Ceragon Networks Ltd. (CRNT) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Ceragon Networks First Quarter 2021 Earnings Call. Please be advised, our call is being recorded today. Following our formal remarks, we will open up the floor for a question-and-answer session. [Operator Instructions] I’d like to hand over the call now to our first speaker today, Ms. Maya Lustig, Investor Relations at Ceragon. Please go ahead.

Thank you, operator, and good morning, everyone. I am joined by Ira Palti, Ceragon’s President and Chief Executive Officer; Ran Vered, Ceragon’s Chief Financial Officer; and our incoming Chief Executive Officer, Doron Arazi. 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 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 date 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 some 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 Ira. Please go ahead.

Thank you, Maya, and good morning, everyone. It’s my pleasure to share with you that we’re hosting this call using 5G technology. Right now, everyone in team Ceragon is on their 5G smartphones. This is a 5G-enabled video call, proving firsthand that 5G is here to stay. It’s here to grow. It’s here to lead. We are proud to be the ones making this revolution a reality. We’re proud to lead the change. Last quarter, I shared with you my vision for a 5G world. I presented you with the ways Ceragon will be a driver of this new data-driven 5G-powered global culture. Now, this quarter, I’m pleased to share with you the details of our participation in cutting-edge projects, new design wins, and POCs, which all show we’ve already moved from a vision into a successful tangible reality. 2021 is looking to be a good year for 5G. Despite the overall economic impact of the pandemic, the worldwide telecom market is marching forward with robust activity. We’re observing a positive trend in the amount of data flowing through the virtual veins of networks. There has been a massive cultural shift toward the digital, and more and more people have become more willing to and skilled in using new technologies. To keep up with this new era, operators around the world are rushing forward to upgrade their existing systems or build new networks. This global shift impacts our 4G and 5G offerings positively. In Q1, we achieved new design wins and saw very strong bookings. In fact, our bookings in Q1 were the highest in two years. Our book-to-bill ratio was way above 1. While this increases our visibility and confidence in market demand for the reminder of the year, it’s clouded by global component shortages, which will probably affect our delivery capabilities. Ran will elaborate on this further. In North America, we had a very strong quarter, the strongest in terms of bookings since 2016. We see increasing demand from existing Tier 1 customer to expand its 5G network. We’re also providing solutions for a significant capacity increase for Tier 2 operators and WISPs. We see growth in sales to WISPs in the U.S. as well as in Canada, which reflects a regional trend. We see this trend in both direct and indirect channels. In addition, we’re increasing our sales efforts to critical infrastructure type of customers such as public safety and utility providers, as they start looking to upgrade their networks to 5G. We see a lot of potential in this market, especially for providing value through complete communications solutions and services. In Europe, driven by 5G demand, we had a very positive quarter in terms of bookings. I am proud to say that more than 20% of the region’s bookings came from 5G-related orders. As European operators continue to push 5G from initial trials into the field, we are there to provide them with the technology, expertise, and the services they need. We are participating in numerous 5G proof-of-concepts and initial rollouts, and plans are being finalized for mass rollout. In Western Europe especially, we foresee a significant opportunity to grow and take market share. After Western Europe, we expect to see 5G momentum build in the rest of Europe. In India, there’s massive competition among operators who now invest heavily in strengthening their 4G capabilities and planning their POCs for 5G. Based on our current relationships with them, we believe we’ll be part of those 5G POCs. At the same time, there are great efforts to bring the vast population still using 2G and 3G into the data-driven world. These efforts drive the operators to rapidly expand their current 4G networks in both reach and capacity, which creates significant demand for our products. Both trends play to our favor in Q1. Our operations and revenues were strong and stable. In fact, in India, we believe 2021 will be even stronger than 2020, assuming no material impact on our operations from the latest COVID outbreak. The Latin American market is showing signs of heating up after a coronavirus-induced freeze. COVID-19 continues to hit Latin America severely, yet there’s new momentum, especially in new investment towards a stronger 4G and readiness for 5G. Operators are catching up for time lost last year, in implementing their networks. I’m pleased to share that our bookings were more than double versus Q4 2020 and that 80% of