Ceragon Networks Ltd.

Welcome to Serga Networks, fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question and answer session. If you wish to participate and ask questions on today's call, you will need to click on the raise your hand icon within the Zoom application on your desktop or mobile device. As a reminder, this call has been recorded. It is now my pleasure to introduce you your host Rob Frink of FNKIR.

Thank you, operator, and good morning, everyone. Hosting today's call is Dharon Arazi, Serga's Chief Executive Officer, and Ronan Stein, 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 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 Securities Litigation Reform Act of 1995. Serga 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 Serga's management. The actual results, performance, or achievements of Serga may differ materially as they are subject to certain risks and uncertainties, which could cause the actual results differ materially from those projected in such forward-looking statements. Such risks and uncertainties are described in Serga's most recent annual report on Form 20F and may be supplemented from time to time in Serga's other filings with the SEC, including today's earlier filing of the earnings press release, all of which are expressly incorporated year-end by reference. Forward-looking statements related to the date initially made do not purport to be predictions of future results, and there could be no assurances that they will prove accurate. And Serga takes no obligation to update them. Serga's public filings are available on the Securities and Exchange Commission's website at sec.gov, and they may also be obtained from Serga's website at serga.com. Also, today's call will include non-GAAP financial measures. For a reconciliation between GAAP and non-GAAP results, please see the table attached to the press release that was issued earlier this morning, which is also posted on the investor relations section of Serga's website. With all that said, I can now turn the call over to Jerome. Jerome, the call is yours.

