Ceragon Networks Ltd.

Ladies and gentlemen, thank you for standing by and welcome to the Saragon Network's Q1 2023 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 your mobile or desktop application and wait for your name to be announced. I'd like to hand over the call now to our first speaker today, Maya Lustig, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I am joined by Doron Arasi, Saragon's Chief Executive Officer and Ronan Stane, Chief Financial 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, future events, business outlook, development efforts and their potential outcome, anticipated progress and plans, results and timelines, and other financial and accounting related matters 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. Saragon intends forward looking terminologies such as beliefs, expects, may, will, should, anticipates, plan or similar expressions to identify forward looking statements. Such statements reflect only current beliefs, expectations and assumptions of Saragon management, but actual results, performance or achievements of Saragon may differ materially as they are subject to certain risks and uncertainties which could cause Saragon'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 Saragon's most recent annual report on Form 20F and as may be supplemented from time to time in Saragon's other filings with the SEC including today's earlier filing of the earnings press release, all of which are expressly incorporated herein by reference. Forward looking statements relate to the date initially made, do not purport to be predictions of future events or results and there can be no assurance that they would prove to be and Saragon undertakes no obligation to update them. Saragon's public filings are available on the Securities and Exchange Commission's website at .sec.gov and may also be obtained from Saragon's website at .saragon.com. Also today's call will include certain non-GAAP earnings per share. Please see the table attached to the press release that was issued earlier today. I will now turn the call over to the Ron. Please go ahead.

