Welcome to the Ceragon Networks' Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Maya Lustig, Head of Investor Relations for Ceragon. Thank you. You now may begin.

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 Reform Act of 1995. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be obtained or that any deviations there from 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 would 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 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.

Thank you, Maya, and good morning everyone. We had a relatively good end to a highly challenging year. I'm pleased to share with you that we delivered at the high end of our projected annual revenue range at $291 million. But our best efforts and success in delivering revenues were overshadowed by the many challenges the business world experienced in 2021. As I mentioned in our previous calls, the global component shortages, supply chain disruptions, and shipping bottlenecks, have rattled many industries including ours. They led to increased prices. As such our financials have been materially impacted throughout 2021. Our gross margin for the fourth quarter was 29%. It is our belief that if it weren't for such strong turbulence in these industries, our gross margin would have been around 3% higher. We maintained our strong position in the market, but it came at a cost. Looking ahead, we have an optimistic view. We believe the crisis will eventually come down and we will see improvements in the second half of 2022. Until then, we are looking to overcome component shortages and looking into new ways to improve the cost competitiveness of our products without compromising on quality and performance. We are also working on optimizing our shipping costs. This is all part of our delivery through margin expansion strategy. Looking at our overall financial results for Q4, I am pleased to report that we have been on track with our expectations all the way down to the operating income on a non-GAAP basis. In fact, we would have been at a breakeven for the second half of 2021 if it weren't for higher than expected financial expenses. Ran will elaborate on this further. In 2021, the majority of our business came from 4G. That said, 5G is growing fast,…

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 Q4 2021 we saw strong bookings coming from India and Europe. When we look at the trailing 12 months, we see a strong book-to-bill ratio above 1. Let me now review the actual numbers with you. Revenue for the quarter were $77.8 million, up 5.1% compared with $74 million in Q4 last year. This was achieved despite the highly challenging environment we found ourselves in. We are proud of this achievement, and the fact that most of our customers' demands were fulfilled. Our strongest region in terms of revenue for the quarter was India, reflecting ongoing deliveries for our main customers in the region and in line with the strong demand we are seeing in this region. Our second strongest region in terms of revenues for the quarter was Latin America, mainly thanks to the progress we made with the deliveries and deployment for our Colombian Tier 1 operating customers whose agreement we announced back in March 2021. We had two above 10% customers in the fourth quarter. For the year our revenues were almost $291 million, up almost 11% from 2020. This reflects our ability to keep up with the strong industry demand we are experiencing even during such challenging times. Gross profit for the fourth quarter on a non-GAAP basis were $22.6 million, giving us a non-GAAP gross margin of 29%, similar to the fourth quarter of 2020. As Doron mentioned, if it wasn't for the component shortages, and surging shipping costs, our gross margin would have been around 3% higher.…

Thank you. [Operator Instructions] Our first call today comes from the line of Alex Henderson from Needham. Alex, please go ahead.

Couple of questions, the first is on the book-to-bill for 2021. You characterized it as "strong" most companies yearend because of the unusual circumstances are giving a little bit more granularity to what their backlog looks like and I was hoping you could provide us a little bit more granularity as well.

I would just say that overall our backlog has increased, if we compared our situation to the beginning of the year, and obviously this gives us some higher level of confidence in delivering in 2022.

All right. The second question I'd like to ask is, relative to the outlook, you gave a full year, but no commentary on the first quarter, can you give us any sense of how you think the growth over the course of the year will progress? I assume it's supply constrained in the first half of the year and therefore lower growth in the first half with little higher growth in the back half? And could you give us a better qualification of what you mean by the supply conditions becoming more normalized? What do you mean by that exactly? Your language is a little bit imprecise. It's hard for us to understand. Are you saying that you're now expecting the supply conditions by year end to be normal or are you saying that you'll still be constrained through year end in your expectations of 5% to 10% growth?