Thank you, Rob, and good morning, everyone. This was a significant quarter in the evolution of Serga. We closed the strategic acquisition that we believe will accelerate our growth, especially in key markets. We exceeded our guidance for revenue and delivered record full-year non-GAAP operating income, giving us great momentum and confidence as evidenced by our guidance for significant growth and margin expansion in 2024. Major parts of our strategy are steadily coming together while we increase our footprint in North America and grow our business with private networks around the world. This might be the right moment to discuss some of the KPIs that are giving us confidence that we are making progress in the execution of our strategy. For example, our bookings from private networks this year were nearly $40 million. This is a very substantial number for us. But even more importantly, while this consists of slightly above 10% of our total booking, the total booking from new private networks customers was above 30% of the company's total new booking from new customers, three times higher. In terms of the number of new customers, the progress is even more impressive. Approximately 50% of our total new customers this year were private networks customers. As part of our plans, we aspire to double the amount of private network booking in 2024. In parallel, we continue to increase our business in tier 1 and tier 2 customers. This has been our bread and butter for many years, in existing as well as new customers. Such as the most recently noted new customer in India. With a few of our long-standing customers, we are in advanced discussion of selling software-led managed services and we hope for more business with them in 2024. According to analyst reports, the millimeter wave market segment had the highest growth rate within wireless transport market, with a compound annual growth rate of 35% for the last four quarters ended September 30, 2023. This particular market segment is expected to continue outpacing the total wireless transport market growth in the coming years. I believe that some of the actions we took in 2023 are positioning Cerogon to monetize on this expected continued high growth. We continue deploying our IP50e in different regions. We developed our optimized total cost of ownership driven IP50eX that is expected to be launched in the coming weeks. And we have started the design of the next generation millimeter wave product that will be based on our new system on a chip, enabling us up to 100 Gbps wireless transport link. Last but not least, we acquired Ciclu, further expanding our millimeter wave offering to additional market segments and enhancing our -to-end solution. With all these actions taken, we believe we will maintain the broadest and strongest millimeter wave products in our market with the richest price performance range. In early December, we completed the acquisition of Ciclu. The integration is well underway. Ciclu contributed only a modest amount of revenue in the nearly one month they were part of Cerogon and the majority of our growth was organic. However, after closing the acquisition, we received a significant purchase order from one of Ciclu's largest customers. And important vote of confidence for us. The financial key indicators of the acquisition have come in as expected. During 2023, Cerogon generated more than 30 million dollars in cash from operations on a full year basis and 10 million dollars in free cash flow for the full year, even including the cash impact related to the acquisition of Ciclu. In the fourth quarter, Cerogon grew revenue nearly 20% to 90.4 million dollars, our highest quarterly revenue level of the year. Again, since the acquisition of Ciclu closed only in early December, Ciclu's contribution to this revenue was essentially insignificant. We delivered non-GAAP operating income of 7.8 million dollars, the third consecutive quarter above 7 million dollars. On a GAAP basis, our operating income was 4.2 million dollars. Our non-GAAP net income was 3.7 million dollars, the fourth consecutive quarter of non-GAAP net income exceeding 3 million dollars. This strong end to the year enabled us to grow revenue more than 18% for the full year to 347 million dollars, exceeding our full year guidance of 338 million dollars to 346 million dollars. Even excluding the nearly one month of Ciclu, we would have achieved our full year revenue guidance, with revenue at the high end of the provided range. For the full year, we delivered operating income of 29 million dollars on a non-GAAP basis and all-time record for Cerogon. On a GAAP basis, operating income was 21.2 million dollars. Net income on a non-GAAP basis was 16.7 million dollars and 6.2 million dollars on a GAAP basis. Clearly, Cerogon has successfully navigated macroeconomic challenges impacting our industry. Continued strong demand for our solutions, especially in North America and India, has enabled us to continue robust growth as we take market share and deliver consistent profitability. In fact, we grew revenue in North America by 43% in 2023 compared to 2022. We continue to believe that our growth strategy expanding our addressable market beyond T1 and T2 customers is coming into clear focus. The acquisition of Ciclu is expected to accelerate this initiative. Our performance in 2023, combined with improving visibility and the expected synergies from Ciclu, has given us the confidence to guide to continue double-digit revenue growth. We are also targeting significant margin expansion in 2024. Onen will speak to our guidance in more detail during his comments. In the next few weeks, two new products are expected to be introduced, providing our customers with a lower total cost of ownership and excellent performance attributes. 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 gross margins. We continue with the testing of our new system on a chip named Neptune and expecting to launch the first product using this chip by the end of 2024. As we already announced, it is our intention to demonstrate some of the Neptune capabilities at Mobile World Congress Exhibition in Barcelona next week. In particular, we will have a live demonstration of our upcoming Neptune-based millimeter wave technology, which we believe far surpasses competitors' capabilities. We will also display our IP50CX microwave radio and IP50EX millimeter wave radios. Both radios demonstrate a dedication to delivering high performance in compact packages for an optimized total cost of ownership. As we have said, this system on a chip platform represents a meaningful competitive advantage, which should help us further take market share in the future. I'd now like to provide an overview of our Q4 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 expand our business in the private network market. We pursue additional opportunities in the enterprise domain, large campuses, including universities, as well as municipalities. Importantly, these contracts typically have a greater component of services and specifically managed services, which is expected to improve the visibility of our backlog and reduce the lumpiness of our business. North America revenue was $24.5 million. Our solutions are in demand, even as service providers more cautiously in their capital expenditures. Bookings in North America were in line with expectations in this quarter, adding to our backlog and reflecting several private network wins and strong demand from our largest service provider customer. Ciclu North America benefited from a strong finish to the year, reflecting solid demand for Ciclu millimeter wave solutions. In India, we have continued to see strong demand for our solutions, even as others report softness. Revenue from India was $30.5 million. And booking were strong, increasing our backlog. We signed a deal in India valued at approximately $150 million, with the potential for additional revenue over time. Seragon collaborated with a large global integrator on this project, which will support a network modernization project for a tier one operator in India. This is a brand new customer for Seragon, and this customer will be the first to deploy our newest solutions. The agreement involves planning product delivery and deployment services, as well as a multi-year contract for Seragon's managed services that covers -to-day monitoring, management, and maintenance oversight of the microwave and millimeter wave network. We expect to begin the delivery and deployment of the new sites in the second quarter, and deployment is expected to complete within approximately two years. Approximately 75% of the project value expected to be recognized during this time frame. The remaining approximately 25% of the contract value is for managed services and maintenance, and is expected to start being recognized over the time of the agreement beginning a year post-deployment. This project will certainly benefit our presence in India, and while this win includes margins typical to India, we do not expect this win to be a drag on plans to continue improving our consolidated gross margins. Clearly, we continue to be successful in India and North America, and we anticipate this trend to continue in 2024. 