Thank you, Maya. And good morning, everyone. Saragon Networks deliver double digit revenue growth and solid profitability in the first quarter with $83.4 million in revenue, 4 cents in non-GAAP earnings per share, and importantly, a book to bill above one. These results are booking levels and the demand we are seeing are encouraging data points for us. And the trends, especially when looking at trailing 12-month revenue and bookings, confirm the positive momentum we are experiencing. To be clear, we have not seen the slowdown in spending softness or pressures that others across the telecom industry have reported. In fact, demand for our solutions has continued to be strong and our sales execution in key regions has improved all while our access to supply chain continues to normalize. The trends we are seeing are encouraging. We are cognizant of the macro environment and recognize that others in the telecom industry are speaking to softness, softness we have not experienced, and volatility in customer buying patterns. With that in mind, we want to validate the customer trends we have experienced to date before we consider raising our full year outlook. Doing so will give us more touch points to confirm that the demand we are experiencing is as it seems and not being pulled forward from a future period. Beyond the revenue line, our results demonstrate the improving earnings power of our organization. Our gross margins continue to expand, reflecting our improved execution in key markets, higher revenues from North America, as well as reductions in supply chain costs. We delivered $3.6 million in non-GAAP net income in the first quarter. Barring any unexpected developments, we continue to believe that we will deliver positive non-GAAP net income during 2023. With a profitable business model, a solid backlog, a booking to revenue ratio that exceeds one, and solutions that address key CAPEX and OPEX goals for customers around the world, we believe we are well positioned for sustained success. Importantly, there were no significant impacts from supply chain disruption in the quarter, and while we continue to carefully manage the supply chain, component availability has been improving. Our geographic diversification continues to benefit our revenue. In the first quarter, we generated sequential and -over-year revenue growth in APAC, Europe, and North America, and -over-year growth in India, where we generated our fourth consecutive quarter of revenue over $20 million. In North America, we generated revenue of $26.4 million, up from $17.2 million in 2015. In the second quarter, we generated revenue of $13.3 million in the fourth quarter, and from $13.3 million in the first quarter last year. In Europe, we believe we have room for improvement, even considering the modest improvement in our revenues. We recently installed a seasoned region head to lead our business in Europe, and we expect further improvements as this transition advances. Our first quarter revenues reflect approximately $5 million in revenue that shifted out of the fourth quarter of 2022 and into the first quarter of 2023 that we noted on our last quarterly call. With that shift, we would expect some normalization in the revenue cadence going forward. This is primarily impacting North America. The fourth quarter had lower than expected revenue from North America, with some revenue shifting into the first quarter, and therefore the normalized run rate in this region is probably somewhere in between these two data points going forward. The trend for our gross margins is also encouraging. We delivered non-GAAP margins of 34% in the quarter, driving $5.9 million in non-GAAP operating income, a positive swing of $6.5 million. This improvement reflects higher revenues from North America, coupled with better operational execution, especially in the supply chain. We continue to advance the productization of our new -a-chip technology. To date, our efforts are advancing according to plan, and while there is much work to be done, we remain on track to launch our new product line in 2024. We believe we have first-movers' position, a -three-year -to-market advantage over our competitors. With this, we believe that our -a-chip powered products will drive significant demand and have a transformative impact on the industry and on our market. I'd now like to overview our Q1 highlights by region, noting that on today's call and future quarterly calls, we will focus primarily on activities in North America and India, the two regions that have, and we expect will continue to have, the greatest impact on our quarterly results. In North America, the 5G build continues to be strong. We have continued to receive orders from major carriers, with one customer driving a significant portion of our volume. We are also participating in multiple RFPs for the critical infrastructure sector and pursuing new rural broadband initiatives as well as other opportunities we are seeing in this region. Those are driven by federal and state funding plans as well as the demand for faster networks rollout, which can be accommodated by wireless transport technology. These initiatives remain a critical area for incremental opportunity and diversification for our business. Rural broadband initiatives represent government priorities in the United States in general and in specific states in the United Kingdom. The process for rural broadband expansion takes time as the various federal plans take shape, but we believe we are increasingly well positioned to capitalize when these opportunities mature. In India, operators are increasingly turning to upselling and cross-selling to improve customer experience and drive engagement. India telcos continue to invest in 4G technology while beginning to deploy 5G in certain regions. We are working with operators in the market for 4G rollout and enhancement in selected regions as well as deploy 5G equipment in urban areas. Indian telcos augment their network capacity with additional fiber and wireless e-band and multi-band to meet demand for high speed, though government has not concluded the e-band fees yet. Coupled with the growing affordability and availability of 5G smartphones, we expect these developments to fuel consumer adoption of 5G in 2023 and beyond. In Q1 2023, we continue to deliver our products for 4G networks as well as delivering our e-band, multi-band solution for 5G networks in an increased pace. We ended the quarter with approximately $30 million in follow-on orders from Tier 1 operators that we expect to deploy mainly over the next two quarters. These orders include both products and services focused on upgrading existing network capabilities to 5G, expanding capacity, improving rural connectivity and providing customers with reliable uninterrupted high-speed experiences. We expect this trend to continue throughout 2023. Looking at the rest of the world, in Europe, we had another good quarter benefiting from strong Q4 bookings, even as we navigate a significant organizational change and despite the ongoing macroeconomic challenges. We believe there is a significant opportunity for us here with near-term room for improvement under the new leadership. In AIPAC, we had a good quarter in terms of booking primarily from Australia and Indonesia. We see opportunities in this region as 5G deployment is unfolding at a different pace in different parts of the region, in the telecom and also in the private network domain. In Africa, we had a significant booking from a private networks business this quarter, although the market is still soft. To summarize, conditions have been improving both on the macro and the micro levels. Demand for our solutions is strong, execution is improving and supply chain availability has been getting better. Quarter to quarter variability in our financials is always a reality, but we believe the trailing 12-month trends for our business are solid and improving, both from revenue and profitability standpoint. Given the positive business traction, our significant backlog and a -to-bill that is above one in the first quarter, we expect our gross trajectory over time to continue. Importantly, we also believe that we can be profitable on a non-GAAP basis for the 2023 full year. Onen, over to you.

