Ceragon Networks Ltd.

Ladies and gentlemen, thank you for standing by and welcome to the Saragon Network's third 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, Maja Lustig, 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 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 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 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 these 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. Creating equal digital opportunities for all people around the world by bringing expert communication capabilities everywhere is the foundation of everything we do and will do moving forward. Today, many operators and network providers are on accelerated schedules to build the networks of tomorrow. We are proud that in the third quarter of 2021, a high number of them continued to select us. Since the days of 2G, we have worked hard to earn the trust of our customers in more than 140 countries. So far, in 2021, we have added around 10 new material customers. Many of them, as well as existing customers, concern projects designed to bring a better communication infrastructure to rural areas. We are seeing a growing number of governments allocate budgets and initiate incentives plans to improve rural networks, and we are all well positioned to take part in these vital projects. We have a strong solution mix and reputation, but it is important to note that gaining new customers in our market can be a long process, often lasting more than a year, depending on the type of customer and other incumbents' positions. Even when we win a new customer, in most cases, the business ramp up is gradual. Our revenues in Q3 were strong. We achieved this despite an external environment marked by unprecedented challenges in the chip and shipping industries. During this challenging time, we've been doing everything in our power to maintain and grow our customer base. These efforts are crucial, but they incur expenses. I will address these issues later in my speech, and so will Ron. In Q3, we have seen further increase in our backlog, which helps provide more confidence and visibility. The primary driver of this outperformance has been sustained strong booking in different regions. In Q3, our 5G orders maintained the trend of previous quarters and showed a steady performance. And once again, we achieved two new 5G design wins. Let me now provide a snapshot of our performance by each region. In North America, our 5G related bookings accounted for over 50% of all North American bookings year to date. As reported in the previous quarter call, we were selected by a leading US service provider for a multi-year managed services agreement. The satisfaction from our level of services and professionalism so far has driven a discussion about potential network modernization. We also just signed a contract with another new strategic operator in North America and are expecting orders in the coming quarters. Furthermore, we have one new 5G design. In addition to everything I've just mentioned, the evaluation of our IP50 products by two leading T1 operators, which we reported last quarter, continues successfully. If all goes well, we expect to have two new T1 customers buying our solutions in 2022. In India, Q3 was a healthy quarter for us as it was for telecom companies. Industry performance was driven by subscriber additions, increase in data consumption and tariff hikes, as well as recovery after a severe wave of COVID-19. The quality of the network experience is becoming more important. As such, there is a growing demand for network upgrades and expansions. India is moving towards rolling out 5G by developing 5G corridors. Three telecom operators have recently been approved to start 5G trials. Spectrum auctions are expected to take place in 2022. Commercial launch is expected during the same year and we will be there to meet the demand. We are planning to participate in RFP processes. Our competitive advantages include our indisputable local market leadership position driven by our technology, brand positioning and experience in India as well as in other regions. In Europe, we had a very strong quarter, especially in terms of bookings. We continue to receive orders by leading European operators from different countries, secured new orders, participated in trials and received great feedback on our POCs. We have multiple RFPs in progress. We are in the POC stage with a tier one global operator in Western Europe. They are interested in our disaggregated wireless transport solutions. With another, we have achieved product validation and we are in the negotiation phase to secure orders. Our European 5G related bookings accounted for over 35% of all European booking year to date. We had one new 5G design one. In APAC, in terms of booking, we have relatively stronger quarter compared to Q2 2021. Our 5G related bookings accounted for over 25% of all APAC bookings year to date. We are in a POC phase with a global tier one vendor regarding our disaggregated solution. While we're building a solid pipeline and witnessing the emergence of a new momentum, it might be too early to yield optimism. The shock waves of the pandemic continue to radiate throughout the region, affecting people, economies, and business decisions. In Latin America, we experienced some improvements in bookings. Even though the macro environment remains challenging, we received a substantial PO from new customer. We are working on POCs and have multiple RFPs in progress. A majority of LATAM countries have begun preparing for 5G. Several have already started trials, including Brazil, Chile, Argentina, Peru, and Colombia. But 5G spectrum allocations have just started and in most countries are to be assigned in 2022 or beyond. We are taking this time to engage with existing as well as new players that may take part in the spectrum allocations in order to position ourselves as the lead 5G wireless transport vendor. In Africa, we acquired new material customers received a new PO for managed services, and are working on a number of new opportunities. When it comes to 5G, only a few countries have started assessing and investigating, sorry, investing in a potential infrastructure. Overall, our global booking increased our confidence in Q4 and beyond. Among other things, what will take us further is the expected growth in the total addressable market. This is thanks to acceleration in 5G network densification, increased efforts to digitize the rural areas, as well as the shift to the open-run architecture. These developments are likely to continue to have positive and profound implications for us, especially in the medium and long term. They create more opportunities for us to not only sell our product-led solutions, but also expand our offering and business model to deliver managed services and increased sales of our software solutions. I mentioned earlier the tough external environment we are operating in. While we have maintained good control and were able to