Ladies and gentlemen, thank you for standing by, and welcome to the Ceragon Networks' Third Quarter Earnings Call. Our presentation today will be followed by a question-and-answer session. [Operator Instructions] I'd like to hand the call over to the first speaker today, Maya Lustig, Investor Relations. Please go ahead.

Thank you, operator, and 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 Re form 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 therefrom 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 day 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 disclaims any obligation to do so. Ceragon's public filings are available on the Securities and Exchange Commission's Web site, at www.sec.gov, and may also be obtained from Ceragon's Web site, 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.

Thank you, Maya, and good morning everyone. Creating equal digital opportunities for all people around the world by bringing expert communication capabilities everywhere is the foundation of everything we do, and will do moving forward. Today, many operators and network providers are on accelerated schedules to build the networks of tomorrow. We are proud that, in the third quarter of 2021, a high number of them continued to select us. Since the days of 2G, we have worked hard to earn the trust of our customers in more than 140 countries. So far, in 2021, we have added around 10 new material customers, many of them, as well as existing customers, consume projects designed to bring a better communication infrastructure to rural areas. We are seeing a growing number of governments allocate budgets and initiate incentive plans to improve rural networks. And we are all well-positioned to take part in these vital projects. We have a strong solution mix and reputation, but it is important to note that gaining new customers in our market can be a long process often lasting more than a year depending on the type of customer and other incumbents' positions. Even when we win a new customer, in most cases, the business ramp up is gradual. Our revenues in Q3 were strong. We achieved this despite an external environment marred by unprecedented challenges in the chip and shipping industries. During this challenging time, we've been doing everything in our power to maintain and grow our customer base. These efforts are crucial, but they incur expenses. I will address these issues later in my speech, and so will Ran. In Q3, we have seen further increase in our backlog, which helps provide more confidence and visibility. The primary driver of this outperformance has been sustained strong…

Thank you, Doron and good morning everyone. To help you understand the results, I'll be referring mainly to non-GAAP numbers. For more information regarding the use of non-GAAP financial measures, including reconciliation of these measures with referral to today's press release. Like Doron mentioned, during Q3 2021, we saw very strong bookings coming from North America, India, in Europe, as well as some recovery in APAC. In fact, Q3 is the fourth consecutive quarter with book-to-bill above one. Our revenues for the quarter was at the high-end of our projections. Let me now review the actual numbers with you. Revenues from the third quarter was $76.1 million up by 8% compared with $70.6 million in Q3 last year. This was achieved despite the challenging environment with regards to component shortages. We are proud of this achievement and the fact that most of our customers demand were fulfilled. Our strongest region in terms of revenues for the quarter was India, reflecting ongoing deliveries for our main customers and in line with the long demand we are seeing in this region. Our second strongest region in terms of revenues for the quarter was Latin America, reflecting the deliveries and installations from the major win we had in the beginning of the year with the Tier 1 one carrier in Colombia. Europe also had a strong quarter, continuing its positive momentum and reflecting more initial revenues from 5G projects. In North America, we continue to see strong momentum with our Tier 1 customer, other relating ISPs and smaller carriers. However, even though the demand continues to be very strong, we will not able to deliver in the same pace as previous quarters as a result of the component shortages. Revenues in Africa and APAC were slightly lower than in previous quarter reflecting the…

Thank you. [Operator Instructions] Our first call today will be from the line of George Iwanyc from Oppenheimer. George, please go ahead and unmute yourself to speak.

So, Doron and Ran, can you hear me.

Yes, hi, George.

Yes, hi, George.

Great, thank you for taking my questions. So, congrats on the solid execution and the ability to grow in a tough environment. The outlook from a design win opportunity sounds very strong, but when you map that with your visibility into the supply chain, especially as you look into 2022, how confident are you at being able to maintain a $75 million to $80 million revenue run rate? And are you able to start projecting even a higher revenue level on top of that next year?

So, George, first of all, thanks for this question. I think that in terms of the supply chain, primarily focusing on the chip industry, there's a lot of turbulence. Based on our new strategy, in terms of procuring components, we believe that we will see some relaxation during 2022 probably towards the second part of it because we changed our strategy in terms of procurement of the critical items. Said that, even this strategy is still dependent on the, I would say, reliability of the projections of the vendors in terms of timelines and lead times. All in all, it is our belief that the situation will start getting better gradually during 2022, primarily on the second half. But what we have seen in the last two or three quarters -- sorry, two or three months is showing that things could change dramatically for the good side and for the bad side. In terms of top line, obviously, when we -- looking into the beginning of 2022, we will probably come with a nice backlog, obviously depending on the booking that we'll be able to generate in Q4, and that gives us some level of confidence to the start in terms of having our revenue in this range that you are just suggesting.