these bookings came from Tier 1 operators, including a multinational Colombian Tier 1 operator whose frame agreement is worth $26 million. Overall, there has been very strong momentum in the Indian and Mexico as well. In APAC, after a slowdown in the last few quarters, we signed a follow-on frame contract worth $23 million with a Tier-1 Pacific Rim operator, one of our more advanced 5G implementations with significant traffic on our equipment. In fact, the majority of the bookings in this region came from Tier-1 operators. We’re also beginning to sell 5G technologies to China and continuing to make progress with a new Tier-1 OpenRAN customer. Overall, in every region, we are moving into a new future where I believe there will be an increasing number of opportunities for us across the globe. I’m pleased to report that we have 12 5G design wins to date, an additional three since we last reported. One is a new addition to our customer base and the rest existing customers. We are working hard to leverage future opportunities and to continue to be a key enabler of the multi-year 5G evolution. Allow me to provide you with some statistics regarding the acceleration in the global 5G evolution. According to the GSMA latest report, Wireless Backhaul Evolution and ABI Research, 5G mobile subscriptions are expected to grow by more than 41% CAGR in the next six years, increasing from 378 million subscribers to 4.2 billion. Traffic is estimated to increase above 6,000 exabytes annually by 2027, with 5G accounting for more than 80% of total traffic. Thus, higher capacity backhaul bands millimeter-wave and microwave will be vital in meeting 5G traffic demands. They will account for more than 55% of the links in 2027. Fiber will be next with only 42%. The need to further densify the network to support 5G will result in additional macro cells and small cells in particular being deployed in urban areas to handle the traffic. While fiber will be deployed, not all urban cell sites can be supported by fiber. Instead, microwave and millimeter wave backhaul links will be used, which are versatile and can handle significant data rates. Now, 5G comes with diverse use cases and requirements. The growing OpenRAN movement provides new avenues for customization and flexibility that meet such requirements, as it offers interoperability among different radio, digital, and control unit solutions from different providers. I believe it’s the brightest future of our industry. OpenRAN has picked up steam across the globe, and it’s causing a massive disruption and disaggregation in how networks are architected. Today, it isn’t just the greenfields-tech but also major market players that turn towards OpenRAN. As the market in general continues to move from monolithic approaches to OpenRAN, our best-of-breed open network hauling solutions become more and more relevant, as they can be seen through our joint project in Brazil, plus various design wins we’re working on. Allow me to elaborate on the Brazil project. We’re participating in TIP 5G OpenRAN trials which test equipment providers for 5G OpenRAN. It’s a joint project TIM Brazil is carrying out with TIP Telecom Infra-Project, and the National Telecommunication Institute. Our new generation, all-outdoor, ultrahigh capacity IP-50E millimeter wave solutions capable of delivering up to 20 gigabits capacity today is being trialed. This type of solution is a must for OpenRAN, as it provides the connectivity to the radio units. We’re proud to be involved in this project, in Brazil’s future network deployments, and we see it as an opportunity to prove our technology edge. To meet future 5G and OpenRAN-related technology demand, we’re developing a new high-capacity low-latency system-on-chip. It’s designed to offer the next-stage of front-haul linking between digital and radio units. With this solution, we’ll be the first ones in the market offering this technology. We’re very excited about this prospect. Ceragon’s system-on-chip, whose tape-out is planned for July, will support both microwave and millimeter waves. With high bandwidth and low latency, it will support significant expansion of 5G networks in addition to supporting all previous wireless generations. Our existing IP-50E and IP-50C family of products successfully support now 5G deployments. The new system-on-chip will enhance our offering with an increased capacity reaching 100 gigabits per second, as well as improved 5G and OpenRAN compatibility. We are innovating on a disruptive market trend as we’ve always done, from 2G all the way to today’s 5G. Ceragon has grown so much in the last decade and a half, and it is a global company today. It has been a pleasure serving as the President and CEO of Ceragon for the past 16 years, and to lead the incredible progress and the very many accomplishments of the Company. In the beginning of July, I will be transitioning my responsibilities to Ceragon’s former Deputy CEO and CFO, Doron Arazi. I will continue serving the Company as Vice Chairman of the Board. Throughout my time at Ceragon, I’ve truly been honored to work with so many talented leaders and visionaries including our incoming CEO, Doron. With that, allow me to briefly pass the mic to him. Doron?

