Ceragon Networks Ltd.

Good day, everyone. Welcome to the Saragon Network's Limited Third Quarter 2020 Results Conference Call. Today's call is being recorded and will be hosted by Mr. Ira Palta, President and CEO of Saragon 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, therefore, will not be material. Such statements involve risk and uncertainty that may cause future 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 COVID-19 crisis on the global markets, and on the markets in which we operate, including the risk of continued disruption to our and our customers' providers, business partners and contractors, business and operations as a result of a COVID-19 pandemic, and such other risks and other factors that could affect our results as detailed in our press release that was published earlier today and as further detailed in Saragon's most recent annual report on Form 20F and in Saragon's other filings with the Securities and Exchange Commission. Such forward-looking statements include as to the risk, uncertainties, and other factors that could affect our results represent our views only as of the date that 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 it will prove to be accurate. Saragon may elect to update these forward-looking statements at some point in the future, but the company specifically disclaims any obligation to do so, except as may be required by law. Saragon's public filings are available from the Securities and Exchange Commission website at www.sec.gov and may also be obtained from Saragon's website at www.saragon.com. Also, today's call will include certain non-GAAP numbers for 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 Mr. Ira Palta, President and CEO of Saragon. 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. Before getting into the quarter, I hope that you, your loved ones, your coworkers are healthy and well. Here at Saragon, the health and safety of our employees continues to be our top priority. We are managing well in the new normal with all departments continuing at full speed. As you can see from the results, Q3 was a stronger period for Ceregon. Our revenues were 70.6 million, nearly back to pre-COVID levels, and our gross margin was above 33%, the highest it has been in more than a year. This combined with lower operating expenses gave us a profitable quarter in line with our forecast. Our performance reflects a market with a stronger than ever need to increase network capacity as the world goes increasingly online to shop, walk, and socialize. It also reflects the complexity and operating difficulty of COVID, which is still strongly with us. The need for broadband is driving urgency for building new 5G networks, expanding 4G networks, and extending ISP service into additional areas. As operators execute on 5G plans, a key consideration is being able to deploy the networks faster while controlling overall cost, and this has led to a complete change in the way networks are built. Many operators are now embracing an open network architecture in which both run and core network domains shift towards a cloud-native, software-centric paradigm, open run and open core. With this approach, networks shift from tightly integrated hardware and software to a disaggregated model that enables operators to create virtual software-based network functions. This makes it much easier to adapt to constantly changing requirements. We at Ceregon play a key enabling role in this process with a new class of equipment designed specifically for the open-run environment. We have recently released our new IP50 platform and open solution architecture for wireless backhaul, mid-haul, and front-haul. As part of the development process, we achieved several exciting technological breakthroughs that led to its recognition last week by the Telecom Infra project TIP community as one of the leading platforms for open wireless hauling. They also recognize Ergon as the only solution provider that offered both technology and products for all components of the open wireless holding architecture. Although this industry shift has been coming for several years, it is intensifying now. Operators making the shift are looking for best-in-class offerings for each network domain, and this is leading them to Ceregon. This is a testament to our strategy of providing best-in-class technology solutions which drive higher customer value for winning market share. This market dynamics are creating strong tailwinds for our 5G efforts around the globe. We are very busy with 5G network design wins and POCs processes, as well as with activities around the release of our new 5G products. We are participating in various stages of the 5G selection process for operators throughout the world, each with the potential to lead to very large multi-year sales. These are long-term efforts that began with design wins, progressed towards POCs or proof of concepts, with small initial shipments, and finally, as we believe we'll see, volume shipments and deployment. On the POC front, we are preparing for a POC with an emerging greenfield service provider in North America. It will test a wide coverage 5G solution with gigabit backhaul to support its upcoming 5G rollout. We are also preparing for a field trial with one of the Pacific Rim leading open network operators, following a very successful lab trial. Our solution will provide them with 20 gigabits 5G mid-hole capacity in millimeter wave spectrum. We have also seen an increased number of design wins, including multiple recent awards from service providers in Europe and North America preparing to transition to 5G. They are looking to upgrade the back-hole installed base with minimal hardware changes, and our solution takes care of it with simple swap of a module as well as by providing a set of new radios in microwave and millimeter wave bands, which seamlessly integrates with our installed base. We have begun shipping our newly released IP50C in Europe to support a number of ongoing 5G network rollouts. The IP50C is an innovative all outdoor quad carrier solution for bringing 5G onto macro cells. It provides extreme 5G backhaul network capacities in microwave spectrum while ensuring network reliability and availability. It is unique in its support of operations in channels that are two to four times wider than our competitors can provide, eight gigabits in the air with the smallest footprint. This is the requirement for 5G macro cells achieving double to quadruple increase in capacity. Operators understand the immense benefits and are already acting in a number of countries to realize this fantastic network development approach to 5G. And we are proceeding with regulatory lobbying with regulators worldwide to open up 224 megahertz channels uniquely supported by our technology which allow the extreme 5G backhaul capacities that are required for this market. By the way, the operators that are preparing for 5G are taking a variety of routes to get there. Some are opting for fiber-first deployments in densely populated area, following later as a second stage with microwave deployments in less dense and rural areas, with front-hauling radio units in the dense urban areas. Other are going ahead first with upgrades to be ready for 5G quickly when the time comes. Therefore, our development activities are designed to make us the go-to supplier for every variation of the 5G opportunity, allowing customers to transform the network at their pace and in their own fashion. This is positioning us ideally and uniquely as a leader of holding 5G technology. As to 4G, we continue to benefit from large expedited operator projects to increase network reach in markets where 4G is currently lacking, whether because of increased demand or inadequate coverage. In some of these projects, the operators are already seeding in the backhaul infrastructure that is required for 5G. In Africa, we were rewarded a big 4G order from Orange Niger and continued shipments to other operators for ongoing 4G upgrade and expansion projects. In India, we continued achieving a good delivery and installation run rate for our Bharti projects despite COVID constraints, giving us strong revenues from both products and services. And in APAC, we delivered very strongly in Southeast Asia where multiple operators are ramping up the 4G networks. In contrast, our business in LATAM was very weak during the quarter due to COVID. One of our largest customers across the region remains in a capex freeze and other clients are coping with supply chain delays. We believe the situation is improving somewhat in LATAM and that budgets for 2021 will begin opening up already by the end of this year. The last market I'd like to discuss is the ISP market, which is benefiting strongly from the long timelines of 4G and 5G rollouts. Given the massive new demand for bandwidth stemming from COVID stay-at-home directives, large population areas have been left with insufficient broadband. ISPs, both national and regional, and been rushing in to fill the demand, especially in North America and to some extent in Europe, and we fulfill that demand both directly and via some of our channels. So to summarize, demand for network capacity has increased dramatically, leading to more 5G design wins, some of which have already translated into small orders. Continued large-scale 4G expansion projects and increased ISP demand. At the same time, significant variability and uncertainty remains regarding the timing of planning, purchasing, network rollout, supplying share factors, as COVID dynamics move according to their own rhythms across the world. We remain extremely focused on execution in this uncertain environment, progressing on track with the IP50 platform development and moving strongly ahead with new 5G design wins, POCs, and orders. I'll stop here and turn the call over to Ran to discuss our finances in more details. Ran? Thank you, Ira.