increase our revenue compared to Q2, we have also encountered challenges. We believe the component shortages all across the globe will extend into 2022. At the same time, international shipping bottlenecks will continue to prolong supply chain turmoil. It looks like there is no quick fix. It impacts both delivery timelines and costs. Our customer-first culture leads us to take measures to stabilize our lead times and avoid delays as much as possible, even on account of the current increased costs. Our goal during this turbulent period is to help customers continue with their plans as smoothly as possible. In parallel, we're working to optimize our product costs. We have undertaken an in-depth analysis of our bill of material cost in order to identify all the necessary cost reduction options that are in our control without sacrificing an ounce of quality along the way. We believe our initiatives will start bearing fruits in the next few quarters. While the big picture is complex and global market dynamics are beyond our control, we remain confident in our mid- and long-term prospects. We may experience shift of revenue between quarters and temporary gross margin pressures on which run will elaborate. Before turning over the call to run, I would like to refer to the progress of our new 5G SOC. As mentioned in our Q2 call, we expect the tape out towards the end of this year. Immediately after the tape out, we'll start the productization process of the SOC, which will be followed by the integration phase into Ceregon's future products. Once launched, our new SOC-based product series will enable our customers to increase wireless transport capacity by 16 times, using only a quarter as much of the spectrum. providing a several year lead on the rest of the market. It is ideal for the bulk of the 5G networks that will be rolling out in two to three years from now. Moreover, it will be significantly more cost efficient and less component market dependent, reducing our inventory and improving our delivery lead times. With that, let me now turn the call over to Ron to discuss the financial 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 reconciliation of these measures, we refer you to today's press release. Like Daron mentioned, during Q3 2021, we saw very strong bookings coming from North America, India, and Europe, as well as some recovery in APAC. In fact, Q3 is the fourth consecutive quarter with book-to-bill above one. Our revenues for the quarter were at the high end of our projections. Let me now review the actual numbers with you. Revenues for the third quarter was $76.1 million, up by 8% compared with $17.6 million in Q3 last year. This was achieved despite the challenging environment with regards to component shortages. We are proud of this achievement and the fact that most of our customers' demand were fulfilled. Our strongest region in terms of revenues for the quarter was India. reflecting ongoing deliveries for our main customers and in line with the strong demand we are seeing in this routine. Our second strongest region in terms of revenues for the quarter was Latin America, reflecting the deliveries and installations from the major win we had in the beginning of the year with the Tier 1 carrier in Colombia. Europe also had a strong quarter, continuing its positive momentum and reflecting more initial revenues from 5G projects. In North America, we continue to see strong momentum with our tier one customer, other leading ISPs and smaller carriers. However, even though the demand continued to be very strong, we were not able to deliver in the same pace as previous quarters as a result of the component shortages. Revenues in Africa and APAC were slightly lower than in previous quarter, reflecting the still challenging situations in both regions. We had three above 10% customers in the third quarter. Gross profit for the third quarter on a longer basis was $23.6 million, giving us a non-GAAP gross margin of 31% compared with 33.5% for the third quarter of 2020. This gross margin is thanks to an especially favorable mix of products and solutions sold to certain customers this quarter. It's a great achievement for us. That said, There are growing challenges associated with component shortages and high supply chain costs that can impact our gross margin. Our efforts to satisfy our customers' needs, as mentioned by Daron, is taking a toll as we pay significantly higher prices to resolve component scarcity. We believe this situation will be temporary. Operating expenses on a non-club basis for the third quarter were $19.6 million, slightly better than our expectations. Research and development expenses for the third quarter on a non-GAAP basis were $6.6 million, a decrease from $7.3 million in Q3 2020, mainly as a result of utilization of vacation in August. We expect these expenses to be higher in the next quarter until we reach tape out towards the end of this year. Sales and marketing expenses for the third quarter on a non-GAAP basis were $8.3 million, an increase from $7.8 million in Q3 2020, but still reflecting the reduced travel that has come with COVID-19. We expect to gradually increase our sales and marketing expenses as markets open post-pandemic. General and administrative expenses for the third quarter on a non-GAAP basis with $4.6 million, a slight decrease from $4.8 million in Q3 2020. Financial and other expenses for the third quarter on a non-GAAP basis were $2.3 million and increased from $1.2 million in Q3 2020. Our tax expenses for the third quarter on a non-GAAP basis were $0.3 million in line with our expectations. Net profit on a non-GAAP basis for the third quarter was $1.4 million, representing two cents earning per diluted share on a non-GAAP basis. Our inventory for the third quarter was $53.2 million, higher than the $51.9 million in Q3 2020, and represents the activities we are undertaking while facing the global component shortages crisis. We have been taking measures to optimize our inventory model to make sure we meet our commitments to our customers. Our trade receivables are now at $109.9 million, up from $108.4 million in Q3 2020. Our DSOs now stand at 140 days. Net cash use in operating activities for the third quarter was $0.7 million. Net cash used in investing activities for the third quarter was $2.3 million. Looking ahead, our strong bookings in Q3, along with a very healthy backlog, reflect increasing business activity, mainly in North America, India, and Europe. I'm happy to report today that we continue to be confident about our revenue growth in 2021 and still expect it to be on the higher end of our annual revenue guidance, which is between $275 to $295 million. That said, the global component and shipping challenges still create fluctuations in our quarterly revenues and influence our gross margin. Despite these challenges, we expect our net income for the second half of 2021 on a non-GAAP basis to be a round break even. With that, I now open the call for your questions. Operator?