Thank you, Doron, and good morning, everyone. Before I review the quarterly results, I would like to call attention to a disclosure that was included in our annual report on a Form 20F that was filed earlier this morning. This is a customer which was discussed on our Q4 earnings conference call that was held in February. Recently, there were changes in the circumstances which reduced the probability to collect the outstanding debt in the near term or in full, and as a result, we found it appropriate to record the credit loss provision for this customer's outstanding debt in Q4 of 2022. As a result, our audited results for 2022 differ from the preliminary unaudited results previously announced, and our operating loss on a GAAP basis is now $10.9 million, a decrease of $12.3 million from the preliminary unaudited results previously announced with corresponding reduction in our accounts receivables. We would like to emphasize that we continue to take vigorous measures towards collecting the debt. Note, this matter has no impact on our guidance for 2023. I'd like to note on today's call when discussing our quarterly results that the purpose for the purpose of sequential comparisons, our Q4 2022, GNA, operating profit, net income, and earnings per share will include the impact of the $12.3 million credit loss provision. With that said, I would like to shift to my review of the Q1 results. As Doron outlined, this was a strong quarter for Cerroba, though it's important to keep in mind that we are a project-driven business, and as such, there is inherent variability in results from quarter to quarter. Because of this, we analyze our bookings, revenue, and gross margin, as well as other key performance indicators over a 12-month period, a duration which we believe better reflects the underlying business trends. In addition, to help you understand the results, I will be referring primarily to non-GAAP financials. 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 results. Revenues were $83.4 million, an increase of .6% compared to $70.3 million in Q1 2022, and .4% compared to $75.5 million in Q4 2022. When we take a trailing 12-months view, our revenues were $308.3 million, an increase compared to last quarter's trailing 12-months revenue of $295.2 million. Our strongest regions in terms of revenues for the quarter were North America and India, with $26.4 million and $20 million respectively, in line with continuous strong demand we see in these regions. Our third strongest region in terms of revenues was Europe, with $12 million. We had two customers in the first quarter that contributed more than 10% of revenues. Gross profit for the first quarter on a non-GAAP basis was $28.4 million, an increase of .7% compared to $19.5 million in Q1 2022, and an increase of .5% as compared to $25 million in Q4 2022. Our non-GAAP gross margin was 34% compared to the previous quarter. Our non-GAAP gross margin was .4% compared to the previous quarter. This upward trajectory of our gross margin trend reflects our overall growth margin of $30.5 million. Our non-GAAP gross margin is the result of our ability to increase margins when we execute on our strategy and operational efficiencies. As for our operating expenses, research and development expenses for the first quarter on a non-GAAP basis were $7.7 million, up from $6.8 million in Q1 2022 and slightly lower from the $7.9 million in Q4 2022. As for revenue, our R&D expenses were .2% in the first quarter compared to .6% in the first quarter of last year. Sales and marketing expenses for the first quarter on a non-GAAP basis were $9.8 million, up from $8.5 million in Q1 2022 and from $8.6 million in Q4 2022. As for percentage of revenue, sales and marketing expenses were .8% in the first quarter compared to .1% in the first quarter last year. General and administrative expenses for the first quarter on a non-GAAP basis were $5 million, higher slightly from $4.8 million in Q1 2022 and down from $17.7 million in Q4 2022. As for percentage of revenues, GNA expenses were .9% in the first quarter compared to .8% in the first quarter last year. Operating profit for the first quarter was $5.9 million, up approximately $6.5 million from the operating loss of $0.6 million in Q1 2022 and up $15 million from the operating loss of $9.1 million in Q4 2022. Financial and other expenses for the first quarter on a non-GAAP basis were $1.8 million, slightly less than expected due to more favorable exchange rates offset by an increase in interest expenses. Our tax expenses for the first quarter on a non-GAAP basis were $0.4 million. Net income on a non-GAAP basis for the quarter was $3.6 million or 4 cents per diluted share compared to a net loss of $1.9 million or 2 cents per share in Q1 2022. The net income for the first quarter was $16.2 million from the net loss of $12.5 million or 15 cents per diluted shares in Q4 2022. As for the balance sheet, our cash position at the end of the first quarter was $26.4 million and our short-term loans stand at $41.9 million. We believe we have cash and facilities that are sufficient for our operations and working capital needs and we are not currently contemplating raising equity capital. Our inventory at the end of Q1 2023 was $68.7 million, down from the $72 million at the end of December. As we continue to better convert our backlog and monitor inventory levels, taking into consideration the improvements in availability of components. Our trade receivables are at $100.6 million, with no major changes compared to $100 million at the end of December. Our DSO now stands at 119 days. As for our cash flow, net cash flow used for operations and investing activities in Q1 2023 was $0.9 million. We expect to generate positive cash flow from operations for the full year. Our 2023 revenue guidance of $325 to $345 million remains unchanged, as Doron shared at the start of today's call. We are encouraged by the strong results we achieved in the first quarter. However, given the macro environment, we think it is prudent to monitor the trends we are seeing before reevaluating our full year outlook. As we see supply chain and component shortages challenges dissipate, our confidence in our outlook and ability to drive sustainable and profitable growth will increase. With that, I now open the call for your questions. Operator?

