Ceragon Networks Ltd.

Thank you, Operator, and good morning, everyone. Hosting today's call is Daron Arazi, Saragon's Chief Executive Officer, and Ronan Stein, Chief Financial Officer. Before we begin, I would like to remind participants that certain statements made on this call, including projected financials, results, and the company's future initiatives, future events, business outlook, development efforts, and their potential outcome, anticipated progress, and plans and results and timelines, and other matters, constitute forward-looking statements within the meaning of the Securities Act of 1933, as amended in the Securities Exchange Act of 1934, the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Saragon intends forward-looking terminology such as believes, expects, may, will, should, anticipates, plans, or similar expressions to identify forward-looking statements. Such statements reflect only current beliefs, expectations, and assumptions of Saragon's management. Actual results or achievements may differ materially as they are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include, but are not limited to, uncertainties as the occurrence and timing of the consummation of the transaction with CGLU and the potential failure to satisfy the conditions of closing of such transaction, the effects of the evolving nature of the recent war in Gaza, as well as other risks and uncertainties that are described in Saragon's most recent annual report on Form 20F and is updated from time to time in Saragon's other filings with the SEC, including today's filing of the earnings press release, all of which are expressly incorporated here on in by reference. Forward-looking statements relate to the date additionally made and are not intended to be predictions of future events or results. There could be no assurance that they will prove to be accurate, and Saragon takes 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 financial measures. For reconciliation between GAAP and non-GAAP results, please see the table attached to the press release that was issued earlier today, which is posted on the investor relations section of Saragon's website. With all that said, I can now turn the call over to Daron. Daron, the call is yours.