Thank you. As a reminder, if you wish to ask a question, you'll need to raise your hand using the Zoom desktop or mobile application and wait for your name to be announced.

Hello, Duran and Ran. Can you hear me?

Yes.

Yes. Hi, George. Hi, George. Great. Thank you for taking my questions. So congrats on the solid execution and the ability to grow in a tough environment. from a design win opportunity sounds very strong. When you map that with your visibility into the supply chain, especially as you look into 2022, how confident are you at being able to maintain a 75 to $80 million revenue run rate? And are you able to start projecting even a higher revenue level on top of that next year?

So, George, first of all, thanks for this question. I think that in terms of the supply chain, primarily focusing on the cheap industry, there's a lot, a lot of turbulence. Based on our new strategy in terms of procuring components, we believe that we will see some relaxation during 2022, probably towards the second part of it, because we changed our strategy in terms of procurement of the critical items. Said that, even this strategy is still dependent on the, I would say, reliability of the projections of the vendors in terms of timelines and lead times. All in all, it is our belief that the situation will start getting better gradually during 2022, primarily on the second half. But what we have seen in the last two or three quarters, sorry, two or three months, is showing that things could change dramatically for the good side and for the bad side. In terms of top line, obviously when we Looking into the beginning of 2022, we will probably come with a nice backlog, obviously, depending on the booking that we'll be able to generate in Q4. And that gives us some level of confidence to the start in terms of having our revenue in this range that you were just suggesting.

All right. You mentioned the favorable mix from the gross margin standpoint. So I have a couple questions related to that. One, how much is the regional strength contributing to that? Are you starting to see much of a lift from the managed services standpoint? And then when you think about the supply chain costs, if your mix normalizes a bit, would you expect it to tick down in the next couple of quarters given the high costs of managing the current environment?

So I will start by answering regarding the managed services and we'll give Ron to give you the trends in terms of the impact of the supply chain costs. In terms of managed services, this is a relatively new initiative that we have embarked on. And it takes time to get to what I would call a very significant business volume that can really impact our both margins and I would say the recurring revenue piece. So it's just a start, but looking by the deal, I'm definitely very optimistic about our ability to generate higher gross margin than the current ones. if this becomes indeed a substantial part of our business.

