Ceragon Networks (CRNT) Q1 2022 Earnings Call Transcript

Ceragon Networks (CRNT 1.09%)
Q1 2022 Earnings Call
May 02, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Maya Lustig

Good morning, everyone. I am joined by Doron Arazi, Ceragon's chief executive officer; and Ran Vered, Ceragon's chief financial officer. 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 as amended, and the Securities Exchange Act of 1934 as amended and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 deviation 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 such 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 represent our views only as of the date 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 they will prove to be accurate.

Ceragon may elect to update these forward-looking statements at any point in the future, but it specifically declaims any obligation to do so. Ceragon's public filings are available on the Securities and Exchange Commission's 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 Doron. Please go ahead.

Doron Arazi -- Chief Executive Officer

Thank you, Maya, and good morning, everyone. We began the year with strong momentum that has built up since beginning of 2021, especially in North America and Europe. We saw exceptionally strong bookings in Q1 2022, the highest in the last four years and on par with second quarter of last year. We continue to make good progress in all three of our strategic pillars together, which constitutes our growth strategy, as you may recall from earlier discussions.

Our first strategic pillar has to do with increasing our traditional business, which is the best-in-class all-outdoor microwave and millimeter-wave market segments. With a massive ongoing 5G network rollout in North America and Europe, we received significant value of orders this past quarter. Our second pillar involves expanding our business into open network architecture domains. Our IP-50FX disaggregated cell site gateway or DCSG solution launched in the first quarter, uses the best-of-breed software and hardware to integrate a cell site router and a radio into a unit offering both in a single solution.

This quarter, we already received the PO for IP-50FX from a large Tier 1 operator in Latin America. And our third pillar in strengthening our managed services offering to deepen our relationship with our customers. This offering has garnered considerable attention from operators, private networks and carriers in North America, Latin America and Europe. In fact, the results of our most recent customer survey, which was conducted in the first quarter demonstrate that 28% of our existing customers would be interested in our managed services.

And we are already seeing this interest turn into POCs and orders for NOC support, Connectivity as a Service and more across different regions. Our customer survey also shows that our product satisfaction rate stands at a competitive 85%. That 85% of our customers think our main advantage is us being their "trusted advisor" and they rate us among the top three technology leaders in the industry. In addition, a staggering 97% report that they are likely to increase or maintain their business with us.

According to them, what sets us apart is our product quality, ease of use and reliability. These results allow us to confirm our continued confidence in the strong demand for our solutions in 2022. I will now give you an overview per region. In North America, we experienced high demand and received healthy bookings.

Based on the current outlook, we anticipate another record year in this region. As we announced earlier today, we signed a contract with DISH and started receiving orders worth multimillion dollars. This will leverage our ultra-high capacity IP-50C microwave and IP-50E millimeter-wave transport solutions to support its nationwide 5G rollout. We will also provide them with deployment services for a smooth rollout and network asset management.

DISH is America's first cloud-native 5G network service provider, and we feel proud to be their partner of choice. Also in the first quarter, we won a deal with a large North American carrier to provide them with our all-indoor technologies. In this region, in addition to accelerated 5G rollout by large operators, we are seeing the ISPs and private networks market expand. In Q1, we enhanced and grew our sales funnel significantly, winning a tender in this domain as well.

In India, the continued high demand is reflected in the strong orders and the bookings we received. Here, we mainly work with the region's Tier 1 operators, helping them with fast site upgrades and network expansion to prepare for the 5G era and deliver uninterrupted connectivity. In February, a leading Tier 1 operator placed orders for our all outdoor 5G-ready multicore solution with deliveries scheduled for Q2 and Q3 2022. Countrywide, the 5G spectrum tender is on track.

Even spectrum release for backhauling is on its way, which presents a significant opportunity for us. We believe that our longtime market leadership and reputed name will help us have a decent market share in this domain. In Europe, we had an exceptionally strong quarter. In fact, it was a record quarter in the past two years.

Here, as large operators begin their 5G field trials, we provide them with our latest capabilities and technologies. A leading Tier 1 operator and the third-party DCSG have tested our RAON, which proved that our RAON software works well with other open network elements. We also finished a successful POC with a Tier 1 global operator as part of their TIP activity. In addition, we acquired a new Tier 1 customer -- sorry, a new Tier 2 customer.