Thank you. In order to ask a question, please raise your hand using your mobile or desktop application and wait for your name to be announced. Once again, please raise your hand using your mobile or desktop application and wait for your name to be announced. Our first question today comes from the line of Alex Henderson of Needham. Please go ahead.

Great. Thank you so much. And nice print, guys. Certainly bucking the trend. It's really good to see you getting some benefit from that backlog you've built. Book to bill above one. Gotta love it in this environment, particularly in a first quarter when normally bookings are soft. So I guess the question I'd ask you here is, one, the trajectory of the back, of the supply chain over the course of the quarter, how much has it improved? How do you see that playing out? When you're looking at the 2Q guide, are you assuming continued improvement or at the current pace? And to what extent, if there's upside to availability, would that drive upside to the top line in the guide?

I think that what we have seen in Q1 is, I would say, very close to getting back to normal. There's still a little gap. I don't think that this gap may create the biggest swings in revenue. But generally speaking, if we did $83.4 million in a single quarter, in terms of production capacity, we can do more if this is required in terms of demand and timeline required by our customers.

So that obviously raises the question. Are your customers changing their perception of availability? Maybe saying, you know, I kind of like that another quarter out. I ordered it six months ago, but I needed maybe another quarter out and pushing things. Or alternatively, are they still clamoring for the delivery?

So far, we have not encountered the first example that you mentioned, which is delays coming or being asked by our customers. Actually, in certain areas, they are even asking us to expedite and to even reach a level of pace that is beyond what we have known even in times where we generated $90 million per quarter. And obviously, we need to adjust to that. But generally speaking, we don't see a slowdown so far in terms of customers asked to deliver.

So the last question, and then I'll see the floor and come back into Q. If you're looking at an improvement in supply availability, and that generally means that orders can come in and be shipped out sooner, i.e. duration is coming in, would you expect that to cause somewhat of a reduction in orders? Or do you think that you're insulated because these are big projects driven and therefore it's really a derived demand on the timing more than it's something that's specific to the delivery timing?

So generally speaking, our plan for 2023 is to increase our booking numbers beyond the increase in the revenue, obviously compared to 2022. Would that mean that it will convert into higher pace of revenue? It could be, but at this point, we assume that the plan is where it is and we assume a slight increase in our backlog at the end of 2023.

I'll step back in the line.

Thanks. Thank you. Our next question comes from the line of Romel Dioncio from Agis Capital. Please go ahead.

Yes, good morning. Thanks. You've talked in the last several quarters about the progress you've made with private networks, particularly in North America. I wonder if you could just chat about the opportunities that you're seeing in Asia, Africa in a little more detail and perhaps potential in Europe as well. Thank you.

In terms of private network, we are seeing also opportunities other than in North America as you started with. I would say that we see that in a couple of segments. One of the segments is the defense segment. Another segment that is very strong is the energy segment. And obviously there are other segments such as health, public safety, and so forth. So we see that in different places, in different continents. And obviously it's our intention, based on our strategy, to pursue these opportunities vigorously because we believe that they will give us more stability and higher margins down the road.

Thanks very much, Teron. Sure.

Thank you. As a reminder, in order to ask a question, please raise your hand using your mobile or desktop application and wait for your name to be announced. Our next question comes from the line of Alex Henderson. The floor is open. Please go ahead.

Great. So going back into the mechanics of ordering, when you look at your private network, your pipeline, do you think it's evenly spread over the next three quarters? Or do you think that given that very large orders you had, unseasonably in the first quarter, suggests that the order rate is more back half loaded? How would you characterize the pipeline at this point?

So Alex, you know our business and you know that while we usually can see the opportunities ahead, the timeline and the exact timing in which orders will come is always more difficult for us to envision. At this point, we expect to continue with the level of order rate that we have seen in the last three quarters. We have seen a lot of bookings we have seen in Q1, at least for the upcoming quarter or even two quarters. But this is always subject to decisions that are being made in many cases on the last minute. So what we have seen in the first quarter is what at this point we assume we will continue to see on average in the quarters to come with one caveat that as we experienced in the last couple of years as some seasonality in terms of booking in Q4, it might come as well. And by the way, this is one of the reasons that we decided not to raise our guidance yet because we do want to make sure that what we have seen in Q1 and what we expect to see in Q2 and on are indeed the trend and it's not suddenly a kind of a reduction of weakness that comes on account of the fact that we had stronger booking in the first part of the year.