Thank you, Rob, and good morning, everyone. Ceragon Networks delivered another strong quarter, our third solid quarter in what is expected to be the strongest year of non-GAAP operating and net profit since 2018. Our strategy to increase market share within the private networks and with smaller service providers is bearing fruit. Since the start of this year, we have received initial orders from 20 new customers in these categories, and we expect our performance in these growth markets will be reinforced by the pending acquisition of Ciklu. Ciclo's strengths align well with our strategy to diversify our business beyond our core of T1 and T2 service providers, with a broader range of solutions that can help us expand our addressable market, further pursuing private networks and small service providers' opportunities to accelerate revenue growth and expand margins. Saragon continues to successfully navigate macroeconomic challenges affecting our industry, demonstrating the durable demand for our solutions, primarily in North America and India. Similarly, the ongoing hostilities in the Gaza Strip have not had any material impact on our business today. While we are proud to be a company headquartered in Israel, The majority of Saragon employees are based outside of Israel, close to the customers and partners. The vast majority of our manufacturing and our suppliers are also located outside of Israel. We have a detailed contingency plan which anticipates conflicts in the region, and this planning has enabled us to minimize the impact of the current events. Following the horrific terrorist attacks of October 7th, approximately 3.5% of our total employee base has been called up to active duty in the Israeli Defense Force. Based on our analysis, we don't anticipate this level to materially change and don't expect it to disrupt our operations in any meaningful way. For now, our offices in Israel are open and some employees are working there while others are working remotely. We are following the same type of protocols we used during the pandemic. We are in constant communication with our team and our priority is the safety and wellbeing of our employees and their families. These are challenging times, but Israelis are resilient and we have a devoted team. We continue to see robust demand, particularly in India and North America, and we are executing well in the face of geopolitical and economic concerns impacting others. This demonstrates the durability of our business. We believe our growth strategy involving expanding our addressable market beyond tier one and tier two customers that have historically been our base is coming into clear focus. And the acquisition of Ciclu, which we expect to close later this quarter, will only accelerate this initiative. For the first quarter in a row, revenue surpassed $80 million And we remain solidly profitable, generating significant cash from operations and investing activities. Our performance in the first nine months of 2023, combined with improving visibility into the fourth quarter, which is only dependent on smooth delivery and absent surprises, has given us the confidence to further narrow and raise the midpoint of our annual revenue guidance range. We believe we will end the year with a strong fourth quarter, giving us significant momentum as we move into 2024, which we expect to be another growth year for Ceregon. We are executing well, de-risking our business and reinforcing our competitive advantages. While the timing of bookings is not in our full control, and we are susceptible to shift in orders, we also believe that we will end the year with a book-to-bill ratio above one, increasing the strong backlog we had at the beginning of the year. Revenue for the quarter was $87 million, up 10.9% year over year. Demand remains strong primarily in India and North America. Revenue in India reached quarterly highs since Q2 of 2018. And this was the third consecutive quarter with North America revenues exceeding $20 million. New leadership in Europe in particular and in other regions are putting initiatives in place to drive improvements in 2024. In addition, we believe the pending CICLU acquisition will provide new capabilities to meet customer demands and help fueling growth, not only in North America and Europe, where Siclu has established significant presence, but also in other regions, especially in South America and Asia. We are encouraged by the initial reaction from existing Ceragon customers to this acquisition. Based on this feedback, we are optimistic that we will have opportunities to integrate cyclus products into solutions for some of our existing customers for specific use cases. Additionally, cyclus technologies broadens our addressable market by opening up the fixed wireless access portion to an end-to-end solution, particularly for private networks and small service providers. For each of these reasons, we see the pending cyclic acquisition as an important strategic transaction providing approximately $25 to $29 million in revenue, incremental to Sergon's standalone plan for 2024, which is expected to be another year of organic growth. We also believe that this pending acquisition will be a catalyst for accelerated revenue and earnings growth over the next several years and think that it will accelerate our path to achieving and potentially exceeding our $500 million revenue target currently anticipated by 2027. Following the closing of this and the finalization of our 2024 AOP process, we intend to provide guidance for 2024 and discuss long-term plans. Simultaneously, our existing core business remain solidly profitable. We delivered 4 cents in GAAP earnings per share and 6 cents on a non-GAAP basis. Importantly, strong collections enabled us to generate nearly $11 million in cash flow from operations and investing activities in the quarter. This reinforces our expectations that we will grow revenue and be profitable for 2023, generating cash and demonstrating that our business is self-sustaining. We have no current plans to raise money, and we do not believe we need additional capital to execute on our existing opportunities. As I mentioned, we have not encountered any significant impacts from supply chain disruption in the quarter. And while we continue to carefully manage the supply chain, component availability continues to improve. I do want to call attention to the increase in inventory that we amassed during the quarter and note that this increase is directly related to current orders that are in hand and in the process of being fulfilled. We continue to advance the productization of our new system on a chip technology. During the third quarter, we surpassed approximately 50% of our testing plan with no bugs or issues that would delay our plans for production of the system on a chip. To date, our efforts are advancing according to plan. And while there is still much work to be done, we believe we remain on track to launch our new product line using the new system on a chip in 2024. In addition, we are in the final stage of productization of two new products, featuring a lower total cost of ownership. These two products are expected to be available for commercial use during Q1 2024. We believe these new additional products will help us further expand our market presence and offer tangible benefits to our customers. In addition, They are expected to also help us with our long-term goal of improving ROS margins. I'd now like to overview our Q3 highlights by region, noting that on today's call, 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 results in the near term. In North America, we have continued to receive orders from major carriers, with one customer driving a significant portion of our volume. Service providers are standardizing on higher transport capacity and investing in upgrading existing sites in parallel to network expansion and densification. We expect this upgrade need will continue creating demand for our high end solutions, even as build out for 5G new sites is slowing down. Encouragingly, we are participating in additional opportunities with smaller carriers and private networks in line with our strategy. These also revolve around new use cases that we had not historically been involved with, as the need for ubiquitous connectivities intensifies and is not fully addressed by fiber. There are multiple enterprise use cases, including autonomous vehicles and IoT, where fiber is either not an option or cannot be delivered fast enough to support the business. Again, Ciclo may help us penetrate this growing market with a larger set of connectivity solutions. To date, our business in North America remains weighted toward large carriers, but this is beginning to shift. As it relates to the multi year contract with the city of Cincinnati, we have started deployment, which will include long term maintenance and support plans. In parallel, we are already identifying various expansion opportunities. The expansion of availability for 5G frequencies, as well as the evolving need for heterogeneous services profiles continue to serve as durable catalysts for our business. This is leading to a growing number of RFPs covering all segments of our addressable market, including T1 operators, rural ISPs, and small carriers, as well as private net. Some of these opportunities, particularly in the rural broadband and critical infrastructure segments, may take longer to mature as they are also supported by federal and state funding plans. However, rural broadband and infrastructure projects remain an important opportunity for Saragon, contributing to our revenue growth and diversification. Our digital twin software solution is also getting traction with several significant customers in North America. With some, we are about to start proof of concept shortly. This solution is a differentiator in providing managed services to help customers optimize their multi-vendor, multi-technology networks. We won our first managed services engagement in North America earlier this year, and we are building a nice funnel of opportunities for additional engagements in the telco and private networks. We believe we are increasingly well positioned to capitalize on all of these opportunities when they mature. We also continue to increase other services business in the region, which often can double the value of the equipment we sell. In India, telcos continue to aggressively invest in 4G technology and 5G expansions, depending on the region with larger cities adding 5G and 4G being used in more rural areas. We continue to work with operators in the market for 4G rollout as 4G continues to be the dominant subscription type in India, as well as delivering our eBend multi-band solution for 5G networks at an increased pace. Bookings were modest in India during the quarter, but this was a factor of timing, not demand. In fact, bookings have accelerated in the first weeks of the four quarter, and we expect a strong end to the year in India from a booking perspective. We have not seen a reduction in demand, and headwinds described by certain major equipment manufacturers have not had an impact on our business. Demand has remained robust. To summarize, we continue to deliver solid execution, including revenue growth, advancing our strategy and driving profitability and cash flow. Conditions continue to improve both on the macro and the micro level, especially in regards to the supply chain. Demand for our solutions is strong and we are participating in RFPs for new opportunities. We believe we can deliver similar revenue trajectory for the foreseeable future and that we can be profitable on a non-GAAP basis for each quarter this year. With that, I'll turn the call over to Ronen Stein, our CFO, to discuss the results in more detail. Ronen, over to you.

