Supply Chain Hurdles Open Entry Into Ceragon Networks

Ceragon Networks Hit By Supply Chain Issues 

Ceragon Networks NASDAQ: CRNT has been on our radar for a year or so due to its exposure to telecommunication and 5G infrastructure. The company makes a wide range of backhaul devices for the telecommunications industry and offers many services to match. While the Q3 results were good and produced more than twice the growth that was expected, the results were deeply hindered by supply chain disruptions. Not only could revenue have been stronger, but so too the margins. The good news is that the fundamental story remains unchanged, the results are satisfactory, and share prices just went on sale. Trading at the lowest levels in nearly a year, the stock looks poised to make a solid rebound over the next few quarters. 

"I'm pleased to report a successful third quarter. We experienced significant growth in our revenues and returned to profitability. Across different regions, we enjoyed sustained robust bookings, the addition of new customers, and the increase in our backlog, giving us confidence for the remainder of the year.,” says Doron Arazi, CEO of Ceragon Networks. 

Ceragon Networks Falls On Shaky Guidance 

Ceragon Networks had a great quarter in which revenue of $76.12 million not only grew by 7.8% but beat the Marketbeat.com consensus estimate by 380 basis points. The revenue was driven by strong bookings in North America, Europe, and India resulting in a book-to-bill ratio above 1. In regards to 5G, 5G bookings topped 50% in the U.S. and 35% in the EU while India remains focused on upgrades and expansion of the existing networks. 

Moving on to the earnings, the company reported strong margins and a profitable quarter but margins came under pressure. The company reported a 250 basis point contraction in gross margin to 30.9% that left the company in a profitable position but only barely. The GAAP margin of 0.0% left earnings at $0.0 to outpace the consensus by a penny while the adjusted $0.02 in EPS was also beat by a penny.

Looking forward, the company is expecting business strength to continue but only reaffirmed guidance at the previous range. The range of $275 to $295 million neatly brackets the consensus estimate so is nothing more than the market wanted. What it didn’t want were comments to the effect the supply chain disruptions could impair results from the top line to the bottom. 

“We continue to be confident about our revenue growth in 2021 and still expect it to be on the higher end of our annual revenue guidance, which is between $275M-$295M. That said, the global component and shipping challenges still create fluctuations in our quarterly revenues and influence our gross margin. Despite these challenges, we expect our net income for the second half of 2021, on a non-GAAP basis, to be around break-even,” continued Arazi. 

The Technical Outlook: Ceragon Networks Falls To Support

Shares of Ceragon Network fell 10% in the wake of the Q3 release because the outlook for growth is clouded by supply chain issues. While those issues may cause some volatility over the next few quarters we still view this business bullishly. The 10% decline in share prices is worrisome but is still holding support well above the key $2.90 level. Price action may move lower in the near-term and test support at this level but we think it will result in a buy signal from the market. Longer-term, we expect to see this stock bob along at current levels and then begin moving higher when the earnings outlook begins to clear. The $4 level may act as the top of a range until then.