I will try to give you an answer about the supply chain and then I will turn the answer to Ran to be more specific about Q1, Q2. The supply chain environment is very turbulent and while we were able to resolve some of the component issues we had during Q4, there are still other component issues that we are not able to resolve yet. And that obviously creates some sort of vagueness or unclarity cloud over our projection for the year. Now, based on the orders that we have put to cover for the need of our components and the current messages coming from the different vendors, we believe that the supply of these components will become steadier during the second half of the year and that will enable us to deliver in, I would say more smooth and flawless way than the challenges we have faced so far. Said that, it's not that we are back to what we've seen prior to this crisis in terms of, I would say regular supply, prices and commitment and reliability of timelines. And therefore, we are taking a cautious approach, saying that the level of severe-ness [ph] that we've seen so far will probably be with us for the upcoming quarter or two and we believe that it will start easing up during the second half of the year.

But just to be clear, are you assuming that there is no supply constraints in the back half of the year or are you assuming that you can get what parts you need, and therefore no backlog issues in the back half of the year? It's an important distinction.

We don't assume that there will be no supply concerns on the second part of the year. We believe that based on the current demand we see for our products and the components that we have challenges with, these items will probably be able to resolve within the upcoming six months and beyond that it makes us feel more confident on the second part. We are not a back to normal situation on the second part of 2022. It's just going to come down a bit.

Okay, one, one last question and I'll cede the floor and then I'll get back in queue for additional questions later. But you didn’t mention the IP-100 at all. Can you give us an update on where you are on your 100 Gig product?

Yes, we didn't mention it because there's no significant change relative to our discussions in Q3. So we are moving forward with productizing the chip itself and as we've said assuming timelines are kept by the supply chain industry of the chip, we believe that we will have the chip ready and productized by the end of 2022. In parallel, we'll start developing the products that will be based on this chip and we hope to start presenting or launching these products to the market towards the end of 2023 or beginning of 2024. That has not changed relative to my previous discussions and announcements.

I'll cede the floor and get back in queue. Thanks.

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

Hello, Doron and Ran, can you hear me now?

Yes, George, hi.

Thank you. So, just maybe following up a little bit about the supply chain and the backlog, when you look at your guidance for the full year, are you anticipating actually starting to burn down your backlog or do you expect it to be relatively flat and that the inventory you have on hand gives you some confidence in being able to grown and then if things change, either positively or negatively, that’s where you move within the range?

First of all, the nature of the backlog is that you consume it, but it is actually filled up by new orders or new bookings. We believe that our booking for next year is going to be at least as strong, if not even stronger than the booking this year. So, obviously we’re going to consume this backlog, but because the customers are expecting us to deliver, but all in all, we expect to see growth in our business and in our bookings. So, if you look at the end of 2022, we believe that our backlog will be at the same value or even higher.

With the 5G activity that you’re seeing, it looks like you added two new design wins. Are you starting to deliver on the base that you have there either in North America or Europe? And like what type of momentum do you have on actually starting to deliver on 5G?

So, it depends on the more traditional and available products such as the 50E, 50C we are seeing as I said on the script, a strong demand and actually for at least 50C less than a year since launch and the 50E slightly longer than that. The amounts that were basically ordered and obviously delivered are quite significant, but obviously just to start, we believe that these amounts will increase further as we move into 2022 for two reasons. First of all, we see more demand coming from more customers or potential customers that are now starting the rollout and secondly, because, obviously there are some regions that have not started yet the 5G rollout. So, the combination of these two elements gives us optimism about increased demand for our 50E and 50C. Said that, obviously the trails, especially when you are talking about very prominent Tier 1 operators of the world, is not something that you can kind of underestimate. It takes time, it takes at least six months, sometimes even nine months until the product has been trialed in the labs and in the field, before we get the final approval to start working with the procurement and with the different circles or markets. So, that's a lengthy process. I believe that at least for the North America trials we will start seeing orders in the second part of 2022. In Europe, they’ve just experienced our IP-50FX, which is actually a brand-new product and we just initiated and launched the first version and they are looking into a second version that will come within a couple of months that will even be more robust and it's a lengthy process. But from my perspective, it's a very good sign for the longer future.

Okay and Doron one more question for you. On the managed services and the disaggregated routing, the new efforts that you're putting in, how quickly do you think that becomes a meaningful part of your overall revenue mix? And does this offer an opportunity to reengage with some customers that you may not have been either selling to recently or maybe driving incremental amount of business with them?

