Ceragon Networks Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen,

Speaker 1

thank you for standing by and welcome to the Ceragon Networks Q2 2023 Earnings Call. Our presentation today will be followed by a question and answer session, at which time if you wish to ask a question, you'll need to either raise your hand using your mobile or desktop application and wait for your name to be announced. I'd like to hand over the call now to our first speaker today, Mr. Rob Fink, Head of Investor Relations. Please go ahead, sir.

Speaker 2

Thank you, operator, and good morning, everyone. Hosting today's call is Doron Orazi, Ceragon's Chief Executive Officer and Ronen Stied, Chief Financial Officer. Before we start, I would like to note that certain statements made on this call, including Projected financial information, other results, and the company's future initiatives, future events, business outlook, development efforts, and their potential outcome, anticipated progress, results and timelines, and other financial and accounting related matters constitute forward looking statements within the meaning of the Securities Act of 1933, Securities Exchange Act of 1934, and the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Ceragon uses 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 Ceragon Management, But actual results, performance or achievements of Ceragon may differ materially as they are subject to certain risks and uncertainties which could cause Ceragon's actual results to differ materially from those projected in such forward looking statements.

Speaker 2

Such risks and uncertainties include, but are not limited to, those that are described in Ceragon's most recent annual report on Form 20F NN has may be supplemented from time to time in Ceragon's other filings with the SEC, including today's filing of the earnings press release, all of which are expressly incorporated herein. Forward like looking statements relate to the date initially made. They do not purport to be predictions of future results and there could be no assurance that they will prove accurate and Ceragon undertakes no obligation to update them. Also, today's call will include certain non GAAP numbers. For a reconciliation between GAAP and non GAAP, please see the tables attached to the press release that was earlier today.

Speaker 2

With all that said, I'd now like to turn the call over to Doron. Doron, the call is yours.

Speaker 3

Thank you, Rob, and good morning, everyone. This was another strong quarter for Ceragon Networks. Demand for our solutions continues to increase and we have successfully grown our presence in key geographies. For the Q2 in a row, revenues surpassed $80,000,000 and our book to bill ratio again exceeded 1. We are profitable, generated positive free cash flow and expanded our credit facility with existing lenders, Further solidifying our liquidity.

Speaker 3

Importantly, the momentum we Experienced in Q1 continued in Q2 and to date we have not seen any slowdown in customer spending or Any of the softness or pressures that some technology providers in adjacent areas of our industry have spoken about. Our performance in the 1st 6 months of 2023 combined with improving visibility into the 3rd quarter has given us the confidence to increase our full year outlook. Revenue for the quarter was $86,200,000 up 22% year over year. Our book to bill ratio was again over 1. In fact, Our bookings increased sequentially compared to Q1 with particular strength in India and North America, bolstering our confidence in continued momentum.

Speaker 3

Additionally, we're solidly profitable With $0.05 in non GAAP earnings per share, our sales execution in key regions has improved Under new leadership in Europe, we went through significant organizational restructuring during the quarter. We see a significant opportunity to Spend in Europe and are optimistic that the new leadership and this business focused new structure will better position us to drive growth. We are cognizant of the macro environment and we have seen large players Report soft results and outlooks. However, those challenges have not impacted our business. We believe that the demand for wireless transport solutions is driven primarily by the relatively faster time to market and lower cost Yet satisfying the increased capacity needs.

Speaker 3

We are working hard on leveraging our robust products And services offering to capitalize on this situation and are pleased with the results. For the Q2 in a row, the results Also demonstrate improving earnings power of our organization reflected in expanding gross margins, Disciplined operating expenses, investments and improved efficiency. We delivered $2,100,000 in GAAP net income In the Q2 and $4,400,000 in non GAAP net income, Ceragon has built a solidly profitable business model, a robust backlog And a diverse set of solutions that address key CapEx and OpEx goals for customers around the world. We have not encountered any significant impacts from supply chain disruption in the quarter. And while we continue to carefully manage the supply chain, Component availability continues to improve.