We will be supporting them with their nationwide 5G projects. In APAC, we saw an improvement in the business environment compared to the last quarter. Post-COVID countries are opening up and the market is working its way back to normal, except for China. This past quarter, we acquired two new private network customers in this region.

Bookings were strong. In Latin America, we experienced a very strong start to the year, thanks to strong bookings. The pandemic seems to be behind us and business recovering. Despite some political instability, which has an impact on business decisions and ongoing projects, investments are beginning to increase in several different countries.

We received POs for our IP-50FX from leading Tier 1 operators in Paraguay and Argentina. In Africa, we had a slow quarter, in line with our expectations due to seasonality. On the delivery and gross margin front, this quarter, we continue to experience the challenges we spoke about in our previous call. These challenges caused our revenue to be somewhat lower than our expectations, so was the gross margin.

This quarter, an issue that stood out was shipping costs relative to our expectations. We have been analyzing the main reasons for this specific cost increase in order to take action where we can and to get a better control of it. As stated in our previous analyst call, we believe that these challenges are temporary. Improvement in our gross margin is expected only during the second half of the year, assuming gradual improvement in our supply chain and shipping constraints and costs.

Our main goal is to continue to meet the increased demand we are seeing from our customers and maintain and expand our market share. That said, we are doing our utmost to improve our gross margin via short, mid and long-term cost reduction initiatives as well as price increases where applicable. Looking ahead, we feel confident about our core domain products as well as our newer products such as IP-50FX, which help us leverage the fast-growing open network trend. We believe that our positioning as best-in-class providers for microwave and millimeter-wave technologies as well as a leader in the new disaggregated market will continue to drive positive returns.

As I mentioned earlier, these two areas cover the first two pillars of our growth strategy. In addition, expansion in the third pillar, which is managed services, will bring us more recurring business and revenues and improve our gross margin. Our belief is that together, increased activity in all three pillars will help us achieve margin expansions, which is our core aim. The bottom line is that demand looks strong, and we see opportunities to increase our market share.

Thus, in spite of the challenges associated with deliveries and cost increases, we are optimistic about the future. With that, let me now turn the call over to Ran to discuss the financials for the quarter. Ran?

Ran Vered -- Chief Financial Officer

Thank you, Doron, and good morning, everyone. To help you understand the results, I will be referring mainly to non-GAAP numbers. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today's press release. Like Doron mentioned, during Q1 2022, we saw strong bookings coming from North America, Europe, India and Latin America.

We see strong continued demand overall. Let me now review the actual numbers with you. Revenues from the first quarter were $70.3 million, up by 2.9% compared with $68.3 million in Q1 last year, somewhat lower than expected. In Q1, we experienced several challenges, which included delivering some of our products on time due to component shortages and supply chain disruptions.

That said, as I mentioned earlier, demand continued to be high. Our strongest region in terms of revenues for the quarter is India, with $15.6 million, reflecting ongoing deliveries for our main customers and in line with the strong demand we see in this region. Our second and third strongest regions in terms of revenues for the quarter were Latin America and North America with revenue of $13.9 million and $13.3 million, respectively. As Doron mentioned, in Latin America, the pandemic seems to be behind us and business is recovering where two above 10% customers in the first quarter.

Gross profit for the quarter on a non-GAAP basis was $19.5 million, giving us a non-GAAP gross margin of 27.7%, lower by almost 2% than the first quarter of 2021. The relatively low gross profit is mainly due to expedite costs, derived from component shortages and increased shipping costs. Operating expenses on a non-GAAP basis for the first quarter were $20.1 million, in line with our expectations. Research and development expenses for the first quarter on a non-GAAP basis were $6.8 million lower than in Q1 2021.

We expect an increase in our R&D expenses in the next quarter as part of the continued productization efforts of our new chip. Sales and marketing expenses for the first quarter on a non-GAAP basis were $8.5 million compared to $8.2 million in Q1 2021. General and administrative expenses for the first quarter on a non-GAAP basis were $4.8 million, same as our expectations. Financial and other expenses for the first quarter on a non-GAAP basis were $1.2 million lower than our expectations.

Our tax expenses for the first quarter on a non-GAAP basis were $0.1 million. This is in line with our expectations. Net loss on a non-GAAP basis for the quarter was $1.2 million or $0.02 per diluted share. As for our balance sheet, our inventory at the end of Q1 2022 was $58.1 million, up from $48.5 million at the end of Q1 2021, but lower than Q4 2021.