I think that generally speaking, all opportunities are open for us in this domain. I will refer to the cell site router and the managed services separately. In the cell site router domain, I can tell you that we are getting a lot of interest. Some of this interest is coming from existing customers. Some of it is coming from new prospects. And we have a very nice list of potential prospects that we have started discussions. Some of them are in more advanced stages; some of them are in less advanced stages. Some of them are in trials, and some of them have finished trials, and they want to move to the next stages. It will take us some time. I don't think that 2022 will have a very, very significant amount of revenue coming from this business, but I do expect us to have a nice ramp-up in booking. As to the managed services, I think that the more we talk with our existing customers, the more we see their needs for more sophisticated tools to basically run and operate the transport network after deployment. So, on the one hand we have a very nice list of existing customers whom we have already engaged with partially or fully, at the same token, there is a very nice list of new customers. Some of them we have just finished trials for a few months, and they are very happy with us. And I expect us to get the business in multimillion dollars in the upcoming quarter or two quarters. Some of them are in the private network domain, and there we also are in a position to win the first win, but the potential is huge. So generally speaking, it's a combination. Obviously, when we will be able to announce these wins in more, I would say, details, we will be announcing them. But generally speaking, I feel that the start is obviously coming from existing customers, but there's many opportunities that we see with some new prospects.

All right. And Doron, just a couple of questions to finish up with you. On the gross margin side, are you seeing any success with maybe raising your own prices to offset some of the pressure there? And you talked about having confidence in returning to the 33% to 34%, 35% type of area long term, do you expect much relief this year on the gross margin side, maybe below 30%?

So let me first answer the first question about increasing prices to customers. Yes, we have succeeded increased our prices to some of our customers. We actually launched a very detailed and specific plan per region. In some of the cases, we've been quite successful. In some of the cases, I would say it's more challenging, but this is going to contribute for the gross margin for 2022. And coupled with, I would say, some relief in the supply chain and the component shortages, which have been a toll for us in the past few quarters. As I mentioned in my prepared remarks, if we would have been with these constraints, our gross margin would have been better by 3%. So I don't expect that all of this will ease in 2022. I do expect some ease in the gross margin to have better gross margin. I would say at about 1% compared to 2021 and 2022.

Great. And my last question is on the OpEx side. With the FX impact that you're seeing and the tight hiring market as well, and how attractive engineers are and all that, do you anticipate having your OpEx level go up to $22 million a quarter or how do you see it on a quarterly basis through the year?

So I think that actually Q4 represents relatively what we expect or a little bit higher in 2022 because of the, I would say, two factors. First is indeed the salary pressure on engineers on Israel and second one is the foreign exchange here in Israel that although has been a rebound a little bit in the past months, according to our forecast, we do expect a negative impact on it in 2022. So all in all, we do expect the OpEx to be higher than in 2021 on average, and to be more close to what we have in Q4 or a little bit more than that.

Thank you very much.

Thanks, George.

Thank you. Our next question today comes from the line of Rommel Dionisio [Aegis Capital Corp]. Please go ahead.

Good morning, Doron and Ran.

Hi, good morning.

Hi, good morning.

You mentioned, Doron, you talked about reengineering -- or maybe it was you Ran, talked about reengineering some of the products to help improve gross margins going forward. Is that something -- is that a factor that could impact 2022 or will that take a little bit longer to see the benefit of those initiatives? Thanks.

It depends because this initiative is a widespread effort. Some of them are relatively small in terms of time that need to be invested and immediately after that enjoying the new design. So in this regard, a portion of it will also impact positively our gross margins in 2022. Some of them are much bigger initiatives and obviously, will have a very nice impact on 2023 and beyond that. But the short answer is, at least partially, we expect this kind of, so to speak, redesign to have a partial contribution into the gross profit and gross margin obviously of 2022 as well.

Okay. During your prepared comments as you were going through the geographies, you talked about, I think a restructuring in North America. I wonder if you could just -- could you just give us a little more granularity on the rationale on the plans for that please?