Thank you, Ira, and hello everyone. I feel privileged and excited to come back to Ceragon as the new CEO. Under Ira’s leadership, Ceragon has competitively enhanced its 4G and 5G offerings and today, it is a global supplier to many of the world’s Tier 1 and Tier 2 operators. As you may know, I’m neither new to Ceragon nor to the industry in which it operates. During my many years in the telecom and related industries, I got exposed to a wide variety of strategies and business models for scaling up results. I led changes that generated stronger, bigger and more profitable businesses. I also built solid relationships with operators, vendors, banks, and investors. I am now bringing this extensive experience back to Ceragon. I see a lot of potential and opportunities in leveraging Ceragon’s core competencies to build a stronger, bigger and more profitable company. It’s my plan to keep our technological leadership, which is the foundation of Ceragon’s success, and develop more and more innovative ways to fulfill the world’s growing 5G needs and beyond. I look forward to furthering our commitment to our existing customers as they navigate the new 5G realm, and continue to enhance their 4G networks. I also look forward to finding new ways to scale our technology and to open new doors in existing and new verticals. Back to you, Ira.

Thank you, Doron. Once again, congrats and good luck in your new position. I would now like to turn the call over to Ran to discuss our financials in more detail. Ran?

Thank you, Ira and 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 Ira mentioned, during Q1 2021 we saw very strong bookings coming from Europe, North America, Latin America, and India. In fact, Q1 was the strongest in terms of bookings in the last two years. Our book-to-bill ratio was way above 1. Our revenues were at a strong level and at the high end of our projections for the quarter. During the first quarter, we made further progress moving back towards normal operations, accelerating the positive trend that began in Q3 2020. Let me now review the actual Q1 numbers with you. Revenues for the quarter were $68.3 million, up 22% compared with Q1 last year. Our revenues varied from region to region in line with the effect that COVID has had on local business operations and network build-out plans. Our strongest revenues for the quarter were from India, reflecting ongoing deliveries to Bharti. Europe had a strong quarter, continuing its positive momentum from 2020. In fact it is the strongest first quarter since 2015, reflecting some initial revenues from 5G projects. Revenues in North America were strong, reflecting continued positive momentum with our Tier 1 customer, other ISPs, and smaller carriers. Latin America had a slightly lower quarterly revenue than its normal run-rate, driven by the low bookings in the second half of 2020. However, we are starting to see a new momentum in the telecom market there, and we started the year with very strong bookings. Revenues in Africa reflect the completion of the Orange Niger project we announced in August 2020 as well as another customer we won in Q4 2020. Revenues in APAC were at a low level in conjunction with low bookings in the last two quarters. We had one above 10% customer in the first quarter. The booking to revenue ratio for the first quarter was way above 1. The strong bookings give us confidence for the remainder of the year, though clouded by the global component shortage crisis which might affect our deliveries. I will elaborate on this more shortly. Gross profit for the quarter on a non-GAAP basis was $20.2 million, giving us a non-GAAP gross margin of approximately 30% compared with 25% for the first quarter of 2020. Our relatively low gross margin reflects the continued high supply chain costs that we have had to deal with in the COVID environment, with a major increase in air freight costs, higher material costs, and more. This is likely to continue to fluctuate over the next few quarters until there is a full recovery. Operating expenses on a non-GAAP basis for the first quarter were $19.5 million, lower than our expectations. Research and development expenses for the first quarter on a non-GAAP basis were $7.4 million, a slight increase from Q1 2020, mainly due to our progress with chip development. As planned, these expenses will continue to stay high until we reach tape-out in July 2021. Sales and marketing expenses for the first quarter on a non-GAAP basis were $8.2 million, same as Q1 2020, reflecting the reduced travel and variable compensation that have come with COVID. We expect to gradually increase our sales and marketing expenses throughout the year as markets open post-COVID. General and administrative expenses for the first quarter on a non-GAAP basis were $3.9 million, lower than our expectations and down from $4.2 million in Q1 2020. Going forward, we expect to return to our 2020 run-rate. Financial and other expenses for the first quarter on a non-GAAP basis were $1.2 million, in line with our expectations, and have returned to their regular levels in Q1 2021. Our tax expenses for the first quarter on a non-GAAP basis were $0.3 million, lower than in Q1 2020 and in line with our expectations. Net loss on a non-GAAP basis for the quarter was $0.9 million or $0.01 per diluted share. On a GAAP basis, net loss was $1.2 million, or $0.01 per diluted share. We reduced our inventory to $48.5 million, down from $59.7 million in Q1 2020. Our receivables are now at $106.7 million, up from $104.2 million in Q1 2020. Our DSO now stands at 141 days, which is almost the same as in Q1 2020. Net cash used in operating activities for the first quarter was $1.7 million. Net cash used this quarter for investing activities was $2 million. Looking ahead, our strong bookings in Q1 which are significantly better than expected, along with a very healthy funnel and positive bookings forecast for Q2, reflect increasing business activity in most regions. Now, all that said, the growing component shortage in different industries all across the globe, has started to have an effect on the supply of our components as well as operators’ 5G rollout plans. Compounding the problem is panic buying of chips in certain industries, leading to further bottlenecks. In Q1, we were able to manage this situation without material impact on our deliveries and in turn, our revenues. We’ve been working with our suppliers, looking for additional ones and taking other measures to increase our supply chain capabilities, efficiency and resilience. We continue to target revenue growth in 2021. Although we still expect a slow start for the first half of the year, we continue to expect yearly revenue to be between $275 million $295 million. Now, all that said, the growing component shortage may have a negative impact on the timeliness of our Q2 and rest-of-the-year deliveries and may lead to a probable push of revenues between quarters until the shortage is resolved. We remain confident in our mid and long-term prospects and deliveries. With that, I now open the call for your questions. Operator?