So just to compliment George on what Doron said, let me try to be a little bit more specific. So we have sometimes, and it can be even within specific regions, specific deals, that has come with more a favorable mix if it is because of software, if it's because the specific product and we benefited from that both in the second quarter as well as in the third quarter. As for the supply chain component impact on our gross margin, I think the impact on both comes from two vectors. The first vector is about our ability to better predict our revenue because in both components and shipping issues, it's hard for us to predict because some of the components that are missing and we can't tell when we'll get it and ship it and then convert it to revenue. And same for the shipping industries. Booking today's vessel and be accurate on time is more challenging than it was, I would say, in the past few years at all. The second piece of this challenge is the cost that is come with in both aspects. So both components and shipping come with the toll on our gross margin. If I need to quantify this, I will probably say the accumulation of both, both from expediting some of the components and securing them as well as to the shipping, I would say around three to 4% impact on our gross margins we are doing a lot to mitigate some of this. We improved our sea versus air and other initiatives that we're taking. But if I'm seeing the overall impact, roughly around 3% to 4% on our gross margins.

All right, and just one more question for me. From an overall OpEx standpoint, you have a very good point. control in the third quarter. But would you expect it to trend more towards the second quarter levels in the fourth quarter, you know, that tick back up and that maybe stabilize at that level next year?

So the short answer is yes. I would say both on R&D and sales and marketing, which are the more heavy lifting in our OPEX, Q3 was a one-of-a-kind phenomenon because a lot of people took vacations in August and that impact, of course, the cost. I do expect next quarter to come more in the run rate of overall $21 million. And when we look at 2022, this is probably going to be the trend that you are seeing. Just one caveat on that, the shekel has been very, very strong, and we do have a policy to hedge on the shekel, but at this levels, this is going to have probably, and I will say at this point, an impact of next year as an initial look anywhere around two to $3 million on 2022.

I will just add to this point of the operating expenses. The current assumption is based on the fact that we have not finalized our AOP, our annual operational plan Obviously, in these days, we're working diligently to decide what is the priorities for us for next year, whether it's in R&D, whether it's with a new business, whether it's with new products and so on and so forth. So the jury is still out there, but I think that we have a history of many years of keeping our OPEX in control. And from that angle, you could rest assured that this trend will continue.

Thank you very much.

Thank you, George.

Thank you. Our next question comes from the line of Matt DeSort. Matt, go ahead and unmute yourself.

Yeah, this is actually Alex Henderson. Can you hear me?

Hey, Alex. How are you? I'm very well, thanks. When Matt's name was announced,

Well, he did the registration for me.

Okay.

So I've got a couple of questions for you. I was hoping you could give us some characterization of the degree to which your book-to-bill has run above the revenue line over the course of this year. And I think you said it was the seventh quarter in a row of the book to build above one. So, you know, how much have you built that backlog? And can you characterize how much visibility that gives you to achieving the level of revenues you had this year in the forward year, assuming supply constraints were not an issue?

So, first of all, let's start by saying that we said that we had – four quarter, not seven quarter in which our book to bill was above one. Generally speaking, I don't want to start giving the exact percentages, but the numbers all in all, when you look at the accumulation of the three or four consecutive quarters was very significant. And as I answer to Joe's question from a different angle, usually the big challenge for us is the start of the year, which is the first quarter. I believe that subject to no big surprises in booking of Q4, Q1 would probably be able to maintain the same level of revenue, more or less, we are seeing in Q3. And obviously the visibility is good, but it's not that our business model has changed so suddenly we have like a three quarter visibility. I would just say that our backlog all in all is something that provide us in an order of magnitude two quarters ahead, maybe slightly even more. And in previous years it was probably between one to one and a half quarters. So that's the difference.

And then you made a comment about the tape out in R&D for the fourth quarter. Can you quantify how large enough that is? I assume it's a one quarter cost hit and then it falls back out in the first quarter once the tape out is completed. Can you give us some sizing on it?

So first of all, Alex, I think that the tape out was delayed more than a quarter. If I go back, the overall delay that has come with a lot of reason is probably more close to a year. And even when they were going to do the tape out, and I think that Ron commented this on the prepared remarks, we still need to do the productization of the chipset and then to integrate it into our new products. And this also will take some time. So all in all, the delay was around, I would say one year. The impact on the costs is just maintaining relatively high level of R&D which you see on the higher OPEX. And the impact of it for the next year when the tape out is going to be finalized at the end of this year is yet to be determined as Doron already comment on that. because we will need, and we're just looking on it now, on the plans of 2022, and what are we going to invest in other things in R&D that are worthwhile. So this point of time, it's a little bit hard for me to comment how it's going to impact the level of R&D spending for the next year.