The level of inventory still reflects our need to stock long-lead and strategic items as a result of increased customer orders as well as the ongoing component shortages. We strive to keep our inventory levels lower, but given the current environment, sometimes the need to stock key and long-lead items arises. Our trade receivables are now at $120.7 million, up from $106.7 million at the end of Q1 2021. Our DSOs are now stand at 150 days higher than the 141 days in Q1 2021.

This quarter, we were able to better control our cash flow from operations and investing activities compared to Q4 2021. We have a strong balance sheet, including $25 million of cash and have available unused credit facilities of $23 million. Net cash used in operating and investing activities for the first quarter was $4.5 million. Net cash provided by financing activities for the first quarter was $12.2 million.

Looking forward, we see strong operator demand. But as the year unfolds, we also see the global component shortage, supply chain disruptions and shipping issues continue to create business challenges as well as fluctuations in our gross margin. Although the situation remains volatile, we are constantly taking measures to counter the challenges and are well positioned to take full advantage of long-term opportunities. We continue to target revenue growth in 2022.

Assuming an improvement in the components, supply chain and shipping drawbacks, we now expect yearly revenue to be between $300 million to $315 million. Improvement in our gross margin is expected only during the second half of the year, assuming gradual improvement in our supply chain, in shipping constraints and costs. With that, I now open the call for your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question today will come from the line of Alex Henderson from Needham. Please go ahead.

Alex Henderson -- Needham and Company -- Analyst

Great. Can you hear me?

Doron Arazi -- Chief Executive Officer

Hi, Alex.

Ran Vered -- Chief Financial Officer

Hi, Alex.

Alex Henderson -- Needham and Company -- Analyst

So a couple of quick questions. One, if you were not supply constrained in the quarter, what kind of revenue could you have produced? And two, on the gross margins, how much of the pressure was a function of the inflation in shipping costs and parts that might be mitigated in future periods. In other words, had -- or do you expect the parts prices that are increasing to stay up at these levels, if that's the case, then don't back that out but if you expect some improvement in parts that you're not expediting do back that out.

Doron Arazi -- Chief Executive Officer

Yeah, so let's start one by one. First of all, our plan at the beginning of the quarter was to generate $75 million or even more. And in terms of the impact of the shipment costs and the expedite fees that we are paying for components, the impact in terms of percentage of gross margin, this quarter was something between 3% to 4%.

Alex Henderson -- Needham and Company -- Analyst

OK. So just going back to your comment about $75 million plus, to be clear, that still with a supply constrained guide. So had you been fully available to buy any part you wanted to and ship anything you wanted to, I assume it would have been higher than the $75 million, is that correct?

Doron Arazi -- Chief Executive Officer

Yeah.

Alex Henderson -- Needham and Company -- Analyst

So what kind of -- I'm just trying to get a gauge of what the true underlying revenues would then had it not been for these supply constraints?

Doron Arazi -- Chief Executive Officer

Yeah. Let me kind of back up for a second. Our backlog is great. It's huge.

What's holding us is all these constraints. And originally, we planned in our AOP for even higher revenue than the $75 million. Once we moved forward and had to provide with our projection in the last call, in the previous call, we took some prudent steps and said, OK, let's reduce a bit. And then we reached to $75 million and even that was not able to be achieved only because of the constraints that we have in terms of component shortages.

And obviously, even the part that we're able to overcome the shipment cost went up dramatically because we wanted to supply to our customers on time. And we had, in some cases, to use more air than sea.

Ran Vered -- Chief Financial Officer

Alex, just to complement on Doron, if I may. Part of the erosion in the gross margin, the rise from our decision to expedite shipments in order to satisfy their customers, so I will say that part of it is in our control in order to make sure that our customers are provided by the equipment as part of their deployment plan and it's in our control. Yes, its cost us money. But we do think that we do -- we are taking the right decisions because we know in this market, the cost of gaining new customers is by far higher than maintaining customers.

And we need a Tier 1 long-standing customers' relationship, we thought that this quarter, that it's the right decision to pay this expedite fees in order to maintain our market share in these customers.

