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Ceragon Networks (NASDAQ:CRNT)
Q3 2020 Earnings Call
Nov 02, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, everyone. Welcome to the Ceragon Networks Limited third-quarter 2020 results conference call. Today's call is being recorded and will be hosted by Mr. Ira Palti, president and CEO of Ceragon Networks.

Before we start, I would like to note that this call includes information that constitutes forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 as amended and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be obtained or that any deviations, therefore, will not be material. Such statements involve risks and uncertainties that may cause future results to differ materially from those anticipated. These risks and uncertainties include, but are not limited to, the effects of general economic conditions, the effect of the COVID-19 crisis on the global markets and on the markets in which we operate, including the risk of continued disruption to our and our customers' providers, business partners and contractors, business and operations as a result of COVID-19 pandemic.

And such other risks, uncertainties, and other factors that could affect our results as detailed in our press release that was published earlier today and as further detailed in Ceragon's most recent annual report on Form 20-F and in Ceragon's other filings with the Securities and Exchange Commission. Such forward-looking statements include, as to the risks, uncertainties, and other factors that could affect our results represent our views only as of the date that they are made and should not be relied upon as representing our views as of any subsequent date. Such forward-looking statements do not purport to be predictions of future events or results, and there can be no assurance that it will prove to be accurate. Ceragon may elect to update these forward-looking statements at some point in the future, but the company specifically disclaims any obligation to do so, except as may be required by law.

Ceragon's public filings are available from the Securities and Exchange Commission website at www.sec.gov and may also be obtained from Ceragon's website at www.ceragon.com. Also, today's call will include certain non-GAAP numbers. For a reconciliation between GAAP and non-GAAP results, please see the table attached to the press release that was issued earlier today. I will now turn the call over to Mr.

Ira Palti, president and CEO of Ceragon. Please go ahead, sir.

Ira Palti -- President and Chief Executive Officer

Thank you. Good morning, and good afternoon to everyone joining us on the call today. With me on the call today are Ran Vered, our chief financial officer; and Osi Sessler, head of investor relations. Before getting into the quarter, I hope that you, your loved ones, your coworkers are healthy and well.

Here at Ceragon, the health and safety of our employees continue to be our top priority. We are managing well in the new normal with all departments continuing at full speed. As you can see from the results, Q3 was a stronger period for Ceragon. Our revenues were $70.6 million, nearly back to pre COVID levels, and our gross margin was above 33%, the highest it has been in more than a year.

This, combined with lower operating expenses gave us a profitable quarter in line with our focus. Our performance reflects the market with a stronger than ever need to increase network capacity as the world goes increasingly online to shop, work, and socialize. It also reflects the complexity and operating difficulty of COVID, which is still strongly with us. The need for broadband is driving the urgency for building new 5G networks, expanding 4G networks, and extending ISP service into additional areas.

As operators execute on 5G plans, a key consideration is being able to deploy the networks faster while controlling overall costs, and this has led to a complete change in the way networks are built. Many operators are now embracing an open network architecture in which both one and core network domains shift toward a cloud-native software-centric paradigm, open one, and open core. With this approach, network shift from tightly integrated hardware and software to a disaggregated model that enables operators to create virtual software-based network functions. This makes it much easier to adapt to constantly changing requirements.

We, at Ceragon, play a key enabling role in this process with a new class of equipment designed specifically for the open run environment. We have recently released our new IP-50 platform, an open solution architecture for wireless backhaul, mid-haul, and front-haul. As part of the development process, we achieved several exciting technological breakthroughs, that led to its recognition last week, but the telecom infra project tip community is one of the leading platforms for open wireless holding. They also recognize Ceragon as the only solution provider that offers both technology and products for all components of the open wireless holding architecture.

Although this industry shift has been coming for several years, it is intensifying now. Operators making the shift are looking for best-in-class offerings for each network domain, and this is leading them to Ceragon. This is a testament to our strategy of providing best-in-class technology solutions, which drive higher customer value for winning market share. These market dynamics are creating strong tailwinds for our 5G efforts around the globe.

