Ceragon Networks' Asian Connection
By Dave Mock
July 22, 2008
Recommended (3)
As many investors hunker down and prepare for the worst with earnings season kicking in, wireless solution provider and Motley Fool Hidden Gems recommendation Ceragon Networks (Nasdaq: CRNT) has helped to spread a little bit of cheer. The small cap delivered impressive financials even with weak demand in the U.S. region.
Quarterly revenue at the company soared 48% to an all-time high of $55.2 million. GAAP net income came in at a whopping $15.5 million, but most of that figure was from a one-time, $11.2 million tax benefit. And in any event, the market was obviously expecting worse, since the stock bounced up by nearly 14% after the announcement.
Recent trends of strong demand continued in the Asia-Pacific region and within Ceragon's original equipment manufacturing (OEM) sales channel. The Asia-Pacific region made up 57% of revenues, even ahead of the 22% that came from emerging markets. Ceragon's OEM business -- which includes the Nokia (NYSE: NOK) and Siemens network partnership -- brought in almost 37% of the revenues this quarter.
Ceragon sees the weakness in North America continuing throughout 2008. But it expects to see improvements after that. It even cites the Apple (Nasdaq: AAPL) iPhone and similar data-centric mobile devices as ways to drive higher data use on wireless networks. Ceragon also sees the WiMax partnership between Sprint Nextel (NYSE: S), Clearwire (NYSE: CLWR) and other partners such as Intel (Nasdaq: INTC) and Google (Nasdaq: GOOG) finally coming around in 2009 and potentially boosting demand for products in the United States.
On the downside, increasing OEM business means lower margins. Ceragon reported a slight dip in gross margin to 34%, and operating margins fell to 7.8%. Net income is also diluted further, with a higher share base following a secondary offering last year. A weak dollar and increasing commodity prices are also making it tough for the company to squeeze more profit from each dollar of revenue.
But with strong demand fueling top-line growth, Ceragon now expects more than 35% growth in 2008. Still, an increased focus should fall on the efficiency of Ceragon's operations going forward, to ensure that increased growth and profitability will overcome dilution and reward shareholders.
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