Doron Arazi -- Chief Executive Officer

Yeah, that's a great point. And I want just to add to it. It's not that we are blindly doing that across the board. We are making decisions on the spot.

And obviously, it's very difficult to see the end result picture of the quarter while you are in the -- within the quarter making decisions day by day. But we are making very, I would say, conscious decisions where we want to spend the extra amount to keep maintaining our -- and maintain our market share, in some cases, even increase it as opposed to the option of losing customers to the competition.

Couple of quick questions. Any exposure to Ukraine, Russia as a result of the war? And then second, has there been any change in the demand as a result of that, particularly in AMEA or other markets that might be impacted by the economic consequences of that war.

Ran Vered -- Chief Financial Officer

So I will pick up the first one, Alex, and would let Doron to comment on the second. So almost, I would say, zero impact of the role in Russia and Ukraine, both, I will say, on the business side of things and also on the balance sheet because we have negligence, I will say, amounts in our real. In regards to these customers and the level of activities, we have is also very small. So I will say almost zero impact on these customers -- on this -- when it relates to Russia and Ukraine.

Doron Arazi -- Chief Executive Officer

Yeah. And regarding your second question, Alex, so far, we haven't seen any impact. Actually, Europe this quarter came very, very strong with a record booking quarter for the last two years. So, so far, we don't see the impact on the rest of Europe.

Alex Henderson -- Needham and Company -- Analyst

OK. One last question and then I'll see the floor. The DISH win, obviously, congratulations. That's great news.

Can you give us some sense of the scale of that on an annual basis as you're rolling out that program, what it could be this year, what it could be, say, three or four years from now, what's the size of this transaction?

Doron Arazi -- Chief Executive Officer

Based on what we have seen so far and the initial orders we have started receiving, I think this year could probably add something within more or less two digit, $10 million of bookings this quarter. And I think that it's also yet to be seen because this is just the first stage. So it's very unclear how things will play out later. But if you ask me, I would assume double-digit amount of millions of dollars, single low double digits.

Alex Henderson -- Needham and Company -- Analyst

So just to be clear, the gross margins in the U.S. tend to be higher. This should be consistent with that? And then second, are you the lead supplier to DISH?

Doron Arazi -- Chief Executive Officer

To the best of our knowledge, we are the lead supplier. Actually, we have the lion's share on the equipment and in this round, probably 100%. And we are leading the installation and providing with the services as well as providing with managing all the boxes using our NMS system. That is where we are at this point.

In terms of the margin, generally speaking, you're right. Margins are -- U.S. margins are higher. Just bear in mind that with the services, since we are in a ramp-up stage because up until now, we did not have a significant services business in the U.S.

the fixed part of our cost is probably going to be a little burden on our gross margin in the near future, but we do see some more opportunities of this kind of services, both to other Tier 1s as well as Tier 3, Tier 4 and the critical infrastructure and as we move along, the services part will increase. And as a result of that, the fixed cost will basically become a lower portion improving our gross margins.

Alex Henderson -- Needham and Company -- Analyst

Got it. Thank you very much for the response. I'll get back in queue. Thanks.

Doron Arazi -- Chief Executive Officer

Thanks. Thanks, Alex.

Operator

Thank you. Our next question comes from the line of George Iwanyc from Oppenheimer. Please go ahead.

George Iwanyc -- Oppenheimer and Company -- Analyst

Hello, Doron and Ran. Can you hear me? 

Doron Arazi -- Chief Executive Officer

Hey, George. How are you?

Ran Vered -- Chief Financial Officer

Hey, George.

George Iwanyc -- Oppenheimer and Company -- Analyst

All right. Thank you. So kind of picking up on Alex's questions. When you look at the supply chain and visibility as the year progresses, it looks like your adjustments to the annual guidance is mostly related to the first quarter but do you see improvement in the second quarter or is most of the revenue growth anticipated to come in the second half of the year?

Ran Vered -- Chief Financial Officer

At this point, because we are in the midst of the storm and we assume we are very prudent, we are trying to kind of be very careful. We assume that the second part of the year is where we are going to see a bigger portion of the growth.

Doron Arazi -- Chief Executive Officer

As well as improvement in the gross margin, of course, as a result of that.

George Iwanyc -- Oppenheimer and Company -- Analyst

When you have discussions with your suppliers, what kind of visibility are they giving you into the timing of availability?