Thank you. [Operator Instructions] Our first question today comes from the line of Alex Henderson. Alex, you’ll be prompted to unmute yourself. Please go ahead.

Hello? Can you hear me?

Yes. Alex, we can hear you. Perfect.

A couple of questions, if I could. First, I wanted to talk a little bit about the tape-down in July of what I think is probably one of your most important products in a very long time. One, do you have any risks around that tape-down timing based on capacity constraints at this -- in the supply chain maybe causing deferrals on timing of taping down new products?

At least what we see right now is no. What we get from the people who needs to do the tape-out and the manufacturing and what’s on there is that, in general, the processes for new chipsets are on time, although there is a question, but that will come a little bit further down the road on capacities to manufacture it. And that’s where we are. Tape-out, we need samples quickly. I think we’ll be on time with samples to build the products. And then probably further down the year, by mid-2022, when we’ll have to ramp up the production might -- then we’ll have to see. By then, I do expect the shortages of chipsets will be over.

And relative to the tape-down, obviously, there’s always risk that tape-downs will come back with the need for another turn. When do you think you’ll have a sense of when that product is -- when do you expect to have the tape-down results back?

Close to the end of the year.

Perfect. And I wanted to go back to the comments around India. I mean, to be honest with you, I’m a little surprised at how strong it is, not so much because of the need, but rather because of the COVID conditions there. Frankly, we were bracing for much weaker results out of India than what you obviously have come in with very good results. The question is, if you had those products, can you get them in and install them given what’s going on there?

The answer is yes with a maybe. Let’s remember on India that, in general, what we see as the demand is plans the operators put us their plans for 2021. Plans were done somewhere in January, February before the very heavy hit of the COVID. Yes, we -- I think I said on my script and Ran indicated that we are a little bit hesitant on the capability to install a lot of those under the current COVID. Although experience from the last time, about a year ago, when we had those issues, we were able to install even under the COVID. Although this time, I expect it might be a little bit more difficult, and that might create some differences in hauls in there. But in general, yes, I think the India market is built to work under the COVID.

Just to -- Alex, just to add on that. We also indicated in our prepared remarks that 2021 can be even better than 2020 because we already see strong bookings in Q1, and we also see very strong funnel in the remainder of the year for India. So, we feel confident about it with the question of COVID and the impact on that.

The question on the supply constraints, just to dig into that a little bit. Obviously, hitting every industry, you guys are certainly not alone on that. But it does beg the question of whether companies will choose to go with companies that can get chips versus ones that can’t. And companies like Nokia may not have best-in-breed product, but they have bigger scale and therefore more cloud. Are you able to get your customers to help you get a little bit more cloud, and therefore, make sure that you’re staying in the right positioning and they’re not going to choose to go with other people because of the lack of availability out of Ceragon?

My feeling is that we do have the cloud in the areas where we need to and -- which is the -- let’s remember that some of the issues we have is with dedicated chipsets, and there we are bigger than Nokia in requirements for some of the vendors. And in some of the other places, which are more general, I think there, the opposite happens. Because we are smaller, it’s much easier flow in between the current on those things. So, yes, it’s a fight out there. I’m seeing progress on a lot of those lanes and a lot of the fund that’s taking place there.