We are very busy with 5G network design wins and POC's processes, as well as with activities around the release of our new 5G products. We are participating in various stages of the 5G selection process for operators throughout the world each with the potential to lead to very large multiyear sales. This, our long-term efforts that began with design wins, progress toward POCs or proof of concept with small initial shipments, and finally, as we believe we'll see volume shipments and deployment. On the POC front, we are preparing for a POC with an emerging greenfield service provider in North America.

It will test a wide coverage, 5G solution with gigabit backhaul to support its up and coming 5G rollout. We are also preparing for a field trial with one of the Pacific Rim leading open network operators following a very successful lab trial. Our solution will provide them with 20 gigabits 5G mid-haul capacity in millimeter-wave spectrum. We have also seen an increased number of design wins, including multiple recent awards from service providers in Europe and North America preparing to transition to 5G.

They are looking to upgrade the backhaul installed base with minimal hardware changes and our solutions take care of it with symbol swap of a module, as well as by providing a set of new radios in microwave and millimeter-wave bands, which seamlessly integrates with our installed base. We have begun shipping our newly released IP-50C in Europe to support a number of ongoing 5G network rollouts. The IP-50C is an innovative all outdoor quote carrier solution for bringing 5G onto macrocells. It provides extreme 5G backhaul network capacities in microwave spectrum while ensuring network reliability and availability.

It is unique in its support of operations in channels that are two times to four times wider than our competitors can provide. 8 gigabits in the air with the smallest footprint. This is the requirement for 5G macrocells achieving double to quarter increase in capacity. Operators understand the immense benefits and already acting in a number of countries to realize this fantastic network development approach to 5G.

And we are proceeding with regulatory lobbying with regulators worldwide to open up 224 megahertz channels uniquely supported by our technology, which allows the extreme 5G backhaul capacities that are required for this market. By the way, the operators that preparing for 5G are taking a variety of rights to get there. Some are opting for fiber first deployments in a densely populated area. Following later as the second stage with microwave deployments in less dense and rural areas and with front-hauling video units in the dense urban areas.

Others are going ahead first with upgrades to be ready for 5G quickly when the time comes. Therefore, our development activities are designed to make us the go-to supplier for every variation of the 5G opportunity, allowing customers to transform their network at their pace and in their own fashion. This is positioning us ideally and uniquely as a leader of holding 5G technology. As to 4G, we continue to benefit from large expedited operator projects to increase network reach in markets where 4G is currently lacking whether because of increased demand or inadequate coverage.

In some of these projects, the operators are already sitting in the backhaul infrastructure that is required for 5G. In Africa, we were awarded a big 4G order from Orange Niger and continued shipments to other operators for ongoing 4G upgrade and expansion projects. In India, we continued achieving a good delivery and installation run rate for our Bati projects, despite COVID constraints, giving us strong revenues from both products and services. And in APAC, we delivered very strongly in Southeast Asia, where multiple operators are ramping up the 4G networks.

In contrast, our business in LatAm was every week during the quarter due to COVID. One of our largest customers across the region remains in the CAPEX freeze, and other clients are coping with supply chain delays. We believe the situation is improving somewhat in LatAm and that budgets for 2021 will begin opening up already by the end of this year. The last market I'd like to discuss is the ISP market, which is benefiting strongly from the long time lines of 4G and 5G rollouts.

Given the massive new demand for bandwidth stemming from COVID stay-at-home directives, large population areas have been left with insufficient broadband. ISPs, both national and regional have been rushing in to fill the demand, especially in North America, and to some extent, in Europe, and we fulfill that demand both directly and via some of our channels. So to summarize, demand for network capacity has increased dramatically, leading to more 5G design wins, some of which have already translated into small orders, continued large-scale 4G expansion projects, and increased ISP demand. At the same time, significant variability and uncertainty remain regarding the timing of planning, purchasing, network rollout, supplying chain factors as COVID dynamics move according to their own rhythms across the world.

