Ceragon Networks Ltd.

Ladies and gentlemen, thank you for standing by and welcome to the Saragon Network second quarter earnings call. Our presentation today will be followed by a question and answer session, at which time, if you wish to ask a question, you'll need to raise your hand using the Zoom desktop or mobile application. I'd like to hand the call over to the first speaker today, Maya Lusi, Head of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. I am joined by Doron Arazi, Saragon's Chief Executive Officer, and Ron Vered, Saragon'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 deviation therefrom will not be material. Such statements involve 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 Saragon's most recent annual report on Form 20F and in Seregon'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. Saragon may elect to update his forward-looking statements at any point in the future, but it specifically declaims any obligation to do so. Saragon's public filings are available on the Securities and Exchange Commission's 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 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 Ceregon 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. Ceregal boasts repeated success in introducing disruptive technologies as the cusp 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 view to 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 so very strong bookings. Our Q2 bookings were the highest in three years, especially in North America, Europe, and India. Our book-to-bill ratio was way above one. In North America, we've 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'm thrilled by the progress we're making in this region. Additional two leading Q1 operators may become new customers for us. They are evaluating our most recent IP50 products for different network scenarios, including frontal. 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 IP50 series. IP50 provides a fiber-like alternative in terms of speed, reliability, and efficiency. We are participating in several trials and initial rollout. In fact, 52% of our year-to-date booking in North America are 5G related and we are encouraged by the significant opportunities in this region to grow and capture market share. In India, our strongest region in terms of bookings, multiple T1 operators placed follow-on orders through which we will support multiple network expansion projects to help providing nationwide coverage and prepare operator 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 number of users to 900 million by 2025. There's 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, Saragon 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 event 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 Korea and India, except for Argentina. We've been awarded several contracts by operators 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 that activity in these two regions will be slow for a while. To summarize, I'm very pleased 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 increased 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 have 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 both situations. In fact, one of our focus areas is to bring our gross margin back to 33% to 34% and even above. Ceregon is on an upward trajectory. For me, it proved to be a fantastic time to rejoin the company and witness many years of effort come into fruition. I am proud to say that we are 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 Ceregon to achieve these objectives for three key reasons. First, 5G is much more complex than previous generations. To grow traffic, we demand densification of the network. This will mean backhaul expansions and upgrades to support high capacity and lower latency. A full-scale 5G rollout is expected to be costly to operators, yet it's also inevitable. According to a 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 from February 2021, the wireless portion of the holding 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 open-run architecture is going global. In fact, according to GSMA, to date, 73 operators from 38 markets have either already deployed or committed to open-run deployment. Briefly, Open RAN 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 IP50E. This photo opportunity is not only supported by heavy reading survey from July 2020, but also reflected in the interest in our IP50E. Therefore, we believe Open RAN will boost opportunities for us as the market leading specialist. Third, I'm very excited about the strides we have made in closing new managed services deals. As announced at the beginning of July, we are awarded with multi-year managed services agreement by a leading network service provider in the US. This service provider is using our radio units as well as competitors. The fact that this provider is using Ceregon to manage and improve the performance of their entire wireless transport is 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 Saragon 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 a chip whose tape out is rescheduled towards later this year will be the next big breakthrough. This new chip is built 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 in our space and we take our time to ensure it will function flawlessly. It handles all microwave as well as millimeter wave bands, including the D-band. It will be the very first in the market to achieve this. It will have impressively high capacity, offering 5G octa-core with 16 times more capacity for quarter of spectrum and eighth 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 Ron to discuss our financials for the quarter. Ron? Thank you, Daron, 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, will 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 projections for the quarter. During the second quarter, we continue to make further progress towards normal operations, accelerating the positive trend that began at the end of 2020. Let me now review the actual Q2 numbers with you. Revenues for the second quarter were $68.6 million, up by 10% compared with Q2 last year. The increase is mainly attributed to stronger sales in North America and India. Our strongest region in terms of revenue 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 one customer, other leading ISPs, and smaller carriers. Europe has also had a strong quarter contributing, continuing its positive momentum and reflecting more initial revenue from 5G projects. Latin America had a slightly higher quarterly 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 had two 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 margin. As Doron mentioned, gross margin and gross profit are key metrics for us. We are looking closely on how to improve gross margin for the long term and bring it to the level of 33 to 34% and above. We see a few elements that contribute to that. Reduced level of component shortages, release bottlenecks in shipments via sea, 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 non-GAAP basis for the second quarter were $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 a continued effort with our chip development. These expenses will continue to stay high until we reach takeout towards the second half Sales and marketing 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 toward the end of the year as markets open post-pandemic. General and administrative expenses for the second quarter on a longer basis were $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 experiencing financial difficulties. Financial and other expenses for the second quarter on a longer basis were $1.4 million, in line with our expectations. Our tax expenses for the quarter on a non-GAAP basis were $0.3 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, we had several one-time events impacting the reconciliation between GAAP and non-GAAP. The major ones were the 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, 139 days. NETCash used in operating activities for the second quarter was $3 million. NETCash used this quarter for the second activity was $1.7 million. Looking ahead, our phone bookings in Q2 which was significantly better than expected, along with a very healthy background and three funnels, reflect increasing business activity, mainly in North America, India, and Europe. I'm happy to report today that we are more confident about our revenue growth in 2021 and expect it to be at the high end of our annual revenue guidance, which is between $275 and $295 million. More than that, we see a bright light ahead of us to return to profitability in the second half of the year. While the current component shortages may still create fluctuations in our quarterly revenues and have an impact on the times of our deliveries, we remain confident in our mid- and long-term business opportunities and deliveries. With that, I now open the call for questions.