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, the fourth quarter represented a solid end to a strong year for Seragon. For the year, we grew revenue by 18% to $347.2 million, expanded our gross and operating profit margins, and delivered positive gap and non-gap net income, along with positive free cash flow. This demonstrates the progress we have made in unlocking the earnings power of Seragon. 2023 was a very strong year for Seragon, and we entered 2024 with accelerating momentum. We remain a project-driven business with inherent variability in results from quarter to quarter, but we delivered four strong quarters, each with revenue over $80 million and each with a non-gap net income of above $3 million. On an annual basis, we were profitable on a gap basis for 2023, the first time since 2018. To help you understand the results, I will be referring primarily to non-gap financials. For more information regarding our use of non-gap financial measures, including reconciliations of these measures, we refer you to today's press release. Let me now review the actual results. Revenues were $90.4 million, up 20% from $75.5 million in the fourth quarter of 2022. Sequentially, revenue increased approximately .6% from $87.3 million in the third quarter of 2023. Our strongest regions in terms of revenues for the quarter were India and North America, with $30.5 million and $24.5 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 $11.8 million. We had two customers in the fourth quarter that contributed more than 10% of our revenues. Gross profit for the fourth quarter on a non-gap basis was $31.8 million, an increase of .1% compared to $25 million in Q4 2022 and up .4% compared to $30.4 million in Q4 2023. Our non-gap gross margin was .1% compared to a gross margin of .1% in Q4 2022 and .9% in Q3 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. Our gross margins continue to fluctuate from quarter to quarter due to changes in product and regional mix, as well as other operational factors. However, we continue to see a positive trajectory. As for our operating expenses, research and development expenses for the fourth quarter on a non-gap basis were $7.7 million, down from $7.9 million in Q4 2022 and up from $7.3 million in Q3 2023. As a percentage of revenue, our R&D expenses were .5% in the fourth quarter compared to .4% in the fourth quarter last year. Sales and marketing expenses for the fourth quarter on a non-gap basis were $10.2 million, up from $8.6 million in Q4 2022 and from $9.7 million in Q3 2023. As a percentage of revenue, sales and marketing expenses were .3% in the fourth quarter compared to .4% in the fourth quarter last year. General and administrative expenses for the fourth quarter on a non-gap basis were $6.1 million, down from $17.6 million in Q4 2022, which included a $12.3 million credit loss provision for a specific customer and up from $5.5 million in Q3 2023. As a percentage of revenue, G&A expenses were .7% in the fourth quarter compared to .4% in the fourth quarter last year. Our non-gap operating expenses are expected to increase in 2024 due to the full consolidation of Ciclu. However, as we have already said, with our growth plan and the added business from Ciclu, we are targeting operating margin expansion. We will continue to be disciplined in regards to our operating expenses to drive increased operating leverage. Our goal is to achieve at least 10% non-gap operating margin for 2024 at the midpoint of our revenue guidance. We expect to utilize our strong cash flow to invest in our strategic initiatives to expand our addressable market and target private network customers. We continue to believe that such investments can better position us to see further growth in these segments in 2024. Operating profit for the fourth quarter on a non-gap basis was $7.8 million compared with operating loss of $9.1 million for Q4 2022 and a profit of $8 million for Q3 2023. Financial and other expenses for the fourth quarter on a non-gap basis were $2.5 million, slightly higher than we expected due to currency losses from our operations in Africa. Our tax expenses for the fourth quarter on a non-gap basis increased to $1.5 million, mainly due to an update in our FIN 48 provisions following tax assessments in one of the territories in which we operate. Net income on a non-gap basis for the quarter was $3.7 million or $0.04 per diluted share compared to a net loss of $12.5 million or $0.15 per diluted share for Q4 2022. A net income of $5 million or $0.06 per diluted share for Q3 2023. Gap net loss for the fourth quarter was $1.2 million, negatively impacted mainly by $1.6 million charges related with the acquisition of Ciclu and a $1.2 million one-time charge related to a termination of long-term agreement with a third party for a joint development of 5G technologies. In accordance with the terms of this termination, we remained the sole owner of the developed technologies in return for waiving $1.2 million future payments by the third party. This agreement termination also had a significant balance sheet effect on our non-current assets and deferred revenues. It is important noting that it does not have any impact on our future revenue projections. Turning to the full year results. Revenues were $347.2 million, up .6% from $295.2 million in 2022. The growth is mainly attributable to a substantial growth in North America and India. Gross profit on a non-gap basis was $120.9 million, up $27 million from $93.9 million in 2022, giving us a gross margin of .8% compared with a gross margin of .8% in 2022. This substantial improvement in gross profits as compared with 2022 is mainly attributable to the substantial increase in revenues while maintaining same or higher margins in most regions, keeping general operational costs under tight control, improved supply chain costs partially offset by higher inventory write-offs. Operating income on a non-gap basis was an all-time record at $29 million compared with operating loss of $3 million for 2022. Once again, this demonstrates the progress we have made in unlocking the earnings power of Saragon and our ability to increase operating leverage. Net income on a non-gap basis was $16.7 million or $0.20 per diluted share compared with a net loss of $12.7 million or $0.15 per diluted share for 2022. As for our balance sheet, our cash position at the end of the fourth quarter was $28.2 million compared to $22.9 million at the end of 2022. Short-term loans were $32.6 million compared to $37.5 million as of December 31, 2022. We believe we have cash and facilities that are sufficient for operations and working capital needs. Our inventory at the end of Q4 2023 was $68.8 million, down from the $72 million at the end of December 2022. We continue to monitor inventory levels, taking into consideration improvements in availability of components and expected changes in demand. Our trade receivables are at $104.3 million as compared to $100 million at the end of December 2022. Our DSO now stands at 110 days. The main impacts of consolidating Ciclu into our balance sheet include the increase of intangible assets and goodwill, the increase of other long-term payables, the impact on our cash position, and additional inventory. As for our cash flow, net cash flow generated by operations and investing activities, excluding the $8 million impact of Ciclu business combination, net of cash acquired in Q4 2023 was $7.8 million. We generated nearly $11 million in cash from operations in the fourth quarter and nearly $31 million for the full year. As Doron indicated at the top of this call, we believe that the demand in our business will continue to be strong. For 2024, with a caveat of lumpiness between quarters, we expect revenue of $385 million to $405 million, representing growth of 11% to 17% compared to 2023. This guidance includes the contribution from Ciclu. Non-GAAP operating margins are targeted to be at least 10% at the midpoint of the revenue guidance. As a result, we expect increased non-GAAP profit and positive cash flow for the full year of 2024. With that, I now open the call for your questions. Operator?