We remain extremely focused on execution in this uncertain environment, progressing on track with the IP-50 platform development and moving strongly ahead with new 5G design wins, POCs, and orders. I'll stop here and turn the call over to Ran to discuss our finances in more detail. Ran?

Ran Vered -- Chief Financial Officer

Thank you, Ira. Since you've all seen the press release, I'll focus on the highlights. As you can see, Q3 was a good quarter from a financial point of view. Our revenues were $70.6 million, up 13% compared with the second quarter and 26% compared to the first quarter of 2020.

They were down just 2% compared with the third quarter of 2019. The revenues waged from region to region, in line with the effect that COVID has had on local business operations and network build-out plans. Our strongest revenue were from India, reflecting ongoing deliveries for Bharti projects and APAC. Revenues from North America and Europe were in line with expectations, reflecting continued progress with ongoing projects, primarily ISPs and small 5G projects in Europe.

Africa had an exceptionally strong quarter, reflecting shipments for the Orange Niger project we announced in August. And as Ira discussed, LaTAM had a very weak quarter with budgets and projects frozen in the face of COVID-19. We had one above 10% customer in the third quarter. In contrast to revenues, our book-to-bill ratio for the quarter was below one.

This resulted from the fact that some of our customers booked their orders earlier in the year, together with very low bookings across Latin America. Bookings in APAC were actually strong and bookings in North America, Europe, and India was stable. Overall, our accumulated book-to-bill ratio for the nine months period is above 1. Gross profit for the quarter on a non-GAAP basis was $23.6 million, giving us a gross margin of 33.5%.

This is our highest gross margin in over a year, compared with 26.5% last quarter and 32.2% for the third quarter of 2019. It reflects the return of our revenues to the normal range, together with approximately $1 million in import tax relief that we recorded during the quarter. Excluding this relief, the gross margin would still have been about 32%, similar to Q3 last year and stronger than it has been in the last three quarters. Our non-operating expenses for the third quarter was $19.9 million, approximately $300,000 higher than they were in Q2 but down compared with pre-COVID in our projections.

R&D was $7.3 million, $0.5 million higher than Q2. The increase due mainly to our progress into the final stages of our chip development as planned. In contrast, our sales and marketing expenses declined again during the quarter to $7.8 billion. This is down about 18% from Q3 last year, reflecting the reduced travel and variable compensation that have come with COVID.

G&A for the quarter was $4.8 million, in line with our expectations. For Q4, the expectation is for OPEX to increase to a level of $20.5 million to $22 million, which is more in line with our normal pattern. In general, our operating expenses are higher for Q4 than for other quarters, reflecting higher variable compensation. In addition, we expect to continue accelerating our investments in chip R&D during the fourth quarter, resulting in a further increase in the R&D line.

Financial expenses and other expenses were a bit lower than the normal expected level during the quarter, and tax expenses for the quarter were low at $200,000. Our focused execution would lead to strong revenues, a high gross margin, and control OPEX, combined with lower taxes, gave us strong net income. On a non-GAAP basis, we posted a $2.3 million net profit or $0.03 per diluted share. On a GAAP basis, we posted a net profit of $1.6 million or $0.02 per diluted share.

Turning to the balance sheet. We continued working to improve our stability and working capital, and you can see our success in many parameters. We reduced our inventory by another $2 million during the quarter and are now at approximately $52 million, down $22 million from our peak 5 quarters ago. Our receivables are now at $108.4 million, down $10 million since the beginning of the year.

Our DSO now stands at 152 days. For Q3, we had $4.5 million negative cash flow from operating and investing activities while for the 9 months period, we had $1.4 million in positive cash flow. In addition, we reduced our loans during the quarter, helping to strengthen our balance sheet. Despite the lockdown on challenges, we continue on schedule with our operations.