Speaker 3

Our geographic diversification continues to benefit our revenue. In the Q2, we generated sequential and year over year revenue growth in India and year over year growth in North America. In India, we generated our 5th consecutive quarter of revenue over $20,000,000 our highest quarterly revenues in the recent years and continued strong bookings. In North America, we generated revenue of $22,200,000 down from of $26,400,000 in the Q1, but up from $15,000,000 in the Q2 last year. We continue to advance the productization of our new system on a chip technology.

Speaker 3

To date, our efforts are advancing according to plan And while there is much work to be done, we believe we remain on track to launch our new product line in 2024. In addition, in the coming months, We expect to launch new products featuring a lower total cost of ownership. We believe these new additional products Will help us expand our market presence and offer tangible benefits to our customers. These products are also expected to help us with our long term goal of improving gross margins. I'd now like to give an overview on our Q2 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 We expect we'll continue to have the greatest impact on our quarterly results.

Speaker 3

In North America, the 5 gs build continues to be strong, Especially with Tier 1 carriers, we have continued to receive orders from major carriers with one customer driving a significant portion of our volume. We have been engaging on new opportunities where technology can be deployed in new ways. For example, we recently signed an agreement To partner with 1 of the leading Open RAN vendors to deliver a wireless high capacity, low latency, multi gigabit transport Solution for Caribbean customers' new 5 gs Open Radio Access Network. We utilized our existing IP50 FX, this Aggregated open router providing the customer with an advanced switching and open routing solution. The deployment of this project is ongoing And we have received very positive feedback from the end customer.

Speaker 3

We are also expecting additional business to expand network and Support Network Operations. This represents the first of its kind open run, open routing and open transport project In North America, we are also pursuing municipal and infrastructure related contracts including recent wins. A great example is the multi year contract worth up to $4,200,000 with the City of Cincinnati we signed during the quarter To upgrade the Citi public safety network, Ceragon is deploying a multi technology, multi service solution that provides a robust Modernized backhaul and routing solution followed by a long term maintenance and support plan. This solution includes Ternicke services including design and engineering, equipment, rollout and integration of the solution to enable the city To support mission critical applications such as artificial intelligence, automation and real time video. We continue to see many opportunities that introduce additional potential demand for our solutions.

Speaker 3

The 5 gs higher frequencies availability As well as the evolving need for heterogeneous services profiles with guaranteed level of service To different end users are driving up this potential demand. This demand is also reflected in multiple RFPs in which we participate Covering all segments of our addressable market, namely Tier 1 operators, rural ISPs and small carriers, as well as private networks. Some of these opportunities, particularly in the rural broadband and critical infrastructure segments may take longer to mature As they are also supported by federal and state funding plans. These initiatives remain a critical area For incremental opportunity and diversification for our business. We believe we are increasingly well positioned To capitalize on all of these opportunities when they mature.

Speaker 3

I'd also note that we have been successful in increasing our services business In the region, which often can double the value of an individual deal. In India, telcos continue to aggressively invest 4 gs technology network while beginning to deploy 5 gs in certain regions. We are working with operators In the market for 5 gs rollout and enhancement in selected regions. 4 gs continues to be the dominant subscription type in India with 4 gs subscriptions expected to peak in 2024. Simultaneously, the 5 gs rollout is accelerating, especially in urban areas.

Speaker 3

We continue to deliver our products for 4 gs networks as well as delivering our e band multi band solution for 5 gs networks At an increased pace, we delivered another strong booking quarter in India, giving us improved visibility for revenue for the second half Of the year, demand remains robust. We are anticipating promising growth with 5 gs adoption, a trend that is accelerating as 5 gs handsets become more and more affordable. To summarize, we are delivering solid execution and conditions continue to improve both on the macro And the micro level. Demand for our solutions is strong and supply chain availability has been getting better. Quarter to quarter variability in our financials is always a reality, but trailing 12 month trends for our business, which we think are a strong indicator to our performance trajectory are solid and improving both from a revenue and a profitability standpoint.

Speaker 3

We believe we can deliver similar revenue trajectory for the foreseeable future and that we can be profitable on a non GAAP basis for each quarter this year. Before I turn the call over to Ronen to walk through the numbers, I wanted to mention that we filed our Proxy statement with the SEC for the 2023 Annual General Meeting, where we have nominated Ilan Rosen, who has been serving on our board since July 2021 as the new Chairman of our Board of Directors. Elon brings significant corporate governance expertise as well as track record of successful M and A and value creation. He also has significant experience in the telco industry. He currently serves as a Managing Director of Harborvest Partners LLC, A global private equity firm.

