-term outlook, our current view is that our expected Q2 revenues will be lower than the $70 to $75 million average quarterly run rate that we previously projected. due to ongoing COVID-19 related difficulties in supply chain installations, etc. With the situation far from resolved, it is too early to make predictions about the rest of the year. As Ira said, while we believe that long-term trends are working in our favor, there is a lot of uncertainty in the short to mid-term. We continue to invest in our major development programs to ensure that our future roadmap supports our design wins effort, sustaining our positioning as the strongest company in wireless hauling, and the key to generating future revenues. Now, I would like to open the call for questions. Operator?