With focused execution, we have been able to convert a large portion of our backlog, a development, which will benefit us going forward. And we continued on track with our major development programs to ensure that our future road map supports our design win efforts, supporting our target positioning as the strongest company in rudderless hauling and the key to generating future revenues. Looking forward, we expect to see significant operator activities, alongside continued uncertainty. If the world enters into a second or third wave with extensive lockdown, this would obviously impact our customers and us.

For this reason, we are taking the cautious approach to our projections for Q4 with a bit wider range than usual, $62 million to $75 million, $69 million to $75 million. With that, I will now open the call for your questions. Operator?

Questions & Answers:


Operator

Thank you. [Operator Instructions] Our first question will come from the line of Alex Henderson. Your line is open.

Alex Henderson -- Needham and Company -- Analyst

Thank you very much. A couple of questions, if I could. So the range of guidance, I assume that the 69 assumes there's further shutdowns and a worsening of the COVID environment. Can you talk a little bit about what you're assuming at the low end of the band and what you're assuming at the high end of the band?

Ira Palti -- President and Chief Executive Officer

When we look at that, with the low end of the band, we do assume some shutdowns, mainly in Europe and other places, and that in LatAm, things won't open up during the quarter. At the high end, we assume that in all places where there were I would say some lockdowns, we would start seeing some releases in those areas. But it's very hard. Let's remember, the large differences between deployment revenues, shipment revenues and bookings, and COVID and lockdowns effect.

By the way, they usually affect the bookings more than the revenues and the deployment because those in most places around the world, this can continue even under lockdowns.

Alex Henderson -- Needham and Company -- Analyst

I'm sorry. You're saying it affects the bookings more, but it does continue during the lockdowns, it seems contradictory? I would think the bookings would be more stable than the revenues under that scenario and the ability to install?

Ira Palti -- President and Chief Executive Officer

Yes. But because of the way we see sometimes the decision-making within the operators slows down significantly under lockdown some of the decision-making while projects that are in place. In most places around the world, the lockdowns are such that we can, at this point, install, work and in-store, ship, work and install.

Alex Henderson -- Needham and Company -- Analyst

OK. So it sounds like then at the low end of the band, you would expect your book to bill to be below one, would it be reasonable to assume at the higher end of the band that you would expect your book to bill to be above one?

Ira Palti -- President and Chief Executive Officer

Probably at one.

Alex Henderson -- Needham and Company -- Analyst

Got it. Perfect. With respect to the '21 environment, obviously, there's been lots of pressure this year, and it's clearly going to be a question of whether we get vaccines and all that sort of stuff. Clearly, a lot of unknowns.

But it also seems like with your book to bill above one through the first nine months with a reasonable probability of some improvement in 5G deployments next year. And continued strength in the new products that you would be seeing a better environment and a better response to your products in that year. Can you talk a little bit about what you're thinking about for the full year? Obviously, not looking for guidance, it's way premature for that. But some tonality to it would be very helpful?

Ira Palti -- President and Chief Executive Officer

OK. So if we look into 2021, it's very, very -- I'll start with the comment, very, very hard to focus. And we have done this exercise here internally because we're planning, it's a budget time. It's a lot of stuff.

So from a budgeting perspective, we are focusing first and foremost internally on the activities we want to do in 2021 internally with customers, markets, and where we want to go. And then playing around with the numbers on the back end. At this point, I still see very high variability on the numbers and if I take, what I would say, the low ranges if I add up the low ranges that I'm getting from some of the regions and some of the activities and the high end is, I'm getting up with an almost particularly high range. We do expect that if the conditions do improve and they expect it to improve, we'll probably see a better year than 2020 into next year.

And that's based on exactly the same comments that you made, a little bit of 5G design wins in some places opening up of some of the markets continued deployment of 4G, which will end up with a year, which is better than 2020. And probably we need to judge that also on a quarterly basis, probably at or above the run rate of the current quarter or some of those that kind, which is, as we said, we believe this quarter was a little bit more toward the normal.