Speaker 3

We have also nominated Ms. Yael Shaham to be appointed by the shareholders as a new independent director on our board. Yael has more than 25 years of experience in management and strategic leadership roles and a wealth of business And technology knowledge, particularly in leading the development of robust software solutions for the telecom space and selling them under managed services models. We believe that Yael's vast experience can be a great contributor to us In advancing and executing our strategy. With that, I'll turn the call over to Ronen Stein, our CFO to discuss the results in more details.

Speaker 3

Ronen, over to you.

Speaker 4

Thank you, Doron, and good morning, everyone. As Doron outlined, this was another strong quarter for Ceragon. Though it is important to keep in mind that we are a project driven business And as such, there is inherent variability in results from quarter to quarter. Because of this, we analyze our bookings, Revenue and gross margin as well as other key performance indicators over a 12 month period, a duration which we believe better reflects the underlying business trends. In addition, to help you understand the results, I will be referring primarily To non GAAP financials.

Speaker 4

For more information regarding our use of non GAAP financial measures, including reconciliations of these measures, We refer you to today's press release. Let me now review the actual results. Revenues were $86,200,000 An increase of 21.9 percent compared to $70,700,000 in Q2 2022 and up 3.3% compared to $83,400,000 in Q1 2023. When we take the trailing 12 months view, our revenue was $323,700,000 an increase compared to last quarter's trailing 12 months revenue of $308,300,000 Our strongest regions in terms of revenues for the quarter were India and North America and with $26,900,000 $22,200,000 respectively, in line with the continuous Strong demand we see in these regions. Our 3rd strongest region in terms of revenues was Latin America with $12,600,000 We had 2 customers in the 2nd quarter that contributed more than 10% of our revenues.

Speaker 4

Gross profit for the 2nd quarter on a non GAAP basis was $30,400,000 An increase of 41.2 percent compared to $21,500,000 in Q2 2022 and an increase of 7.2% compared to $28,400,000 in Q1 2023. Our non GAAP gross margin was 35.3% compared to 30.5% in Q2 2022 and 34% in Q1 2023. We have achieved high gross margins Even as revenue from India grew as a percentage of consolidated revenue, mainly as a result of improved Product mix, including more software revenue and further cost optimizations, offset partially by higher inventory write offs. Our gross margins continue to fluctuate from quarter to quarter due to changes in product and regional mix. When we take the trailing 12 months view, our non GAAP gross margin was 34.5%, an increase compared to last quarter's trailing 12 months gross margin of 33.4%.

Speaker 4

This upward trajectory of our gross margin trend reflects our ability to increase margins when we execute on our strategy and operational efficiencies. As for our operating expenses, research and development expenses For the Q2 on a non GAAP basis were $7,600,000 up from $7,500,000 in Q2 twenty twenty 2 and slightly lower from the $7,700,000 in Q1 2023. As a percentage of revenue, Our R and D expenses were 8.8% in the 2nd quarter compared to 10.6% in the Q2 last year. Sales and marketing expenses for the Q2 on a non GAAP basis were $9,400,000 up from $9,100,000 in Q2 2022 and down from $9,800,000 in Q1 2023. As a percent of revenue, Sales and marketing expenses were 10.9% in the 2nd quarter compared to 12.8% in the Q2 of last year.

Speaker 4

General and administrative expenses for the Q2 on a non GAAP basis were $6,100,000 up from $4,600,000 in Q2 2022 and up from $5,000,000 in Q1 2023. As a percent of revenue, G and A expenses were 7% in the Q2 compared to 6.5% in the Q2 last year. We intend to continue being disciplined in our operating expenses, while leveraging our strong results to further invest in certain areas to support continuous profitable growth. Therefore, we estimate average quarterly operating expenses in the second half of twenty twenty three to range between $22,000,000 to $23,000,000 Operating profit for the Q2 was $7,400,000 up approximately $7,000,000 from the operating profit of $400,000 in Q2 2022 and up $1,500,000 sequentially from the operating profit of $5,900,000 in Q1 2023. Please note, this non GAAP metric exclude A charge related to restructuring and related charges in Europe amounting to $900,000 Financial and other expenses For the Q2 on a non GAAP basis were $2,200,000 in line with expectations.