Doron Arazi -- Chief Executive Officer

Yeah. Let me explain to you the situation. You get, I would say, a reasonable visibility, and we thought it's improving. However, there's two things that are impacting this visibility and can create surprises to us, and this is why we are very cautious.

One, even if the component vendors commit to a certain specific day, they may decline this commitment sometimes as late as two weeks before delivery date. Now we are working primarily with a contract manufacturer in Singapore that buys most of the components, the regular components for us. If he faces this kind of situation, he has nothing to do with it. He just can let us know that this is happening and that's it.

Said that, we think that they can improve the visibility as opposed to what we have seen in the last couple of quarters. And by the way, one of the goals I have is to meet with them this quarter and discuss how we can improve the visibility coming from them so that we can come up, I would say, with better estimations about the revenue we'll be able to generate.

George Iwanyc -- Oppenheimer and Company -- Analyst

When you look at the pricing environment and the expedite extra cost from a shipping perspective, how much are you able to either transfer some of those costs or have discussions with your customers on the potential to raising prices and/or like temporarily offsetting some of the shipping costs?

Doron Arazi -- Chief Executive Officer

I would say that this is an ongoing discussion with all of our customers. And as you can understand, every day is a new day and just looking at the growth of the increase in airfreight and sea freight, just in the last couple of months, you can understand that the environment is very, very volatile. I can tell you that we have successes -- almost in each and every region we have successes of either increasing prices or doing some changes in shipment terms but it's not a walk in the park because let's not forget, 70% of our business is coming from Tier 1 operators and Tier 2 operators, which are by far a bigger and their leverage and commercial power over Ceragon and not only Ceragon, is big. And obviously, the competition is waiting aside, and I've not seen a very intensive price increase coming from the competition.

So we are doing it one by one. I can tell you that I'm quite satisfied with the progress we have made but now after seeing the shipment cost increase, we might make a decision to go back to our customers for a second and the third round.

George Iwanyc -- Oppenheimer and Company -- Analyst

All right. And Doron, can you give us a bit more of an update on the 5G side and whether you added any incremental design wins and then from a productization standpoint from the new chipset, where are you, what kind of timetable should we expect?

Doron Arazi -- Chief Executive Officer

So I mentioned on the conference call, actually, the interest we have seen with our new IP-50FX, it is in the RAON, which is basically -- the software is basically a virtual indoor unit is amazing. We were very surprised by the level of traction -- and we are making a lot of progress with some of the biggest players -- customers, potential customers, actually in Europe. In terms of other areas, also this particular disaggregated cell site router is getting a lot of interest in Latin America and to a certain degree, we are considering launching a lower cost of this product in the future and this also gets a lot of traction in India. So this product is showing very, very strong initial signals of success.

Obviously, it's yet to be seen. As for the chip, generally speaking, we are moving forward more or less in accordance with our plan. We're in the productization phase. We're about to start all the validation tests soon and we do hope to finish the productization phase at the end of 2022.

Basically, this part is competing with many other chip designers on substrate, on manufacturing queue and so on and so forth, so I'm saying that very carefully. I hope to really finish the productization in 2022, but the situation in the component -- in the chip market could create some delays, which we hope will be minimal. Obviously, once we're in a position where we can start working with the chips and move forward fast with our new 100 series, we will do that. And at this point, it is our estimation that we'll start basically launching our new products under the 100 series probably at the beginning of 2024.

George Iwanyc -- Oppenheimer and Company -- Analyst

OK, two more questions. So Ran, you mentioned that R&D is expected to increase in the next quarter. How do you look at your overall opex spend? Are you able to maybe save a little bit on the G&A side?

Ran Vered -- Chief Financial Officer

Yeah. So thanks for the question, George. The answer -- the simple answer is yes. We are going and we already take a real look on our opex expenses and try to be, I will say, a more disciplined in terms of opex spending, mainly on the G&A side of things and we are going to keep it for the next quarters, especially with the volatile market in terms of -- from gross margin, we are going and we already do some more disciplined opex expenses, in particular on the G&A side of things.

George Iwanyc -- Oppenheimer and Company -- Analyst

OK. And last question. So Ran, thank you for the conversations and all the work over the years, and I wish you well. So Doron, how is the CFO transition search going? Can you give us an update on what you're looking for?