All right. You mentioned the favorable mix from the gross margin standpoint, so I have a couple of questions related to that. One, how much is the regional strength contributing to that? Are you starting to see much of a lift from the managed services standpoint? And then when you think about the supply chain costs, if your mix normalizes a bit, would you expect it to tick down in the next couple quarters given the high cost of managing the current environment?

So, I will start by answering regarding the managed services, and then will give it to Ran to give you the trends in terms of the impact of the supply chain costs. In terms of managed services, this is a relatively new initiative that we have embarked on. And it takes time to get to what I would call a very significant business volume that can really impact our, both, margins and, I would say, the recurring revenue piece. So, it's just a start, but looking by the deal, I'm definitely very optimistic about our ability to generate higher gross margin than the current ones if this becomes indeed a substantial part of our business.

So, just to complement, George, on what Doron said, let me try to be a little bit more specific. So, we have sometimes, and it can be even within specific regions, specific deals that has come with a more favorable mix if it is because of software, if it's because of the specific products. And we benefited from that, both in the second quarter as well in the third quarter. As for the supply chain component impact on our gross margin, I think the impact is -- on both, comes from two vectors. The first vector is about our ability to better predict our revenue because in both component and shipping issues it's hard for us to predict, because some of the components that are missing leasing, we can't tell when we'll get it, and ship it, and then covert it to revenue, and send for the shipping industries booking today's vessel and be accurate on time is more challenging than it was, I would say, in the past few years or at all. The second piece of this challenge is the cost that has come with in both aspects. So, both components and shipping come with a toll on our gross margin. If I need to quantify this, I will probably say the accumulation of both from expediting some of the components and securing them as well as to the shipping, I would say around 3% to 4% impact on our gross margins. We are doing a lot to mitigate some of these. We improved our sea versus air and other initiatives that we are taking, but if I'm seeing the overall impact, roughly around 3% to 4% on our gross margins.

Right. And just one more question from me. From an overall OpEx standpoint, very good control in third quarter, but would you expect it to trend more towards the second quarter levels in the fourth quarter and then tick back up and then maybe stabilize in that level next year?

So, the short answer is yes. I would say, both on R&D and sales and marketing, which are the more heavy lifting in our OpEx. Q3 was one-of-a-kind phenomena because a lot of people took vacations in August, and that impacted, of course, the cost. I do expect next quarter to come more in the run rate of, overall, $21 million. And when we look at 2022, this is probably going to be the trend that we’re seeing. Just one caveat on that, the shekel has been very, very strong, and we do have a policy to hedge -- to hedge on the shekel. But these levels, this is going to probably, and I will say at this point, an impact of next year as an initial look anywhere around $2 million to $3 million on 2022.

I will just add to this point of the operating expenses, the current assumption is based on the fact that we have not finalized our AOP, our annual operational plan. Obviously in these days, we are working diligently to decide what is the priorities for us for next year, whether it's in R&D, whether it's with a new business, whether it's with new products, and so and so forth. So, the jury is still out there, but I think that we have a history of many years of keeping our OpEx in control, and from that angle you could rest assured that this trend will continue.

Thank you very much.

Thank you, George.

Thank you. Our next question comes from the line of Matt Rizort. Matt, please go ahead and unmute yourself.

Yes, this is actually Alex Henderson. Can you hear me?

Hey, Alex. How are you?

I'm very well, thanks.

I was surprised when Matt's name was announced…

Well, he did the registration for me.

Okay.

So, I got a couple of questions for you, I was hoping you could give us some characterization of the degree to which your book-to-bill has run above the revenue line over the course of this year. And I think you said it was the seventh quarter in a row of the book-of-bill above one. So how much have you built that backlog and can you characterize how much visibility that gives you to achieving the level of revenues you had this year in next -- in the fourth year, assuming supply constraints were not an issue?

So first of all, let's start by saying that we said that the four quarter, not seven quarter in which our book-to-bill was above one. Generally speaking, I don't want to start giving the exact percentages. But the numbers all in all, when you look at the accumulation of the three or four consecutive quarters was very significant. And as I answer to George's question from a different thing, usually, the big challenge for us is the start of the year, which is the first quarter, I believe that subject to no big surprises in booking of Q4, Q1 would probably be able to maintain the same level of revenue, more or less, we're seeing in Q3. And obviously, the visibility is good. But it's not that our business model has changed. So suddenly, we have like a three quarter visibility, I will just say that our backlog all in all is something that providers in an order of magnitude, two quarters ahead maybe slightly even more. And in previous years, it was probably between one to one and a half quarters. So that's the difference.