Speaker 4

Our tax expenses for the 2nd quarter On a non GAAP basis, we're $800,000 Net income on a non GAAP basis for the quarter was $4,400,000

Operator

or $0.05 per diluted

Speaker 4

share compared to a net loss of $2,500,000 or $0.03 per share In the Q2 last year, the 2nd quarter net income was up $800,000 from net income of $3,600,000 or $0.04 per diluted share in Q1 2023. As for our balance sheet, our cash position at the end of the second quarter was $24,500,000 and our short term loans stands at $39,600,000 During the Q2, we increased the bank loan facility to $72,000,000 and extended the maturity date for an additional year until June 30, 2024. We believe we have cash and facilities that are sufficient for our operations and working capital needs. Our inventory at the end of Q2 2023 was $67,800,000 down from the $72,000,000 at the end of December. We continue to monitor inventory levels, Taking into consideration the improvements in availability of components and expected changes in demand.

Speaker 4

Our trade receivables are at 107 As for our cash flow, net cash flow generated by operations and investing activities in Q2 2023 was $400,000 We expect to generate positive cash from operations for the full year. As Doron indicated at the top of this call, demand in our business continues to be strong, and we are encouraged by our bookings, which give us good visibility into the Q3. Based on our results Through the first half of this year, we are raising our full year revenue outlook from $325,000,000 to $345,000,000 to $334,000,000 to $348,000,000 and reaffirming expectations for full year profitability. The outlook we are providing today is based on our current visibility, and it leaves us some room for adjustment as we progress further into the back of the year. With that, I now open the call for your questions.

Speaker 4

Operator?

Speaker 1

Thank you. In order to ask a question, please raise your hand using your mobile or your desktop application and wait for your name to be announced. Once again, please raise your hand using your mobile or desktop application and wait for your name to be announced. Our first question today comes from the line of Alex Henderson from Needham. Please go ahead.

Speaker 5

Great. Thank you so much. I was hoping you could talk a little bit about the margins, specifically in India. Historically, India has had gross margins that are substantially lower than the corporate average, but It's often been a case that you've been shipping very low end products into that geography because of their 3 gs and Lesser extent 4 gs, networks. As they move to 5 gs, do you expect to be able to ship them a better mix of software and 5 gs related feature sets that ultimately allow you to get somewhat better margins or Alternatively, is the Indian bias to very low pricing going to continue to result in Significantly below margin shipments into that geography.

Operator

Hi, Alex. This is Doron. So thank you for your question. India is India and we remain India, which means a very, very high pressure on prices, which results in relatively low margins that will continue. The only difference is that When they buy configurations that are more robust, They buy a bigger piece of software as part of the deal, and that can create Some difference in the gross margins, either between quarters or between years, depending on There are decisions how to invest in the network.

Operator

So, in general, we still Expect the margins in India to continue on average, be more or less the same, With some fluctuation depending on their buying decisions.

Speaker 5

Okay. So we don't expect the Indian margins To improve at all, it's stable. So clearly North America has much greater margins, but Indio is probably stronger in terms of overall sales. So I guess the question is, you've had Very good gross margins, 34%, 35.3% in the 1st and second quarter. What are we thinking about in terms of gross margins into the back half?

Speaker 5

Are we down back into the 33%, 34% range? Or What's the trajectory there?

Speaker 4

Well, we don't have exact trajectory for the Full second half of the year. So we assume it will continue to be in line more or less With our trailing 12 months, it could be a bit less or it could be a bit more. It's very difficult to predict at this stage.

Speaker 5

So I guess that would suggest a higher margin at the upper end of your Historical range because you've averaged over 34%. Is that fair?

Speaker 4

Around this number, yes, it could be. It could fluctuate between Q3 and Q4. We don't have yet the full visibility. But this is the range where we are at, Assuming North America and India will continue to perform as they performed until now.

Speaker 5

You called out improving costs and an inventory write off. Can you give us a sense of the size of the inventory write off that was absorbed in the quarter?