So, relative to the last question, then I’ll cede the floor to the next guy. But relative to the guidance, I assume at the low end of the guidance, you’re probably assuming a lack of availability of components. And at the high end of the guidance, you’re assuming that kind of the best-case scenario of availability relative to a reasonable expectation of supply on the components that you’ve been hearing from people. What would be the circumstances that would get you to the low end? Is that a situation where people basically back off on deliverables that they told you they were going to give you, or I mean...

I think that’s what we indicated on the call. We still believe in the guidance that we gave in there. I do not know exactly on the range and the impact of the supply chain issues as they come across. At least in first quarter and what we’re seeing in second quarter, we’re able to mitigate most of the risks and the things on the table, not all of them, but a lot of those. Time will tell. And it’s an issue that will fold across the year, where I think that longer-term, it’s there. I think our customers see the same issue from all suppliers. And I think it will make the, as we said, probably push out of deliveries in between quarters as we move forward. And longer range, we are very, very confident that this is -- once the supply chain constraints have reduced, we are in an excellent position to expand.

Just to add on that, Alex, my view, as we also indicated on the call, we saw very strong demand in Q1. And we also see very strong demand and funnel for Q2. So, in that sense, our backlog is very healthy in that sense. The question is, how can we deliver it with the shortages, and what will be the push between quarters that we will face? That is yet unclear. But as we indicated, we feel at this point confident with the guidance that we provided there three months ago.

Okay. Well, in closing to this question, Doron, thank you for joining us. It’s good to see you, and look forward to working with you. And Ira, congratulations. You’ve had a great run and really done a good job of positioning the Company going forward. And I really appreciate working with you over the years, and certainly hope to keep in touch even in your longer-term post-Chairman position.

Thank you very much, Alex.

Alex, first of all, thank you for your warm words. And Ira is not literally leaving us. So, let’s not make this separation that dramatic. Looking forward to working with you, Alex.

Great. Thank you, guys.

Our next call is going to come from the line of George Iwanyc.

Hello? Can you hear me?

Yes. Hi, George.

Thank you for taking my questions. And yes, I’d just like to start off with thanking you, Ira, for your perspective on the industry over the years and the relationship. And Doron, congratulations on coming back and coming on board. So, with that, maybe digging into the guidance a little bit more. With the visibility you have into the supply chain right now, is there any risk that revenue could decrease quarter-over-quarter because of the tightness, or is this just an amount that you can’t deliver to the demand and you’re kind of keeping expectations kind of close to the best for the near term?

Hi George, this is Ran. So yes, revenues might go down quarter-over-quarter. But as I said earlier, it’s not at all a matter of demand. The demand is very strong. The backlog is very strong. It’s the matter of delivery, how we can deliver with the supply with shortages and convert this very strong backlog into revenue. So, we feel very confident with the backlog and with the demand. It’s just the supply constraint, the shortages that will impact us.

All right. And then, when you look at the potential for maybe not being able to deliver in India, is the demand in North America, Latin America, where you’re seeing the improvement, at a level where it could offset how strong India was in the first quarter?

Well, India generates roughly on an average 25% of our revenue. And we -- our experience from the last year with COVID in India was actually a positive one, if I may say so, because we were managed and were able to deliver and execute despite the COVID situation. I think that at this point, the outbreak in India is more severe and something that we didn’t -- had the experience in the past. At the moment, and as we said also in Q1, despite the fact we were able to deliver, deploy and install very strong in India, but this -- at this point of time, we want to be a little bit more cautious on that.

All right. And then just, I guess, one more related to the supply chain tightness. When you look at your gross margins for the near term, is it comfortable around this 30% level, or do you think there’s a bit of risk of having to pay expedition costs and some extra expenses that way?