Yes. In North America, our traditional business was focused on the Tier 1 operators. And yes, we had a very fruitful partnership with some partners in this particular region to basically sell our products to smaller ISPs and to a certain degree, private networks. But the focus was primarily on the Tier 1 operators. Now what we want to do is to increase our focus on the Tier 3, Tier 4 ISPs and private networks by coming with a slightly different strategy. In places where they are seeking for a one-stop shop, we want to provide them with a full network solution using the great ecosystem that we have with Access vendors, with core vendors and the fact that we have been doing that for a while in other regions. Obviously, we are going to handle this strategy in a very high, I would say, sensitivity so that we will continue also the strengths, the strong partnerships that we have, but we see this, I would call it, unserved market of small players who do not have one throat [ph] to choke in terms of one-stop-shop that can serve them and either they don't have the knowledge, if it's coming from the private networks or they don't have the capacity to have the expertise in-house. And we believe that this target market also has a good opportunity for managed services. And for that, we have actually changed our sales organization and obviously, also the technical people so that we can really focus on this unserved part of the market and win business there.

Great, thanks very much.

Thank you, Rommel.

Thank you. Our next question comes from Alex Henderson's line from Needham. Please go ahead.

Great, thanks. A couple of questions. Since we start just -- you were just -- were talking about the U.S. private networks and Tier 2 through 4. Can you update us on your relationship with Cambium and whether that's growing or how that business is doing?

We have great relationship with Cambium, and we are having, I would say, recurring goals and discussions about continuing our partnership and strategizing or actually fine tuning our strategy in light of what we see in the market. I'm speaking with Atul almost every month, at least every -- at least once a month and we intend to continue this collaboration because basically, they are augmenting the needs of their customers with our products and in some cases, by the way not only in North America but also in other regions. We are augmenting our offering with their products, so this partnership is fruitful, and will continue for sure.

Do you expect them to benefit from RDOF and therefore, see a meaningful acceleration in that business, as well as potential for your strategy here to capture some of the RDOF business?

The short answer is yes. The longer answer is that the nice thing about our partnership between -- the partnership between us and Cambium is that they've decided that they don't want to be involved in providing with services. They just want to sell their products. We have a different strategy, and we believe that with our experience and software tools, we can provide very robust services. And therefore, in many cases, when they come across opportunities for their funnel, where the value-added reserves cannot provide with the services that the customer, the end customer is expecting them to provide, and it happens, we are getting into the picture and taking responsibility. And we have seen a couple of such opportunities just recently and I hope that this stream of opportunities will continue and I'm sure that we'll be able to collaborate with them further.

Well, the RDOF stuff should drive Cambium business. Excluding that services base, I would assume that, that would also drive acceleration demand for your products through that channel?

Yes. Yes, that's true, but for me, that's natural, and it's part of my anticipation for further growth in North America...

When do you think that will kick in?

Sorry?

When do you think that will kick in as a driver?

I believe that we can see more business coming probably towards the second part of the year because let's not forget, the process is filing applications, asking for grants. It's not a process where you just make your decision and go to the next value-added reseller and ask for this amount of equipment of microwave and this amount of equipment of unlicensed. It's a process, and I've seen a lot of activities of different ISPs filing for grants. It takes time. It's not something that happens within a second. But I do believe that we have a good chance to start seeing an increase towards the second part of 2022.

You mentioned service a number of times. Is it additive to the growth rate in 2022 in a meaningful fashion? Can it add a percentage point to the growth rate or is it more of a 2023, 2024 contribution to growth?

I don't think that a huge increase in our services beyond the traditional business is baked into our projection. And since we are aiming to manage services, the ramp-up is usually reflected in the revenue kind of later on. So I think, it's a buildup for further growth in 2023 and beyond.

And will the gross margin benefit or be hurt by services Doron?

Our assumptions and our use cases are showing that eventually this could help our gross margins. Remember, the [indiscernible] managed services is not just to replace human beings by human beings. It's also to come with sophisticated software tools that can be used remotely to really bring value to the customers. And for software and for software that provides value customers, primarily in North America, Europe, developed countries are willing to pay. So all in all, we do believe that it will contribute positively to our gross margins.