Speaker 4

No, we don't give these details, But we do wherever it's necessary, of course, due to expectations of shifts in demand And shifts, as Doron explained earlier, in our portfolio, we do all the time the assessments And we act accordingly.

Operator

Just to add to this point, Alex, we generally speaking, We have a methodology of inventory inspection and provisions for Obsolete inventory that we've been using for many years, it's always part of our non GAAP numbers. And therefore, we don't disclose this specific number as we don't disclose many other components that They are comprising our cost of revenue. We just noted that because there were Some things for the up, and we also wanted to make sure that investors understand that there were some things for the down In terms of the impact on our gross margin this quarter.

Speaker 5

Well, we're taking inventory write off and still getting 35.3 is pretty good result. One more set of questions. On the interest line, you've changed Your provisions with your creditors. So can you give us some guidance on what that Impact is and what the interest expense line ought to look like in the 3Q, 4Q timeframe? And similarly, can you give us some sense of the tax rate?

Speaker 4

Well, on the financial expenses, You have the data about the our loans. The loan facility change as it is does not change much. We cannot expect exactly the changes in interest rates. Right now in this quarter, we already see a 0.25 percent increase In the software, so we could expect a slight increase In this quarter, and it really depends on the actual use, we don't see much change in our Use of the facility of the loans facility, although as we progress to a better Positive cash flow, we may reduce it slightly, but it will not have a great impact. So to summarize, it will remain more or less in the same level and fluctuations might be mainly due to foreign exchange this week at Montage.

Speaker 5

Right. Was there any ForEx in the 2Q number that I mean it was up Over 300,000 quarter to quarter?

Speaker 4

It was not material to any side. It was Relatively reasonable number in terms of going backwards to the most recent quarters.

Speaker 5

So you're suggesting that we ought to be using around the $2,100,000 level for both 3Q and 4Q?

Speaker 4

Yeah. The level that we saw in Q2 is more or less the level I cannot But you know, in terms of forecasting, I cannot say something else.

Speaker 5

Yeah. Okay. And then on the tax rate side?

Speaker 4

So the tax is a bit more complicated because the tax is because we have so many losses. The taxes are more impacted by some local rules in different geographies and different states. And it's a bit difficult to predict. But you see that there's no much changes. The bid increased.

Speaker 4

As level If revenues increase, it should increase accordingly, but not it cannot be mobilized easily.

Speaker 5

Right. So you did $439,000,000 in the Q1, dollars 7.87,000,000 in the Q2. Should I take the average of those 2 and Trapplate that to the back half?

Speaker 4

It's, it could be a good it could be a reasonable idea.

Speaker 5

Okay. I'll cede the floor. Thanks.

Speaker 1

Thank you, Alex. Our next question today comes from the line of Scott Searle from Roth Capital. Please go ahead.

Speaker 6

Hey, good morning, good afternoon. Nice job on the quarter. Thanks for taking my questions. Hey. Maybe just to quickly follow-up on Alex's question for a clarification.

Speaker 6

In terms of the inventory write off, I just want to be clear, was that you Took inventory write offs in the quarter or there was a benefit of previously written off inventory in the quarter? And then as well on the OpEx, I apologize if I missed this, but the G and A was a little bit elevated versus the last several quarters. Are there any one time Charges in there that we should normalize out? Then I had a couple of follow ups on geographies and products.

Speaker 4

So regarding the inventory, it was just a write down of inventory to a certain extent for this quarter. It could be at any quarter, it could be higher or lower inventory write offs. So we cannot predict that. As we said, we monitor it. We have models and we continue to monitor it even beyond the models to ensure that we have A proper recording of this of inventory.

Speaker 4

With respect to the G and A, as you just mentioned, I cannot say that things were Typically one time. Some things could be a little bit higher or lower in specific periods. But in general, as you see, we have provided some guidance I provided some guidance earlier To the expected operating expenses in general for the next two quarters.

Speaker 6

Great. Okay. Thank you. And maybe if I could, geographically, North America, one of the regions that continues to be strong for you, it sounds like the order book continues to build there as well. Can you give us a little bit of an idea of where the order book is coming from?