Alex Henderson -- Needham and Company -- Analyst

So over that time frame, would you expect your book to bill to gradually improve as the momentum builds and you're looking out through the period into '22, '23. Just a technical question on the print. I was a little surprised to hear you say that the gross margin was impacted by a tax adjustment. It's not normally what I would assume happens.

And does that happen again? Can you explain that a little bit and whether that's something that's going to happen again, or what's going to --

Ira Palti -- President and Chief Executive Officer

I will let Ran -- a one-off, but I'll let Ran explain.

Ran Vered -- Chief Financial Officer

Alex, it's Ran. Thanks for the question. So it's more a one-off. It's some kind of import taxes that we have in Latin America, that we provision for it many years ago and now with some regulatory changes, we seem to get it back.

And this is a onetime $1 million that improved the gross margin by 1.5%.

Alex Henderson -- Needham and Company -- Analyst

I see. So that -- there's no change in the tax rate going forward, therefore, no permanent benefit to it?

Ran Vered -- Chief Financial Officer

Correct. Correct. It's one time.

Alex Henderson -- Needham and Company -- Analyst

All right. I don't want to be a pig, so I'm gonna let the next guy get into the questions. Thanks.

Operator

Thank you. Our next question comes from the line of Gunther Karger, and your line is open.

Gunther Karger -- Discovery Group Inc. -- Analyst

Yes. Hello? Can you hear me? Yes. First of all, congratulations on an excellent report. And secondly, the -- the second is the question.

Do you have any -- do you -- I hear you. Yes. The question is this. We have a delay here.

What I wanted to ask is this. Is there any constraint regarding supplies given the international COVID situation?

Operator

And, speakers, would you like to respond?

Ira Palti -- President and Chief Executive Officer

OK. So I'll respond, Gunther. You asked about the supply chain issue. In general, the supply chain is open at this point.

We do not see significant issues around the supply chain. Although we do have once in a while here and their issues with some parts and operators, but not significant. The place where it's more significant is that some of our supply chains is via air. And air shipments is still very, very expensive right now, where air shipments -- given a very high priority for medical supplies and other things, and it costs a little bit more.

We do see an increase in supply chain costs within our gross margin because of the COVID as it happens.

Operator

Thank you. [Operator Instructions] And we will go to a follow-up from Alex Henderson. And your line is open.

Alex Henderson -- Needham and Company -- Analyst

Hey. Thank you very much. So couple of things that I wanted to talk to. The situation in India, obviously, there's been some challenges associated with installations.

There's been some challenges associated with getting qualifications. It does sound like some of that started to bleed off. And it also sounds like there's tremendous increase in traffic. As I understand that the traffic growth in India has been running at 70% plus in each of this year and last year.

And considering they didn't spend very much in '19 and weren't unable to spend much over the first two or three quarters of '20. Can you talk about what kind of pent-up demand you might see there? And how do you see that bottleneck breaking?

Ira Palti -- President and Chief Executive Officer

OK. So in India, I need to talk into two things. One is sometime toward the beginning of August, a lot of the constraints in India on operating because of the lockdowns were lifted. And since that time, I'll say, running full speed.

We were planning on that. We were running full speed, both in delivery of equipment and delivery in the field in doing installations. I do not see what you would call a pent-up demand because in India, and I'll talk about some of the operators, but mainly both GEO and Bharti continued moving ahead with their plans even under COVID, they were fully operational. We saw both the relevant bookings, and we saw the relevant orders.

And the minute that everything was lifted up, we got a huge pressure to help and do the deployment. I do expect this to continue at the current run rates probably into first or maybe all of next year as really they build up the network, there's a certain speed out there. The only big question, Mark, is a customer of ours, which we haven't worked with for a while, which is Vodafone in India, which is going under significant changes. And there, you would say there is a pent-up demand because they have not been investing in the network for quite a while.

And we're still waiting to see what would they do. And how would they run their business moving forward?