Doron Arazi -- Chief Executive Officer

Yes. We are basically, obviously, in the midst of the process of search, I think we have identified a couple of very good candidates and obviously, it's a process that it's not only me who is involved, also some of our directors from the board of directors will interview the candidates. I hope that this -- that we are relatively in the last, I would say, stages of this process, but yes, it may take us some more time. Generally speaking, the profile is of people who have business experience and are not just very much focused on the accounting and financial because people who know Ceragon know that the impact of finance on the success of the business is very significant.

So we are looking for this kind of profile and obviously, if this person also is coming from some experience, in particular, in the telco industry or vendor or equipment vendors to this industry, that would be nice to have.

Ran Vered -- Chief Financial Officer

Just can I compliment for just for a second. So George, first, thank for the warm words. Just two more comments from me on that. First, I'm leaving, but I have a very, very strong team that I -- some of them, I recruited myself, some of them Doron recruited on his previous role here as a CFO and we are able to maintain them.

Second, even after my departure, I have my commitment to Doron and the board to have a transition with a new CFO. So I guarantee a smooth transition on that respect as well.

George Iwanyc -- Oppenheimer and Company -- Analyst

Thank you very much.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Alex Henderson from Needham. Please go ahead.

Alex Henderson -- Needham and Company -- Analyst

Great. Thanks. Clearly, the supply chain issues have been a big problem in the rearview mirror. But looking in the headlights, there's a lot of risk coming out of China these days, locking down, I don't know, what is the 400 million in Shanghai and now they're doing Beijing, I don't know whether they're going to lockdown 800 or what, but I can't imagine living in an environment where somebody from the government comes and padlock you into your office or your apartment.

But those points aside, what's the impact do you think of this on you? And how much have you been able to diversify away from that risk?

Doron Arazi -- Chief Executive Officer

Yes. So I need to distinguish between a direct impact and an indirect impact. When I'm saying direct impact, I refer to some Chinese vendors who are supplying to us certain elements of our solution directly. In this respect, the exposure at this point is low.

At least one of the vendors have two sites. One of them is out of China, and we were able to remove most of the activity to the side that is out of China. And with the other one, we have started and embarked a process of alternate solution outside of China. And at this point, assuming the lockdown is not going to linger forever the direct impact is not big.

The indirect impact is something that we cannot access, and I will explain to you why. If our contract manufacturer buy certain components from the Chinese market, we are not aware of each and every nitty-gritty element and component in our solution, and it could be that they may have some, I would say, challenges. So far, we haven't seen a big deterioration coming from the CM and based on that, we assume that the impact, if any, is already included in their estimations.

Alex Henderson -- Needham and Company -- Analyst

So it sounds like the exposure on parts is lower. What about on the travel side of it, the freight side? Do you expect the freight cost to start to trim down or do you expect the problems in Russia/China to cause freight to stay a big problem in -- through the second quarter, at least?

Doron Arazi -- Chief Executive Officer

Frankly, it's very hard to tell. I can tell you that, for example, we've seen an increase in the freight cost to India in the first quarter and now it looks like there are certain relaxation in this cost. The rest -- it's very difficult to say. Our assumption at this point and based on that, we give our revised, so to speak, outlook for the year is that this situation will continue for a while.

And the relaxation will come later in the year, but not in, I would say steep improvement.

Alex Henderson -- Needham and Company -- Analyst

And then on the T&E side, three weeks ago, I hadn't traveled in two years now. I've got 10 trips scheduled over the next quarter. So I assume that you guys have a similar kind of improvement and -- or cost increase to cope with, but also hopefully, productivity generated from that. Can you talk about what your assumptions are for the year in terms of T&E rebounding, is it 60%, 70% of where it was 2019? Is that the new normal? How do we think about that?

Doron Arazi -- Chief Executive Officer

So we do -- actually, even in the first quarter, we are seeing some signs of recovery of the T&E. However, not at a great extent. And even when I see the projections of travel, it's by far less than the level of 2019. If I want to give you some ballpark, less than -- more than 50% less than the level we had in 2019.

And even that is when we see -- it's mainly the main factor of our travel is actually travel in continent for installations, for training, for knowledge transfer, less travels we see for internal meetings and things like that. This is still not something that is happening at this point.

Alex Henderson -- Needham and Company -- Analyst

So is that a new normal or what do you think the new normal to be?