Speaker 6

Is that more private networks? Or are we starting to see a little bit of an acceleration On the operator side, in particular, DISH has been behind on some of their build outs, at least in terms of geographic coverage as opposed to pop coverage. I'm wondering if you're starting to see that start to pick up now as we go into the back half and into 2024?

Operator

So generally speaking, the strength in North America was actually Primarily, at least for us, led by the Tier 1 operators. And We see these operators making the decisions about investing in wireless transport Based on their own, so to speak, programs, They are not adopting the same strategy of rollout. And before, The numbers and obviously the timing would change among them. But, I think that the strength so far, it was driven by, by the Tier 1 operators, at least for us. Do we still see this trajectory continues?

Operator

I would say I would carefully say that based on What we see and the discussions we are having with all of the Tier one operators in this particular region, There is a good chance that we'll continue seeing this business coming strong also in the quarters to come, But this is a very cautious assessment based on discussions that we are having with them about The plans, they are not committed yet to any of these discussions. We also see a trend up In other segments of this particular region, because The number of use cases where additional capacity is required, and it is required fast, are growing. And as a result of that, we also see a certain trend up in demand also in other Segments, it's less, so to speak, impactful on our business at this point. But we're very much encouraged by the up trend of the increased funnel, And we believe that this will fuel our business in the near and the long term in a very significant way.

Speaker 4

I will just add to Doron's points and point to what he mentioned earlier About one very nice win in City of Cincinnati. So this was also released. And it shows that we have a good trajectory there as well.

Speaker 6

Okay. Very helpful. And if I could, shifting over to India quickly. Doron, obviously a key market for you and I know it's a little bit early to start thinking about 'twenty four, but I'm wondering if you're starting to get some visibility Into this sustained level or greater as you kind of look into 2024 in terms of the build out cycles and where they are from a 5 gs perspective?

Operator

Yeah. So, as we said in the prepared comments, What is fueling our success at this point in this year It's a combination of 5 gs rollout and continued 4 gs rollout, where the 4 gs rollout at This point is taking the vast part of our success. Based on our discussions With the different operators, as well as the opportunities that we see in the market, We believe that generally speaking, the business could be as strong In 'twenty four, as it is today and maybe even higher, but I think that the portion of the 4 gs at a certain point relative to the 5 gs will start going down. So generally speaking, we expect to see the same strength and Maybe even bigger business in 2024, I think that the mixture We'll start gradually moving towards more 5 gs and less 4 gs.

Speaker 6

Gotcha. Very helpful. And and lastly, if I could, Dharan, on the product front, it sounds like you're tracking from an ASIC perspective to bring down the BOM cost As you go into 2024 and beyond, but it sounds like there's some other products as well that are in the pipeline. I wonder if you could elaborate on that a little bit more. Are you talking more from a Software perspective in terms of network management capabilities or some other products that we're going to start to see, you know, rolling out To marketplace in the second half in twenty twenty four timeframe.

Speaker 6

Thanks so much.

Operator

Sure. Not less than not more than a year ago, We announced that we intend to come up with another version of certain products That will be, I would say, more appealing From TCO perspective, understanding that the current product Offering that we have could address very nicely the technological needs, But sometimes not with the right TCO. And as we said that in the past, now we are coming To the stage where we actually deliver to our commitments. And in the coming few months, We hope to start announcing the launch, commercial launch of these new products. It's not on account Of the longer plans using our new system on a chip, and Obviously, it's an addition to our product portfolio.

Operator

Just To augment the current portfolio with more products that can address more use cases With the right total cost of ownership.

Speaker 6

Great. Thanks so much. Nice job on the quarter.

Operator

Thank you so much. Thank you.

Speaker 1

Thank you. As a reminder, 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 next question today comes from the line of Gunther Carter. Please go ahead. Gunther, can you hear us?

Speaker 1

Our next question today comes from the line of Alex Henderson. Please go ahead.

Speaker 5

Great. Thanks. I wanted to go back to the next gen chip with a Much higher capacity capabilities. You indicated that you probably expect to see that shipping out in Product and generating revenues in 2024. I was hoping you could give us a little bit better sense of The trajectory of that, is that very late in the year?

