Ladies and gentlemen, thank you for standing by and welcome to the Ceragon Networks Q2 2023 Earnings Call. [Operator Instructions] 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.

Thank you, operator, and good morning, everyone. Hosting today’s call is Doron Arazi, Ceragon’s Chief Executive Officer; and Ronen Stein, Chief Financial Officer. Before we start, I would like to note that certain statements made on this call, including projected financial information and other results of the company’s future initiatives, future events, business outlook, development efforts and the potential outcome, anticipated progress, results and time lines 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’s 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. Such risks and uncertainties include, but are not limited to those that are described in Ceragon’s most recent annual report on Form 20-F and as 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-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 issued earlier today. With all that said, I’d now like to turn the call over to. Doron. Doron, the call is yours.

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 second quarter in a row, revenue surpassed $80 million in 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. 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 first 6 months of 2023, combined with improving visibility into the third quarter has given us the confidence to increase our full year outlook. Revenue for the quarter was $86.2 million, 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. Additionally, we are solidly profitable with $0.05 in non-GAAP earnings per share. Our sales execution in key regions has improved. And the new leadership in Europe, we went through significant organizational restructuring during the quarter. We see a significant opportunity to expand 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. We are working hard…

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. 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 $86.2 million, an increase of 21.9% compared to $70.7 million in Q2 2022 and up 3.3% compared to $83.4 million in Q1 2023. When we take the trailing 12 months view, our revenue was $323.7 million, an increase compared to last quarter’s trailing 12 months revenue of $308.3 million. Our strongest regions in terms of revenues for the quarter were India and North America and with $26.9 million and $22.2 million, respectively, in line with the continuous strong demand we see in these regions. Our third strongest region in terms of revenues was Latin America with $12.6 million. We had two customers in the second quarter that contributed more than 10% of our revenues. Gross profit for the second quarter on a non-GAAP basis was $30.4 million, an increase of 41.2% compared to $21.5 million in Q2 2022 and an increase of 7.2% compared to $28.4 million 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…

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

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 3G and lesser extent 4G networks. As they move to 5G, do you expect to be able to ship them a better mix of software and 5G-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?

Hi, Alex. This is Doron. So thank you for your question. India is India, and will 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 their decisions, how to invest in the network. 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.

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 India 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 first and second quarter. What are we thinking about in terms of gross margins into the back half? Are we down – back down into the 33% to 34% range or, what’s the trajectory there?

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.

So I guess that would suggest the higher margin up – at the upper end of your historical range because you averaged over 34%. Is that fair?

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.

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?

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 the – in our portfolio, we do all the time the assessments, and we act accordingly.

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 the specific number as we don’t disclose many other components that 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 further down in terms of the impact on our gross margin this quarter.

Well, we’re taking an 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?

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% 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 that we cannot hedge.

Was there any ForEx in the 2Q number that – I mean, it was up over $300,000 quarter-to-quarter.

It was not material to any size. It was a relatively reasonable number in terms of going backwards to the most recent quarters. Yes.

So, you are suggesting that we ought to be using around the $2.1 million level for both 3Q and 4Q?

Yes. The level that we saw in Q2 is more or less the level – I cannot expect – in terms of forecasting, I cannot say something else.

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

So, the tax is a bit more complicated because the taxes – 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 is no much changes, a bit increased. As level of revenues increase, it should increase accordingly, but not – it cannot be modelized easily.

Right. So, you did 439 in the first quarter, 787 in the second quarter. Should I take the average of those two and extrapolate that to the back half?

It could be a good – could be a reasonable idea.

Okay. I will see the floor. Thanks.

Thank you, Alex.

Our next question today comes from the line of Scott Searle from ROTH Capital. Please go ahead.

Hey. Good morning. Good afternoon. Nice job on the quarter. Thanks for taking my questions. Maybe just to quickly follow-up on Alex’s question for clarification. 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&A was a little bit elevated versus the last several quarters. Are there any one-time charges in there that we should normalize out? And then I had a couple of follow-ups on geographies and products.

So, regarding the inventory, it was just a write-down of inventory to a certain extent for this quarter. It could be – in 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. With respect to the G&A, as I just mentioned, I cannot say that things were specifically one-time. Some things could be a little bit higher or lower in specific periods. In general, as you say – 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.

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? Is it 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. And I am wondering if you are starting to see that start to pick up now as we go into the back half and into 2024?

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 therefore, the numbers, and obviously, the timing could change among them. But I think that the strength so far was driven by the Tier 1 operators, at least for us. Do we still see this trajectory continues, I would say – I would carefully say that based on what we see and the discussions we are having with all of the Tier 1 operators in this particular region, there is a good chance that we will 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 their 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 are 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.

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.

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 ‘24. But I am wondering if you are 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 5G perspective?

Yes. So, as we have said in our prepared comments, what is fueling our success at this point in this year is a combination of 5G rollout and continued 4G rollout, where the 4G 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 ‘24 as it is today, and maybe even higher. But I think that the portion of the 4G at a certain point relative to the 5G 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 will start gradually moving towards more 5G and less 4G.

Got it. Very helpful. And lastly, if I could, Doron, on the product front, it sounds like you are tracking from an ASIC perspective to bring down the BOM costs as you go into 2024 and beyond. But it sounds like there are some other products as well that are in the pipeline. I am wondering 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 are going to start to see rolling out to the marketplace in the second half and 2024 timeframe? Thanks so much.

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 a TCO perspective understanding that the current product offering that we have could address very nicely the technological needs, but sometimes not in – with the right TCO. And as we have 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. Just to augment the current portfolio with more products that can address more use cases with the right total cost of ownership.

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

Thank you so much.

Thank you.

[Operator Instructions] Our next question today comes from the line of Gunther Karger. Please go ahead. Gunther, can you hear us. Our next question today comes from the line of Alex Henderson. Please go ahead.

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

Yes. So, we were talking about launching the first 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 will have positive surprises. But at this point, this is our basic assumptions. In terms of margins and BOM cost, obviously, the trend and the history shows that as the products become 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 is 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 performance-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 will be able to sell these products from the store 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.

Do you expect any start-up costs associated with that, as you are 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 low?

So, one of the things we are doing is basically when we prepare to manufacturing, we also look into the equipment that we have today for manufacturing and to what extent we will 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 are 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.

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?

Look, I think Ceragon is very well known for the strength of its radios and the total cost of ownership. The IP-20C, which was launched significantly, I would say, in 2013 or 2014, one such a big business for us, because of this combination of very strong radio with a relatively BOM cost, that could create a very interesting total cost of ownership to our customers. I think that this system-on-a-chip will actually come with the same message to the market. You will see 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.

I guess what I am 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 are 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?

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 and their 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 consideration why they keep a very, I would say, close relationship with us, even in 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 will obviously share more information with the customers.

Great. Thanks.

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

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 third quarter, 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 are increasingly excited about Ceragon’s opportunities. I look forward to updating you further on our next call. Have a good day everyone.