Doron Arazi -- Chief Executive Officer

When we planned 2022, my guidance to management was, guys, we got used to close deals via Zoom, via Teams and I'm not saying that we should stay contained in our rooms forever, but this is a very effective tool. And yes, there is no substitute to physical proximity. And obviously, the more important part of meeting and closing deals and so on and so forth could and should be done face-to-face. But the budget that was instructed is more or less 50% than the level of travel expenses we have seen in 2019.

I think that the Ceragon has proven itself, especially on the opex to be a very disciplined company, and this is what I expect from the management and employees.

Alex Henderson -- Needham and Company -- Analyst

So kind of a new normal is a much lower level on it.

Doron Arazi -- Chief Executive Officer

Yes.

Alex Henderson -- Needham and Company -- Analyst

Going to the exchange rate, can you remind us where you are on the hedging and I mean the shekel has certainly helping things at this point if you are not shock.

Doron Arazi -- Chief Executive Officer

Yes. So unfortunately, Alex, on the -- I would say the expense side, I say unfortunately because we already hedged 2022 at an average rate of 3.15, something like that. And since the dollar strengthening against the shekel, we are already hedged. It does help us, I will say, on the balance sheet items that are not hedged and are denominated in shekel.

And this is why you see also the financial expenses this quarter were much lower than in the previous quarters.

Alex Henderson -- Needham and Company -- Analyst

One more question and I'll see the floor again. Churn, staffing churn and wage inflation, what are you seeing?

Doron Arazi -- Chief Executive Officer

Yeah. So first of all, I'm happy to announce that we -- in the first quarter, especially in R&D, we have seen some relaxation in the attrition and the ratio between recruitment and attrition has improved very significantly. So obviously, that's a good news to us. There are some new, even, I would say, articles talking about a spike on the demand side of work on employees and that is being noticed.

So this gives us some sort of hope that this very challenging situation will start coming down and obviously, as a result of that also salaries will get to something that is more reasonable. But I don't think it's coming very soon. I still believe that this year will continue to be a bit difficult. In other main locations, primarily Romania and India, I think we have seen similar situation.

In India, we've seen a lot of turnovers but not only in Ceragon across the industry and people are just trying to improve their terms -- and so is in Romania to a certain degree. At this point, I think that we are managing this situation very well. It's a combination of sometimes salary increase coming with some efficiency measures, making sure that people are really doing 100%, so to speak, productivity. And so far, this helps us to contain or to keep our budget in accordance with what we planned.

Alex Henderson -- Needham and Company -- Analyst

Just one last question. I apologize, I forgot to ask. So most of the companies in the networking and telco space have been talking to the magnitude of their backlog on a full year basis. For instance, Ciena is running a backlog that's equal to roughly 100% of its annual product sales.

Juniper is well over 50%. This has become kind of a standard comment. Are you willing to give us some gauge of what your backlog is relative to the full year product revenue guide?

Ran Vered -- Chief Financial Officer

So Alex, you asked this question so politely, I cannot deny or refuse to answer this. It's -- I would say that it's about 50% and I would say no more.

Alex Henderson -- Needham and Company -- Analyst

That's very helpful. Thank you so much for that. And Ran, I understand you've got a great new gig, congratulations. I look forward to maybe working with you where we end up.

Thanks.

Ran Vered -- Chief Financial Officer

Thank you, Alex. It was a pleasure working with you as well.

Operator

Thank you. You have no further questions. Please proceed.

Doron Arazi -- Chief Executive Officer

Thank you. In closing, we will continue to stay focused in the areas that add value to our business and market leadership in the medium and long term. We will continue to sharpen our competitive edges, which are our technology leadership, our growing managed services offering and our reputation that spans over 25 years. Our latest product, IP-50FX, our newest customers, orders and bookings are all testaments to our strengths and to the trust our customers continue to place in us.

As 2022 unfolds, we will continue to build on and amplify these distinctions through our growth strategy and by focusing on the best opportunities in each region. I look forward to updating you further on our next call. Have a good day, everyone.

Duration: 55 minutes

Call participants:

Maya Lustig

Doron Arazi -- Chief Executive Officer

Ran Vered -- Chief Financial Officer

Alex Henderson -- Needham and Company -- Analyst

George Iwanyc -- Oppenheimer and Company -- Analyst

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