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 first question today comes from the line of Alex. Great.

Am I up? Can you hear me? Yes, if you can speak a little louder, Alex, it will be even better. Perfect.

Good morning, Alex. I

can certainly do that. So start with congratulations on a great year and great quarter. A really good job this year, and it looks like the Ciclu acquisition was quite strong. So good news all around. So a couple of quick questions. What would be the organic growth rate excluding Ciclu? And if you could give us any update on your estimation of the Ciclu revenues for the full year.

So first of all, we were talking about this when we announced the deal. We're talking about an amount of 25 to 29 million dollars of revenue that we believe we'll be able to generate in 2024. I think for the sake of the assessment of the organic growth, this is still a good number. If we kind of carve it out from the revenue range that we projected in general, it's not in our intention to start splitting the numbers every quarter because the idea is to really have a very, I would say, tight integration where we go to the market with both products, lines offering solutions. Yes, and I think it will be a bit of misleading if we separate that for the future. But the outset, as I said, you should deduct this revenue range, and this should be the relevant gross or modal growth we expect organically.

Yeah, so no changes to the Ciclu revenue guide. Great. Second question, if I could. You've obviously got a bias to higher margins. Can you give us any sense of what kind of margin range we're looking at in terms of gross margins in 2024? I assume that it's probably what, 35 to 36, something like that. Can you give some guidance there?

I think that we will be around 36 percent. Some quarters will be shy below, some quarters may be shy above. Of course, there could be lumpiness between quarters. So this is in general, but in a specific quarter, it could jump or be a little bit lower. But this is more or less around the 36 percent, which is what we see as the annual one.

And then can you give us some sense of what the growth rate is between R&D and sales and marketing, G&A? I assume it's double digit in both sales and marketing and R&D, but probably low single digits in G&A, with more expense upfront and then trimming it as you bring that Ciclu integration costs down. Is that a fair assessment?

So I would say the following. In general, we target, as we said, the total operating profit to be on the midpoint above 10 percent. The split between the R&D and sales and marketing, I think that we will see a bit higher sales and marketing shift to higher sales and marketing, mainly due to the fact that our strategy shift into the lower tiers requires more sales and marketing, while in the R&D there will be some increase, but it's relatively modest. And we keep R&D more or less in the same level, trying not to exceed the R&D levels.

OK. And back on the balance sheet, obviously there's an opportunity here to bring some inventory down as the supply chain normalizes, and your ARRs still look pretty rich. So can you talk about what your expectations are for those two lines as we go through the year?