And then you made a comment about the tape out in R&D for the fourth quarter, can you quantify how large enough that is? I assume it's a one quarter cost hit, and then it falls back out in the first quarter once the tape out is completed, could you give us some sizing on it?

So first of all, I like to think that the tape out was delayed more than a quarter if I go back the overall delay that has come with a lot of reason is probably more close to a year. And even when they were going to do the tape out, I think that Doron commented this on the prepared remarks, we still need to do a productization of the chipset and then to integrate it into our new products. And this also will take some time. So, all in all, the delay was around I would say one year, the impact on the costs is just maintaining relatively high level of R&D, which you see on the higher OpEx. And the impact of it for the next year when the tape out is going to be finalized at the end of this year is yet to be determined as Doron already commented on that because we will need and we're just talking on it now on the press of 2022 and whatever we're going to invest in other things in R&D that are worthwhile. So, this point of time, it's a little bit hard for me to comment how it's going to impact a level of our R&D spending for the next year.

Just Alex to add to Ran's answer. In terms of cost, obviously, developing a chip is very costly, but this cost is spread over a couple of years and that would not make any change. The tape out phase by itself is not generating a significant additional cost for us. Obviously, the process after it, which is the productization in which we work hand in hand with different cheap vendors doing the packaging, doing the evaluation board and all this stuff is costly. But as I said again, it's not a one-time hit that we'll face in this quarter or that quarter, it will either be part of our regular R&D expenditure, or if the accounting insists a part of R&D capitalization.

So just to be clear, you're saying that the fourth quarter of 2022 is when you're going to do the tape out as opposed to the fourth quarter of 2021?

No, no. What we are saying is as follows. The tape out is a milestone where we basically finished all the tests, including the tests that are done by our cheap vendor, so that we can move to the next phase and productize the chip. This was delayed. And now we are on the process of productization of our chip, which is done by our chip vendor together with some subcontractors of them and that starts at beginning of 2022.

So, to be clear, the year delay that you're citing was in the rear view mirror that happened a year ago.

Yes.

Yes.

This is not a new delay that's happening now.

No.

No, no, no.

All right, that's -- yes, because -- you're implying delay has happened, but it's not a delay that's new. It's happened well over a year ago.

Correct.

So you're on schedule with the timeline around the fourth quarter 2021 and you're productizing it now and those costs are in the expectations in 2021 4Q and in 2022.

Yes.

Yes, yes, yes, exactly.

No change.

Just one comment, because I want to make sure everything is clear. From our angle, the delays are behind us. Now, it's more of a process that is dependent on the cheap vendors and its subcontractors. And due to the turbulence in this industry, even the timelines we're getting today, we are taking them with a grain of salt because of this turbulence. But from our perspective, the majority of the effort to develop the chip and to test it is behind us.

I understand, thank you very much for that clarification. Now, I thought you were saying you had an additional delay. Can you talk through why you're unable to pass through the higher cost associated with your supply chain, given most customers that we've heard from other companies have been willing to absorb that? Because it's obviously not within the control of the individual companies and it's a broad industry-wide problem and phenomenon.

So, let's start by saying that I did not say explicitly that we cannot pass these costs. And in fact, we have a few discussions on ways to work with our customers, so that they kind of participate in this time of pain. The approach, which I'm leading in this company, is first of all serve the customer, make sure that you don't jeopardize his rollout attempts as much as you can with all the things that are dependent on you. And then when the customer feels comfortable and happy with your performance, then you can easily or more easily come and have this discussion. We are going to try that. I can tell you that there's a lot of differences between industries. And I can tell you that it also -- it's also a matter of a culture. It's also a matter of particular policy of this vendor -- sorry, this or operator or that operator and it's also a matter of what the other competitors in our industry are doing. The bottom line is that we do have discussions with our customers about sharing the pain with us. I cannot give anything beyond that, because at this point, there is no, I would say, so to speak reliable projection I can give you based on the discussions we're having.

So, just the last question on the same line, so the gross margins have been bumping around 31% or so, you've had a mix shift to India in the particular -- in the current quarter, you've had very strong wins in EMEA and the U.S. Those tend to be much higher margin, more fully featured. So should we anticipate the mix shift will actually shine through the margins or should we anticipate that the cost problems and the ability to pass it through are the more dominant factors as we go out over the next two, three quarters?

At this point, I would assume that the cost we are incurring to delivery on time, no matter what will be more dominant. And this is why when looking at the second half of the year, we kind of turn down a bit our expectations. Yet, I think, it's a temporary situation. I believe that within a couple of quarters, and I actually mentioned that to George if the lead times that are promised by our vendors are indeed so to speak reliable and they deliver to these lead times, I think, that our costs to manage this temporary situation will start going down and accordingly we start seeing a better gross margin, but this will probably happen during 2022.