Since you've all seen the press release, I'll focus on the highlights. As you can see, Q3 was a good quarter from a financial point of view. Our revenues were $70.6 million, up 13% compared with the second quarter, and 26% compared with the first quarter of 2020. They were down just 2% compared with the third quarter of 2019. The revenues varied from region to region, in line with the effect that COVID has had on local business operations and network build-out plans. Our strongest revenues were from India, reflecting ongoing deliveries for BARTi projects and AIPAC. Revenues from North America and Europe were in line with expectations, reflecting continued progress with ongoing projects, primarily ISPs and small 5G projects in Europe. Africa had an exceptionally strong quarter, reflecting shipments for the Orange and Ger project we announced in August. And as Ira discussed, LATAM had a very weak quarter with budgets and projects frozen in the face of COVID-19. We had one above 10% customer in the third quarter. In contrast to revenues, our book-to-bill ratio for the quarter was below one. This resulted in from the fact that some of our customers booked their orders earlier in the year, together with very low bookings across Latin America. Bookings in APAC were actually strong, and bookings in North America, Europe, and India were stable. Overall, our accumulated book-to-bill ratio for the nine-month period is above one. Gross profit for the quarter on a non-GAAP basis was $23.6 million, giving us a gross margin of 33.5%. This is our highest gross margin in over a year, compared with 26.5% last quarter and 32.2% for the third quarter of 2019. It reflects the return of our revenues to the normal range, together with approximately $1 million in import tax relief that we recorded during the quarter. Excluding this relief, the gross margin would still have been about 32%, similar to Q3 last year, and stronger than it has been in the last three quarters. Our non-GAAP operating expenses for the third quarter were $19.9 million, approximately $300K higher than they were in Q2, but down compared with pre-COVID and our projections. R&D was $7.3 million, half a million higher than Q2. The increase due mainly to our progress into the final stages of our chief development as planned. In contrast, our sales and marketing expenses declined again during the quarter to $7.8 million. This is down about 18% from Q3 last year, reflecting the reduced travel and variable compensation that has come with COVID. G&A for the quarter was $4.8 million in line with our expectations. For Q4, the expectation is for OPEX to increase to a level of $20.5 million to $22 million, which is more in line with our normal pattern. In general, our operating expenses are higher for Q4 than for other quarters, reflecting higher variable compensation. In addition, we expect to continue accelerating our investment in cheap R&D during the fourth quarter, resulting in further increase of the R&D line. Financial expenses and other expenses were a bit lower than the normal expected level during the quarter, and tax expenses for the quarter were low, at $200,000. Our focused execution, which led to strong revenues, a high gross margin, and controlled OPEX, combined with lower taxes, gave us strong net income. On a non-GAAP basis, we posted a $2.3 million net profit, or $0.03 per diluted share. On a GAAP basis, we posted net profit of $1.6 million, or $0.02 per diluted share. Turning to balance sheet, we continued working to improve our stability and working capital, and you can see our success in many parameters. We reduced our inventory by another $2 million during the quarter, and are now at approximately $52 million, down $22 million from our peak five quarters ago. Our receivables are now at $108.4 million, down $10 million since the beginning of the year. Our DSO now stands at 152 days. For Q3, we had $4.5 million negative cash flow from operating and investing activities, while for the nine months period, we had $1.4 million in positive cash flow. In addition, we reduced our loans during the quarter, helping to strengthen our balance sheet. Despite the lockdowns and challenges, we continue on schedule with our operations. With focused execution, we have been able to convert a large portion of our backlog, a development which will benefit us going forward. And we continued on track with our major development programs to ensure that our future roadmap supports our design win efforts, supporting our target positioning as the strongest company in wireless hauling and the key to generating future revenues. Looking forward, we expect to see significant operator activities alongside continued uncertainty. If the world enters into a second or third wave with extensive lockdown, this would obviously impact our customers and us. For this reason, we are taking a cautious approach to our projections for Q4 with a bit wider range than usual, $62 to $75 million. $69 to $75 million. With that, I will now open the call for your questions. Operator?