Just, Alex, to add to Ron's answer, in terms of cost, Obviously, developing a chip is very costly, but this cost is spread over a couple of years and that would not make any change. The tape out phase by itself is not generating a significant additional cost for us. Obviously, the process after it, which is the productization, in which we work hand in hand with the different cheap vendors, doing the packaging, doing the evaluation board and all this stuff is costly. But as I said, again, it's not a one time hit that we face in this quarter or that quarter. it will either be part of our regular R&D expenditure, or if the accounting insists part of the R&D capitalization.

So just to be clear, you're saying that the fourth quarter of 2022 is when you're gonna do the tape out as opposed to the fourth quarter of 21?

No, no, what we're saying is as follows. The tape out, is a milestone where we basically finished all the tests, including the tests that are done by our chip vendor so that we can move to the next phase and productize the chip. This was delayed and now we are on the process of productization of our chip, which is done by our chip vendor together with some subcontractors of them. And that starts at the beginning of 2022.

So to be clear, the year delay that you're citing was in the rearview mirror. That happened a year ago. Yes. This is not a new delay that's happening now.

No, no.

Right. Because you're implying a delay has happened, but it's not a delay that's new. It's happened well over a year ago.

Correct.

So you're on schedule with the timeline around the fourth quarter of 21, and you're productizing it now, and those costs are in the expectations in 21 for Q and in 22. Correct.

Yes, yes, yes, exactly. No change. Just one comment, because I want to make sure everything is clear. From our angle, the delays are behind us. Now, it's more of a process that is dependent on the chip vendors and its subcontractors. And due to the turbulence, In this industry, even the timelines we are getting today, we are taking them with a grain of salt because of this turbulence. But from our perspective, the majority of the effort to develop the chip and to test it is behind us.

I understand and thank you very much for that clarification. I thought you were saying you had an additional delay. Can you talk through why you're unable to pass through the higher costs associated with your supply chain, given most customers that we've heard from other companies have been willing to absorb that because it's obviously not within the control of the individual companies and it's a broad industry-wide problem and phenomenon?

So let's start by saying that I did not say explicitly that we cannot pass these costs. And in fact, we have a few discussions on ways to work with our customers so that they kind of participate in this time of pain. The approach which I'm leading in this company is first of all, serve the customer. Make sure that you don't jeopardize his rollout attempts as much as you can with all the things that are dependent on you. And then when the customer feels comfortable and happy with your performance, then you can easily or more easily come and have this discussion. We are going to try that. I can tell you that there's a lot of differences between industries. And I can tell you that it's also a matter of a culture. It's also a matter of particular policy of this vendor, sorry, this operator or that operator. And it's also a matter of what the other competitors in our industry are doing. The bottom line is that we do have discussions with our customers about sharing the pain with us. I cannot give anything beyond that because at this point there's no, I would say, so to speak, reliable projection I can give you based on the discussions we're having.

So just the last question on the same lines, the gross margins have been bumping around 31% or so. You've had a mixed shift to India in the particular, in the current quarter. You've had very strong winds in EMEA and the U.S. Those tend to be much higher margin, more fully featured. So Should we anticipate the mix ship will actually shine through the margins, or should we anticipate that the cost problems and the ability to pass it through are the more dominant factors as we go out over the next two, three quarters?

At this point, I would assume that the cost we are incurring to delivery on time, no matter what, will be more dominant than And this is why, when looking at the second half of the year, we kind of toned down a bit our expectations. Yet, I think it's a temporary situation. I believe that within a couple of quarters, and I actually mentioned that to George, if the lead times that are promised by our vendors are indeed, so to speak, reliable, and they deliver to these lead times, I think that our costs to manage this temporary situation will start going down. And accordingly, we start seeing a better gross margin, but this will probably happen during 2022. All right, I'll see the floor. Thanks. Sure. Thanks. Thank you.

Our next question comes from the line of Rommel Dioncio from Agus Capital. Please go ahead.

Hey, Rommel. How are you?

Hi, Rommel.