Speaker 5

Can you do it by mid year? That type of stuff. And how you think that that product will unfold in terms of initial startup costs versus eventual margins, whether that product will produce margins that are above corporate average when it's matured somewhat Or is it a drag to margins upfront as it starts to launch?

Operator

Yes. So we were talking about Launching the 1st product in our product line using this chip during 2024. The current assumption is that it will not have a very meaningful impact On our revenue in 2024. This is the basic assumption that we are currently Using it could be that we'll have positive surprises. But at this point, this is our basic assumptions.

Operator

In terms of, margins and bond cost, obviously The trend that the history shows that as the product becomes more and more mature, You can take costs down, and obviously if volumes are high, This will actually enable us to even accelerate the cost reduction. However, the idea behind this chip It's not only coming with all these features and capabilities, it's also system on a chip That is meant to position us even in the starting point when we start Manufacturing this product in mass production with a cost structure That is at least equal or even better than our previous products. If you obviously compare, feature to feature, and, performances to performance. So all in all, we believe that the starting point of this product is going to be Quite appealing. And obviously, when we have the rest Of the product portfolio that will still be sold for a very long time in parallel, We expect that we'll be able to sell these products from the start with decent gross margins, And down the road, these gross margins will even improve as the volume of the product That is being sold is going up.

Speaker 5

Do you expect any startup costs associated with that, that As you're doing the initial very small volumes, I would assume that those will probably start off at a loss For the simple reason that the volumes are so

Operator

low. So, one of the things we are doing It's basically when we prepare the manufacturing, We also look into the equipment that we have today for manufacturing and to what extent we'll be able To leverage this equipment, instead of actually either buying new equipment That fits better to this particular product. So, in this respect, we are very, very efficient And we're probably going to use a significant part of our Existing equipment, including testing equipment for these products as well. And therefore, we don't anticipate, I would say, any Significant costs that are associated with manufacturing this particular product in small quantities.

Speaker 5

Okay. And just going back to the marketing side of this, How important has this product been in terms of the roadmap in winning new customers, particularly in North America, but generally speaking?

Operator

Look, I think Ceragon is very well known for The strength of its radios and the total cost of ownership. The IP20C, which was launched Significantly, I would say in 2013 or 2014, won Such a big business for us because of this combination of very strong radio With a relatively bone cost that could create a very interesting total cost of ownership I think that this system on a chip will actually come with the same Message to the market. You will see a much stronger capacity capabilities, Especially if we look at the E band, with a cost Price or with price line that is by far better per gigabit than the current Proposals that are in the market.

Speaker 5

I guess what I'm asking here Doron is, Are your Tier 1, Tier 2 customers looking at this product and saying, I want to be more closely tied to Ceragon because This product is coming down the pike and it looks like it's disruptive and therefore you're getting some benefit, halo benefit on your current orders In anticipation of its availability, so it's not a 2025 revenue impact. It may actually be impacting revenues earlier In the sense that people are choosing to go with you because they see that in your roadmap?

Operator

Generally speaking, the short answer is yes. To be more elaborative, Look, the position we are having in Tier 1 operators is primarily because They know how strong we are in building, radios that fits their needs

Speaker 3

and their

Operator

standards. And this is a general notion. And obviously, we have already started sharing The things that are coming, and I believe that this is one of the considerations Why do they keep a very, I would say, close relationship with us, even with some cases where they are not Yet, I would say a very big customer of us, but they know what's ahead, and therefore, They are keeping this relationship very close. Let's not forget that we are not disclosing to our customers Very specific features before we finalized and discussed the roadmap In more details within Ceragon. And when the time comes, we'll obviously share more information With the customers.

Speaker 5

Great. Thanks.

Speaker 1

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

Speaker 3

To close, we are encouraged by our first half results. We delivered strong revenue And significantly improved profitability. Bookings have been strong, providing us with good visibility into the Q3 And we believe that we are well positioned to achieve self sustaining cash flows as we execute on our growth Strategy. We expect that our product roadmap will give us a durable competitive advantage. We're increasingly excited about Ceragon's opportunities.

Speaker 3

I look forward to updating you further on our next call. Have a good day everyone.

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Earnings Conference Call
Ceragon Networks Q2 2023
00:00 / 00:00