So regarding inventory, we continue to try to achieve a reduction in inventory. For sure, inventory as a percentage of revenues will decrease even if we have only slight reduction in inventory, because at the end we expect to increase revenues. On the ARR, we expect to see more or less the same level, trying to reduce a bit. It will be a bit challenging while India, big projects are coming, and it might be a little bit challenging on that, but we still expect to be around the same numbers last year, the same DSO, to keep the same DSO. Last

question, then I see the floor. Can you give us any guidance on the tax line and on the interest line? What are we expecting for the full year on those two items?

Well, on one hand, we had the $8 million, which we did not increase so much. And only half of it went into our loans, and we could take the loans down, which will obviously benefit us on the interest rates. Also, we see some interest rates relief, so it's a little bit going down. So we expect the interest expenses to go down. It's very difficult, as you know, to expect the exchange rates differences as a global company and the effects on certain operationals, but we don't see them as big numbers. This is for the financial expenses. With respect to the tax expenses, I think that this year was a bit higher than the regular, and we are working to align our tax structure as much as possible, and hopefully we will even reduce tax expenses from this year.

So just to round that out, so tax line about the same or down a hair and then interest line, what, $2 million a quarter kind of thing?

Something like that would be reasonable. Thank

you. I'll see the floor. Thank you so much, Alex. Our next question comes from the line of Moumel Niancio. You may speak.

Good morning. I wonder if you could just discuss a little more detail of the integration plans for Ciclu, just in terms of combining marketing forces, management, some of the infrastructure that they're bringing in, and I realize there's significant cross-selling opportunities, obviously, with your existing Salesforce. I wonder if you could just give us a little more granularity on that, please. Thank you.

Yeah. Hi, Roman. So the plans, as I said, are basically or the execution of our plans is on the way. What we see at the outset is that there is a strong demand for Ciclu products from the original markets they were at. You may understand from the deal structure that they were in some, I would say, financial distress before we bought them. And that actually inhibited their ability to supply the demand. So first of all, at the high level, we expect to see the -to-speak standalone Ciclu business ramping up because obviously we released all the ropes of financial difficulties and so on and so forth. And this is primarily driven by the sales team of Ciclu that is part of our region nowadays. In parallel, we are seeing opportunities for quick wins, especially in customers that are seeking for both the microwave and millimeter wave solution. Up until recently, when Ciclu was a standalone company, they were not able to offer microwave solutions from their portfolio. And now we see this as an opportunity for us to also boost our microwave business sales in existing customers of Ciclu. The other side of it is actually introducing Ciclu solutions and products to some of our customers. So far, the initial feedback from the market is very positive, especially looking into the -multi-point pterograph solution that can be used for fixed wireless access. And all in all, we see a lot of interest in Mobile World Congress. We intend to dedicate a big portion of our booth to explain and to show what these products and solutions can do and how they can help. So all in all, we are very optimistic. Our sales team is also learning. We have done a lot of training activities so that we boost also the sales of Ciclu products within our sales team. And by that, having a multiple or multiplying the sales force that is out there to sell Ciclu products. This is for the short run. For the long run, there's much more strategic thoughts that I don't think it's the right time to start discussing them. The only thing I would say is that I'm sure that with the Ciclu's acquisition on the Cerogon side, our ease of use in terms of our product is going to improve very significantly because these guys did an amazing job in terms of GUI design, in terms of alignment when you're doing installation. So this is a part of the integration that we intend to end up also on a Cerogon product, which means faster deployment by far and also better configuration or easier configuration of our products as well. I think I will stop here.

Great. That's very helpful. Thanks so much, Doron.

Sure.

Thank you, Roman.

You

have no further questions. Doron, please proceed. Thank you. So this was an encouraging year for Cerogon. We're increasing our footprint in multiple domains and expect to continue delivering significant revenue growth. The overall wireless transport market continues to grow based on projections from independent industry analysts, and the expectation is that growth will continue in coming years. We believe we can grow much faster than the market growth by focusing on the parts of the market that are expected to grow faster and expanding into new domains. Beyond delivering strong radio products to this market and primarily focusing on millimeter wave that is expected to outpace the market growth, we're expanding our business in other focused domains, which are private networks as well as the software-led managed services. This growth profile serves as the basis for our expectations for double-digit growth going forward. We are solidly profitable and expect to further expand our margins in 2024. We believe that we are well positioned to continue to achieve self-sustaining cash flows as we execute our growth strategy. I look forward to updating you further on our next quarterly call. Have a good day, everyone.