Yeah, well said and well expressed. Looking at the outlook here, clearly there's differences in geographies. Can you talk about the pipeline relative to the expansion in the US? How much of it's being driven by that high margin arena and the expansion in the MIA which is pretty similar and conversely how much of it is more slanted towards the lower margin India and markets?

I would say generally speaking that our plan and the current forecast is that eventually North America in 2023 obviously in terms of revenue but also in booking will have a bigger portion of our business, of our revenue as opposed to 2022. And that also keep us more optimistic about improvement in our gross margins. In Europe, it really depends on how things will move forward with the new leadership. If we're able to increase our market share in Europe, this could also help us slightly with improving our gross margins. I do not expect any major change in Asia or rest of the world. In Africa, the current assumption is that it's going to continue to be a relatively smaller portion of our business.

Going back to the India market, are you seeing a shift to higher margin products there as a result of the move towards 5G finally starting to kick in a little bit which obviously drives the higher capacity, higher software functionality? Can you talk a little bit about that?

Yeah, the dynamics of this market has always been on the one hand looking for the latest and greatest technology but at the same talking leveraging their buying power to reduce prices significantly. Recently, we've seen more competitive investors trying to penetrate into India because of the huge opportunity and that although we are coming with new technology, is continuing to put a lot of pressure on prices. So the bottom line, I don't expect a significant improvement in gross margins in India, at least not in the new term.

So increased competition offsetting a mid-shift to higher functionality product which otherwise would have carried higher margin, understand. The last question I have for you is the sales and marketing was a little bit stiffer than we had modeled. Overall, you obviously beat us on top line and bottom line but sales and market was a little stiffer. Is that a function of the timing of realization of orders, realization of revenues, accruals for the success or is that the continuation of the investment in North America and where are you on driving the productivity on the North American sales and marketing investments? Thanks.

So it was a mix of two things. One of the things that we had in the quarter coupled with the fact that we built the organization and realigned with some of our investments within the regions and that increased the cost. We should not expect, we have provided also a range of percentages from revenues so I think that we will monitor that as well.

Okay, I'm going to step back and cue operator but if there's no other in cue, I'd like to ask one more question.

Feel free to proceed.

Great thanks. So can you talk a little bit about the 100 gig product, the progression on the chips there and when do you expect to be the time to market? What are you hearing from the customers? How important is the 100 gig product in terms of the decision making process and the customers putting themselves in cue for it? What's the impact and how's the progress?

First of all, the progress as I said on the prepared comments, the progress is in line with our plan and I would say that we are in the last 10 miles of testing and making sure that the chip is indeed functional in terms of our expectations and the functionality. This is a lengthy process of testing because eventually it's a very robust chip and so you need to do a lot of tests but so far we're moving in the right direction. In terms of interest, we see different use cases, new use cases coming from operators around the world in which we believe that our chip will have a great advantage in terms of the products we can deliver or the solutions we can deliver to these use cases. It's early to quantify when and what would be the pace of traction in terms of commercial orders but so far operators are quite intrigued by the fact that the new use cases are being delivered by the capacity and there are also some new use cases we did not even think of that this chip would put us ahead of the competition with the right design of the next generation of our products.

Going back into the broader question, what exactly do you think you'll actually have orders in hand for it and when do you actually think you'll be shipping revenue from it, even if it's a small amount of revenue?

Alex, you are pulling me by my tongue. It's very difficult to kind of assess. I would say that I would not expect getting orders before the end of 2024. That would be my guess at this point.

Great, thank you so much.

You have no further questions. Please proceed.

So to start, to the year for us, we delivered strong revenue and significantly improved profitability. We are well positioned to achieve self-sustained cash flows as we execute our growth and diversification strategies. We expect that the new system on a chip based product line to launch in 2024 will give us a durable competitive advantage. We are increasingly excited about Seragon's opportunities. I look forward to updating you further on our next call.