Thank you, Doron, and good morning, everyone. As Doron outlined, this was another strong quarter for Ceregon. Though it is 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 margins, 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 $87.3 million up 10.9% from $78.6 million in Q3 2022 and 1.3% compared to $86.2 million in Q2 2023. When we take the trailing 12 months view, our revenue was $332.4 million, an increase compared to last quarter's trailing 12 months revenue of $323.7 million. Our strongest regions in terms of revenues for the quarter were India and North America with $29.9 million, and $22.5 million, respectively, in line with the continuous strong demand we see in these regions. Our third strongest region in terms of revenues was Latin America with $12.9 million. We had two customers in the third quarter that contributed more than 10% of our revenues. Gross profit for the third quarter on a non-GAAP basis was $30.4 million, an increase of 8.8% compared to $28 million in Q3 2022, and essentially unchanged compared to $30.4 million in Q2 2023. Our non-GAAP gross margin was 34.9%. compared to 35.5% in Q3 2022 and 35.3% in Q2 2023. We continue to achieve high gross margins, mainly as revenues from North America continue to maintain its high level and product mix continue to be favorable while we keep costs under control, although this was offset to some extent by inventory write-offs as we prepare to launch new products. Our gross margins continue to fluctuate from quarter to quarter due to changes in product and regional mix. When we take the trailing 12 months view, our non-GAAP gross margin was 34.3%, slightly lower from last quarter's trailing 12 months gross margin of 34.5%. As for operating expenses, Research and development expenses for the third quarter on a non-GAAP basis were $7.3 million, up from $7.2 million in Q3 2022 and slightly lower from the $7.6 million in Q2 2023. As a percentage of revenue, our R&D expenses were 8.3% in the third quarter compared to 9.1% in the third quarter last year. Sales and marketing expenses for the third quarter on a non-GAAP basis were $9.7 million, up from $8.3 million in Q3 2022, and also up from $9.4 million in Q2 2023. As a percent of revenues, Sale and marketing expenses were 11.1% in the third quarter compared to 10.5% in the third quarter last year. General administrative expenses for the third quarter on an on-gap basis were $5.5 million, down from $6.1 million in Q3 2022 and down from $6.1 million in Q2 2023. As a percent of revenues, G&A expenses were 6.2% in the third quarter compared to 7.8% in the third quarter last year. We intend to continue being disciplined in our operating expenses while leveraging our strong results to further invest in certain areas to support continuous growth. Primarily, it is our intention to increase our sales and marketing expenses to support acceleration in our penetration to private networks and small service providers. Therefore, we expect our operating expenses in the fourth quarter to slightly exceed $23 million. We believe that such investments can better position us to see further growth in these segments in 2024. Operating profit for the third quarter on an on-gap basis was $8 million, up from the $6.4 million reported in the last year's third quarter and also up from $7.4 million reported in Q2 2022. Financial and other expenses for the third quarter on an on-gap basis were $2.1 million, in line with expectations and prayer periods. Our tax expenses for the third quarter on an on-gap basis were just under $1 million. Net income on an on-gap basis for the quarter was $5 million, or $0.06 per diluted share, compared to net income of $4.1 million, or $0.05 per share, in the third quarter last year. The third quarter gap net income was $3.4 million, or 4 cents per diluted share, compared to a net loss of $0.9 million, or a loss of 1 cent per share for the third quarter last year. As for our balance sheet, our cash position at the end of the third quarter was $34 million, compared to $22.9 million at the end of 2022. Short-term loans were $38.2 million compared to $37.5 million as of December 31st, 2022. We believe we have cash and facilities that are sufficient for operations and working capital needs. Our inventory at the end of Q3 2023 was $70.1 million, down from the $72 million at the end of December 2022. we continue to monitor inventory levels, taking into consideration the improvements in availability of components and expected changes in demand. As Doron mentioned, Inventory levels increased slightly compared sequentially to the second quarter, reflecting firm orders we are scheduled to deliver in the fourth quarter and the first quarter. As such, we expect inventory levels to normalize in the near term. Our trade receivables are at $104.6 million as compared to $100 million at the end of December 2022. Our DSO now stands at 115 days. As for our cash flow, net cash flow generated by operations and investing activities in Q3 2023 was $10.8 million. We expect to generate positive cash from operations for the full year. As Doron indicated at the top of this call, demand in our business continues to be strong and we are encouraged by our backlog, which gives us good visibility into the fourth quarter. Based on our results and as our visibility improves, we are updating and raising the midpoint of our full year revenue outlook from 334 to 348 million to $338,346 million and reaffirming expectations for full-year profitability. The outlook we are providing today is based on our current visibility. 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.