All right, I'll see it before. Thanks.

Sure, thank you.

Thanks, Alex.

Our next question comes from the line of Rommel Dionisio from Aegis Capital. Please go ahead.

Hi, Rommel. How are you?

Hi, Rommel.

Good morning. Can you hear me?

Yes.

Yes, good morning.

Great, thanks. Thanks for taking my question. Good morning. So just over the long-term, as you look at dovetailing of Alex's question on the pricing, are there other things you can do just over the long-term from a supply chain standpoint, whether sourcing from different partners or just to maybe diversify the risks that you're seeing today? Obviously, this might take some time and you're doing all the things you can to address the problems today, but just over longer term maybe some comments on how you think about that.

Yes, basically, there is lot of new initiatives for -- generally speaking for cost reduction of our products, because we understand that this industry wants the best for the cheapest. And yes, I know that there is some conflicting elements in those two aspirations, but I think that Ceragon is known for doing miracles and this is what we are doing. Now to be more serious, first of all, we are considering different manufacturings that will reduce our manufacturing costs significantly. This is one thing. The other thing we are looking at some of our products that we believe will be the high runner for the years to come. And going all the way, even to look at the design of the product and change it to reduce our costs very significantly, this will obviously take time because it's more of a -- I would say a development work before being able to productize, but we even go thus far to change the cost structure of our high runner products. And I think that this will be reflected gradually probably during 2022, probably do towards -- or more significantly towards the second part of 2022 and beyond.

And just one follow-up if I could, you touched on India and the potential there for that market to eventually transition to 5G. Typically that market has been maybe a little lower margin than the U.S. and Europe for you? Is that a key margin driver potentially as that market transitions or is there something other than as the market transition to 5G, is that a margin opportunity for you in India where you're so strong, are there other factors, yes, thanks.

India is a major market for us. And it's going to stay the same. I think that our advantage is that we know the Indian market very much and we usually can anticipate the price points. And obviously, one of the things we're trying to do is to look at what we believe will be the high runners for India, once 5G is out there and make sure that in this particular product, we're doing the utmost effort to adjust our cost structure to the Indian market. I know for a fact, because I'm talking to these customers that the Indian market likes our product and technology very much. And this is the most important thing that won us the business in previous years, when we just started the big journey [indiscernible] back in 2013, and 2014, our margins were very, very low. But over the years, we're able to reduce our cost significantly, and have a much more significant modules and it is our intention to do the same. We're going to fight for our market share in the 5G era, and I think that we're well positioned and even if the beginning, we'll start with relatively lower margins, the story shows that with these volumes, we'll be able to improve our margins very fast, and continue with our strong relationship with this market.

Great, thank you very much.

Thank you.

Our next call is from the line of Brian Kinstlinger from Alliance Global Partners. Please go ahead.

Hi, guys, thanks for taking my questions.

Hi, Brian.

Just one. Hello. You talked about just now your lower opportunities to lower your costs. But you also mentioned earlier changing your procurement strategy. So can you identify some of the key changes to help you work through the supply chain challenges as part of the strategy and how long before you expect it can have an impact on your procuring components?

So on their procurement strategy, the main change is basically, I would say the projection period based on which we go out to procurement. If in the past, our projection period was just for the sake of the example was nine months or six months projection, we have extended eight to 15 months or 18 months projection. Now, obviously, we're doing that very, very carefully because we don't want to get stuck with inventory that will become obsolete, eventually. And this is why we pick and choose the main components that are on the one hand critical and very difficult to attain in this turbulence period. But at the same token, we check that these components are for our high runners. So the chances that we'll get stuck with obsolete inventories are slim to none. That's a major element, the other thing that we're doing in components that we're so to speak single source components, we're actually developing the relationship with second source. Sometimes it require little changes that are not a critical, sometimes it doesn't even require any changes, so that we're trying to reduce the level of single sources as much as we can. And this and the third one that is even longer-term the new product series will have more and more common components so that the commonality will create even higher flexibility in terms of delivery timelines and beyond that, our new chip will take it one step further because with the new chip, we put a lot of system elements into this new chip. And that will reduce the number of components that we need to buy. So it's a very big strategic move. And it has different ingredients. Some of them will pay out faster; some of them will pay out in the longer-term.

Great, thank you.

We have no further questions, please proceed.

Thank you, all. In the third quarter of 2021, we not only enjoyed strong bookings and the healthy backlog, we also achieved considerable success in containing the impact of the unfolding challenges around us in different industries. Looking beyond the operational challenges, this turbulent period creates for us, we see very high market traction that we expect to convert into growth and margin expansion in the mid and long-term. I look forward to updating you further on our next call. Thank you everyone. And have a good day.