Good morning. Can you hear me? Yes. Great. Thanks. Thanks for taking my question. Good morning. So just over the long term, as you look at dovetailing off Alex's question on the pricing, are there other things you can do? just over the long term from a supply chain standpoint, whether sourcing from different partners or just to maybe diversify the risks that you're seeing today. Obviously, this might take some time and you're doing all the things you can to address the problems today, but just over the longer term, maybe some comments on how you think about that.

Yeah, basically, there's a lot of new initiatives for, generally speaking, for cost reduction of our products because we understand that this industry is wants the best for the cheapest. And yes, I know that there is some conflicting elements in those two aspirations. But I think that Saragon is known for doing miracles. And this is what we are doing. Now, to be more serious, first of all, we are considering different manufacturings that we reduced our manufacturing costs significantly. This is one thing. The other thing, we're looking at some of our products that we believe will be the high runners for the years to come. And going all the way even to look at the design of the product and change it to reduce our costs very significantly. This will obviously take time because it's more of a, I would say, development work before being able to productize. But we even go that far to change the cost structure of our high runner products. And I think that this will be reflected gradually, probably during 2022. probably do towards or more significantly towards the second part of 2022 and beyond.

Just one follow-up, if I could. You know, you touched on India and the potential there for that market to eventually transition to 5G. Typically, that market has been, you know, maybe a little lower margin than the U.S. and Europe for you. Is that a key margin driver, potentially, as that market transitions? Or is there something other than, as the market transitions to 5G, is that a margin opportunity for you in India, where you're so strong? Or are there other factors? Yeah, thanks. Yeah.

India is a major market for us. And it's going to stay the same. I think that our advantage is that we know the Indian market very much. And we usually can anticipate the price points. And obviously, one of the things we are trying to do is to look at what we believe will be the high runners for India once 5G is out there and make sure that in these particular products we are doing the utmost effort to adjust our cost structure to the Indian market. I know for a fact because I'm talking to these customers that the Indian market likes our product and technology very much. And this is the most important thing that won us the business in previous years. When we just started the big journey with the 20C back in 2013 and 2014, our margins were very, very low. But over the years, we're able to reduce our costs significantly and have a much more significant margins. And it is our intention to do the same. We're going to fight for our market share in the 5G era. And I think that we are well positioned. And even if the beginning will start with relatively lower margins, the history shows that with these volumes, we'll be able to improve our margins very fast and continue with our strong relationship with this market.

Great. Thank you very much.

Thank you. Our next call is from the line of Brian Kissinger from Alliance Global Partners. Please go ahead.

Hi, guys. Thanks for taking my questions. Bye-bye, Brian. Just one, hello. You talked about just now your lower opportunities to lower your costs, but you also mentioned earlier a change in your procurement strategy. So can you identify some of the key changes to help you work through the supply chain challenges as part of this strategy and how long before you expect it can have an impact on your procuring components?

So on the procurement strategy, The main change is basically, I would say the projection period based on which we go out to procurement. If in the past, our projection period was, just for the sake of the example, was a nine months or six months projection, we have extended it to 15 months or 18 months projection. Obviously, we are doing that very, very carefully because we don't want to get stuck with inventory that will become obsolete eventually. And this is why we pick and choose the main components that are on the one hand critical and very difficult to attain in this turbulence period. But at the same token, we check that these components are for our high runners. So the chances that we'll get stuck with obsolete inventories are slim to none. That's a major element. The other thing that we are doing in components that were, so to speak, single source components, we are actually developing relationship with second source. Sometimes it require little changes that are not critical. Sometimes it doesn't even require any changes so that we're trying to reduce the level of single sources as much as we can. And the third one that is even longer term, the new product series, will have more and more common components so that the commonality will create even a higher flexibility in terms of delivery timelines. And beyond that, our new chip will take it one step further because with the new chip, we put a lot of system elements into this new chip and that will reduce the number of components that we need to buy. So it's a very big strategic move and it has different ingredients. Some of them will pay out faster. Some of them will pay out in the longer term.

Great, thank you.

You have no further questions, please proceed.

Thank you all. In the third quarter of 2021, we not only enjoyed strong bookings and a healthy backlog, We also achieved considerable success in containing the impact of the unfolding challenges around us in different industries. Looking beyond the operational challenges this turbulent period creates for us, we see very high market traction that we expect to convert into growth and margin expansion in the mid and long term. I look forward to updating you further on our next call. Thank you, everyone. Have a good day.