Great, thank you so much for letting me ask the question here. And my thoughts are with you guys, given the horrible terrorist attack that's thrown you guys into war. Hope everybody's safe and your families are OK. I wanted to hit a couple of quick questions. The first one is, can you give us some sense of the size of the inventory right down in the quarter? And is that now completed or do you expect a similar kind of write down in the fourth quarter as you anticipate launching the products in the first quarter of next year?

Regarding the level of write-offs, I would say that there was approximately $1.6 million of write-off that is beyond the regular write-offs. So it is in total, it's around $2 million. We do not anticipate any additional write-offs, but this is being monitored every quarter. So I cannot say that we know now about any expected write-offs expect from the regular model that we have.

So if I adjust for that right off, your gross margins would have come in at 36.7%. Can you talk about why that would not be the case again in the December quarter?

Well, the impact of the inventory is just something that we cannot anticipate exactly the mixture in the next quarter. There could be different paths to achieve our targets for the next quarter. And as you see, we still have some room of change in the revenues. So it can be higher, it can be a little bit lower. We cannot anticipate that exactly and provide guidance in that.

Again, if I back out the $1.6 million, you're 36.7. Is it reasonable to think that you're in the 35% plus range, not only in the fourth quarter, but for that matter with these new products launching, having higher margins in 24, shouldn't your margins be of 35% plus going forward?

So we have shown that we can reach higher numbers of higher percentage of margins, even to 35.5, and we even discussed that we can reach even 36%. But this is something that we have to make some room also for any other changes in mixture of products, software, yes or no, and other mixture of revenues from different regions. As long as we don't know exactly the final revenues mixture, it's very difficult to predict it. Usually there are something that can take us down, as you can see, to the level of 35, 36. But yes, in the last few quarters, we have been in the high 34 to the high 35.

Okay, so looking out into the 24 timeframe and just looking back at the 23 window, just to be clear, the supply chain problems did not cause a boom bust in your revenue recognition and the timing of your revenue. So we're not looking at a boom. an overage on 23 that's then setting up a tougher comp in 24, which has been expressed by some of the companies that are in the same category. Is that a fair statement?

Sorry, I couldn't hear you well. Can you repeat the question, please?

Sure. So a number of companies have understated revenues in prior periods because they couldn't get parts. Then when the supply chain improved, they over shipped relative to demand and have very tough comps. I don't believe that that happened with the Saragon. Saragon's 23 numbers are normal demand numbers, correct? There is no boom bust in the, or bust boom in the shipments because of supply chain. Is that a fair statement?