But just to add on that Alex, I see the same view as Doron that it will be positively contribute to the gross margin. Although usually in the first period, six months, nine months we do require to have some more, I’ll say incremental investment that will pay off over time. We actually have been seeing it in the managed services agreement. We announced I think a year ago or nine months ago with the U.S. provider. So we see actually an improvement, and we see also some opportunities in this engagement for upsell, which also contributes positively to the gross margin.

Could you talk about mix as we go forward? One of the biggest swings in the mix of your gross margins is the geography that you're selling into. India has been strong in 2021. You've had very strong wins in both Europe and the U.S., which I think carry much higher margins and take every feature you make available. Will we see a mix shift from geographic perspective to higher-margin geographies in 2021 and -- excuse me, in 2022 and into 2023?

We believe that in North America and Europe, the trend up of stronger business and higher business than in the past will continue. Just for you to remember, actually, the strong year we had in Europe and North America unfortunately, due to the component issues was not converted into our fully converted into our revenues yet and obviously, this is a very nice part of our backlog to be consumed next year. Generally speaking, if the issues of the supply chain will come down partially as we expect, we do expect the revenue of Europe and the revenue of North America to become a bigger portion as opposed to India unless the growth we are seeing or planning for in India will be even bigger. In that case, we'll see absolute numbers go in both or in the three regions which will obviously make us very, very satisfied because maybe we'll be even able to exceed the guidance we just gave.

Just a couple of quick ones. The Peru build-out, is that now completed?

Not yet. There were some challenges due to the COVID that basically held this project progress. And also due to some changes in the government, there are some delays. I would say that at least one of the regions is about to be finished very shortly, and the other two regions will follow. Obviously, pending the discussions with the government and how they want us to continue with this project, given the situation of the COVID and the impact on the economy there. So it's not ended yet, but we believe that probably it will end up towards end of 2022, maybe will slip also into the first half of 2023.

Okay. Last question, and then I'll cede the floor. The IP-50FX, I heard you say three trials in Europe, one trial in Latin America. I think you said that you expect trials in the U.S. in the second half of 2022. Is that all of the trials or are there, I mean, if can you aggregate them and give us a totality of your trial expectations so that we have a little bit better feel for it, it's a little bit disjoined?

We are talking -- all in all, we are talking about a list of tens of trials across the globe. North America is not there yet because they are focused in what we call 4G plus, which is actually expanding the capacity. And by the way, the Tier 1 operators in the region were already introduced to this product in the past, so they know that it exists. But in terms of priorities, at this point, their approach is slightly different. But we are seeing numerous trials or stages of trials. Europe, Asia, Latin America, I don't think, I missed any significant one. I think that even in Africa there's a trial starting now.

So tens of trials implies 20-plus trials kind of thing?

Yes.

Yes, okay.

We have a list of 20 plus trials. Some of them were not even able to start because we didn't have so much equipment available for trials. We are going - we are speeding up, and we intend to catch up in this quarter in Q1

Just last two points on that question. One, what's the gross margin impact of this product once it ramps? Is it a -- I assume it's a lot of software and therefore, it's accretive to gross margins? And does it pull your other products in your line as well? Thanks.

So yes, we expect the gross margins to be higher. Obviously, region by region, we're analyzing region by region. And generally speaking, the idea is that this product can also connect with our all-outdoor solutions as an indoor unit and serve the market that is still seeking for split mode solutions. And not only that, in one of the future versions, this software of the radio wear would be able also to contact third-party radios and that will hopefully give even much higher flexibility to potential customers to buy something that is much more cost efficient.

Perfect, thanks.

We have no further questions. Please proceed.

In closing, allow me to reiterate that in 2021, we enjoyed strong bookings and healthy revenues. We were able to contain the impact of the crisis around us. I sincerely thank our employees for the enormous endurance and creativity they showed in these extraordinary times. While in the short run, we expect to be dealing with the same issues, continued strong demand by our customers brings us optimism. We expect market share growth and margin expansions in the mid and long run. Our goal is to create equal digital opportunities for all people around the world whether they are in an urban setting or in a rural area. We work to bring reliable communication capabilities everywhere. I look forward to updating you further on our next call. Have a good day, everyone, and thank you.

Good bye.