Alex Henderson -- Needham and Company -- Analyst

Can you talk a little bit about the implications of the Huawei ban that's going on there and whether that changes the demand characteristics, particularly Vodafone, which I believe was predominantly a Huawei shop?

Ran Vered -- Chief Financial Officer

Vodafone was a predominantly Huawei shop, and my guess, because of the limitations in India, they'll have to choose other vendors. And I think we are in a good running position there, but let's wait and see. Until they make their decisions, I think they have issues before that, which have to do with the financing and getting the financing in place. And then I think we're in a good running position there.

Alex Henderson -- Needham and Company -- Analyst

Can you talk about what the share of Huawei has historically been in your category in that geography?

Ira Palti -- President and Chief Executive Officer

In India, the share of Huawei was somewhere around 20%, 25%.

Alex Henderson -- Needham and Company -- Analyst

So do you think you'll pick up --

Ira Palti -- President and Chief Executive Officer

Yes. But we took some of that share already in Bharti in doing it, and so there are things that need to be picked up as well.

Alex Henderson -- Needham and Company -- Analyst

OK. I got the gist of that. Going to the North American market, there's been some discussion about you getting some trials with some tier ones with, in addition, T-Mobile/Sprint situation coming back on stream, now that's closed. Can you talk a little bit about what you're thinking is in that geography?

Ira Palti -- President and Chief Executive Officer

And in the U.S. market, we need to look at a few things. One, as I mentioned on the call, we are in POCs with a greenfield operator for the 5G network and POCs are there. We did talk about the tier one trials.

We are still in discussions with them in lab trials on the equipment. And this is progressing slower than we wanted, but it's progressing. And the other thing that we see in there is that, again, with the COVID, it's slowing down decision-making. It's much harder, and I think I mentioned that both on the 5G, less on the 4G.

When people need to do a lot of planning and all the employees are working from home, things are doable, and I say a lot of progress, but some of the things are a little bit slower in there. One of the things that we saw, we did expect T-Mobile and Sprint to move much quicker this year and I think they're making very significant, very good progress around what we see the very little viewpoint that we have on the integration and integration of the networks but it's still slower than what we expected at the beginning of the year before COVID.

Alex Henderson -- Needham and Company -- Analyst

I get the gist of that. That all makes sense. Relative to the chip side of the business. Can you talk about your partnership there and whether that's expanded? What are you seeing from the competition in response to losing both Huawei and one other Pac rim key customers? So are you in a position now where you think you'll see the merchant market for your chips start to develop, or the competitive advantage that you see on those chips accelerating as a result of the lack of an available merchant chip with higher characteristics?

Ira Palti -- President and Chief Executive Officer

As much as we know today, there's no work and no plans for a merchant chipset out there from anyone, and that's the best of our knowledge at this point. We do see and we continue to do as you know, we had a JV with NEC, which is using those technologies out there, and we continue to work very closely with them. And this will tell will other people join our efforts around it or not.

Alex Henderson -- Needham and Company -- Analyst

So no change in status in that environment?

Ira Palti -- President and Chief Executive Officer

No change in status at this point in the environment.

Alex Henderson -- Needham and Company -- Analyst

Got it. Let me stop there and see if there's any other questions in queue.

Operator

Thank you. And with that, speakers, I'd like to turn it back over to you.

Ira Palti -- President and Chief Executive Officer

OK. So as we don't have other questions, I'd like to put a few comments around closing remark. Despite today's uncertain environment, I think we are operating well, very focused on operating, taking advantage of both the short-term trends and position to benefit strongly from the longer-term opportunities as we move into 2021 and beyond. I would like to thank all of you for your interest being with us.

And for those who are interested, we will be holding the next virtual R&D tours, so you can contact us and we'll schedule it out there. I'd like to thank you, and good day. And for our friends in the U.S., happy voting. Thank you.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Ira Palti -- President and Chief Executive Officer

Ran Vered -- Chief Financial Officer

Alex Henderson -- Needham and Company -- Analyst

Gunther Karger -- Discovery Group Inc. -- Analyst

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