Let me take this, Alex. If you are talking business-wise, as I said, we expect book-to-bill ratio in this year to be above one. And that means that probably the short answer is that we don't feel that we over shipped or over delivered this year relative to the true demand that we are seeing now from the market.

Perfect. So you made the comment in the prepared remarks that you expect similar levels of growth. You're growing at about a 10% clip now. Is it fair for us to think of 24 as a 10% growth year?

I think I did not make the exact comment like you got it. I think that we do expect to grow next year as well organically, setting aside cyclos contribution. I think we can get to high single digit, maybe touch 10%. But let's not forget that this year is a year of very, very strong demand where we started with a relatively low baseline in 2023. So all in all, I think we can be in high single digit growth, touching 10%, maybe slightly below, and that's in terms of organic growth.

Looking at the fourth quarter, just to nail it down a little bit, you talked about $23 million in OPEX, which is a pretty good increase sequentially and year over year, quite a substantial increase. I assume that some of that's in the sales and marketing. I assume some of it's in the R&D line for the new products. Is it reasonable to think that the gross margins can be robust enough in 4Q to allow you to produce close to that 10% operating margin again in the quarter, or is that stretching?

You want to take it, Ronan?

Yes, we do believe that this investment is important. And as I mentioned, primarily in the sales and marketing, we feel that in order to achieve our targets in growing in the specific segments of private networks and small to medium service providers, we have to invest and to use our profitability right now in these quarters for some investment to the future. So there may be some fluctuation in the profitability in the operating a profit, a percentage from revenues. But as we don't know exactly the gross margin that is expected, hopefully we will not be much less than the current operating profit.

All right. I'll see the floor and go back in the queue. Thank you, Alex.

Thank you. mobile to the desktop application and wait for your name to be announced. Our next question today comes from the line of Ramo, the on-seal of Edges. Please go ahead.

Good morning. Thank you. And I just want to echo Alex's sentiments as well and wishing you and your families all the best and safety. I wonder if you could, thanks. You know, you guys talked about marketing efforts on, you know, to reach out to expand your business with private networks and smaller customers. Could you talk about, are you adding personnel there? Are there other sort of more temporary expenses that you'll be incurring in the near term or Would it be additional personnel and thus, therefore, a more permanent addition to the sales and marketing level? Thank you.

Yeah, Romel, thanks for this question. Basically, it's a combination. First of all, we have kind of beefed up our sales force in North America primarily that is focusing on this private network segment. So that's one thing for us to stay. And obviously, as these guys start bringing business, it will also help us to grow our booking and obviously the revenue. The second part is more of a variable part. It's an investment in marketing. Let's not forget that Saragon is very, very well known Brand in the t1 t2 operators across the world are we are just building the brand in the private networks and the smaller players. And that requires certain marketing investments. Now, this could be up and down depending on campaigns, depending on the marketing strategy. So that is a part that is more of a variable expenditure.

Okay. And just on a geographic focus standpoint, you've obviously made some penetration in North America with the private networks. Looking forward, do you foresee continued penetration in North America, expansion into Europe potentially? What are some of the geographic regions you want to target there?

Thanks, Taran. So generally speaking, first of all, I mentioned the – 20 new customers in the domain of private networks and small operators. One thing is that this is widespread, but definitely North America has a very significant portion in this success. And just for you to understand, we are not counting every $5,000 new customer. The aggregate amount of these 20 new customers initial orders is amounting to eight digit booking. So it's not an insignificant amount. We see the opportunity. in many regions. And we are actually changing the structure of our sales force to be led by segment rather than by geography in each and every region. So for example, in Europe, Now we have three categories. One is chasing T1 big operators. One is chasing private networks. And one is chasing smaller transactions via channels. So the focus on private networks is increasing. And as I said, the wins are not just in North America, although in North America we are very, so to speak, pleased with the progress. But this is meant to be a global effort, not just in North America.

Great. Thank you very much.

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.

To close, we are encouraged by our year-to-date results, and we believe that we are well-positioned to achieve self-sustaining cash flows as we execute our growth strategy. We are excited about the opportunities in front of Ceregon. We have commenced our strategic planning and budgeting process for 2024 and we anticipate achieving organic growth business next year. We announced a pending closing strategic acquisition that we believe will accelerate Sargon's strategy execution and can provide incremental growth opportunities and extend our margin expansion efforts. We expect to communicate our guidance for 2024 when we announce Q4 2023 results. I look forward to updating you further on our next quarterly call. Have a good day, everyone.