So, I will say the following. The gross margin just -- that we all keep in mind is -- may fluctuate from various of reasons, geographies, timing of revenues and the revenue levels as well. Because if you remember, in the first quarter and second quarter of last year, we had very low gross margin because the revenue were lower because we have some portion of our costs in the cost of revenues that are fixed costs. At this level of revenues, we feel pretty confident on this figure. But again, it’s dependent of whether the revenue will go down or if they will go up, we do think it should be improved. Keep in mind that on a pre-COVID world, we would expect the gross margin to be better. We do face some expedited costs and some changes -- dramatic changes in the air freight cost that impact us. We do try to balance that by an operational efficiency, doing some more sea deliveries and some other measures that we are taking. Not all of that will have the near-future impact -- positive impact, but we are very focused on operational excellence, including on the supply chain and airfreight. But back to your questions, at this level of revenue, we do expect the gross margin to be as it is.

All right. And are you comfortable at the OpEx level that you’re at, can hold that for a quarter or two before starting to increase again?

So actually, with the -- on the OpEx, some very low G&A that will probably be higher. As I also indicated, more like in the 2021 rate. R&D, probably at the same rate. We do expect, because we’re continuing to invest in the chipset in the second quarter, to be at the same level. And sales and marketing, probably a little bit higher. So, I do expect that our Q2 OpEx will be higher, a little bit.

A little bit higher.

And just one last kind of area of questions. This one for you, Ira. When you look at taping out your 5G SoC chipset, how quickly do you see productizing that? Is that something that you’ll see a few products by the end of the year, or is it first half of next year? And as you put that in front of your customers, does that accelerate your pipeline generation? Do you feel that you’re going to see a step-up in demand as the portfolio expands?

We’ll see step-up in demand as the portfolio expands. We’ve already put it up in front of customers. We do, by the way, expect to see products only towards the end of next year or beginning of 2023. Let’s remember, between tape-outs and I think then having the chipsets here and then turning into products, it’s usually an 18 months type of period, at least on products out there. But I think that the story there is part of the continuous innovation we are doing with the different products that we have on the table in really creating the demand and keeping our leadership position in the market versus all the competitors. Again, I think we discussed last time when we were on the call that we’re disruptive. We have done again and again the disruptions in the market and putting it on the table. Even our current products, like the IP-50E I mentioned on the call and IP-50C, are disruptive in the market and enable capabilities no one else has. Like the 20-gigabit in the 50 -- the 50E product or the very wide channels we have in the 50C, all of those are required today for 5G. And that’s what’s building the 5G design wins and the things that we are doing. The chipset is built for the next step out there, again disrupting. Because let’s remember, 5G is not a onetime event. It’s probably over the next six or seven years, as we move forward. And that’s where the next SoC comes in with 40, 50, 100 gigabits in the year and capabilities when we see things coming in on the table and doing the disruption again. And it’s a continuum that we drive the Company. Now, going back to your questions, you’re 100% right, because the operators are looking for someone who’ll do the long-term ride with them. It’s yesterday, we rode with them. New ones, we are -- they are on with us. They want the best technology, best of breed today, but they want to make sure that that best-of-breed stays with them for the next step as well. So, that’s where the whole story sits on the table. And this guy here needs to make this reality in the delivery, right?

Yes.

Well, with that, thank you very much, Ira. And again, Doron, congratulations.

Thank you very much. Thanks.

Thanks, George.

[Operator Instructions]

Congratulations on the quarter. It seems like you guys are executing really well in a challenging environment. And by the way, thank you for doing this call on Zoom. I think, this is so much easier than doing the dial-in and then waiting for the operator and everything. So, kudos on that. My question is actually just on the balance sheet. I saw that cash increased a little bit despite the fact that you guys are burning a little cash. So, presumably, you have some sources of liquidity. But $33 million of cash doesn’t sound like a lot of money to me. And so, I’m just wondering if you could speak to your additional sources of liquidity. Is Ceragon adequately capitalized given what I think we all agree is a pretty meaningful opportunity here at the advent of 5G?

Hi Lance. Thanks. So just also to comment on the Zoom call. It’s not only Zoom call. All the call was done by 5G handset on the 5G network. So, this is really exciting, so just to begin with. So, yes, we have $33 million cash available, but we also have almost $40 million of available cash revolver that we can utilize for anything that we would like to. The banks are really -- just a reminder, we had $40 million of credits with the banks, which we increased during the corona crisis last June to $50 million. And we utilized just $11 million out of it. It’s more than enough for working capital needs. You can see that we also improved working capital for the last year pretty dramatically. We reduced our inventory levels. We improved our R&D. So, we reduced some of the payables. So, I think that the balance sheet and the working capital is pretty strong, and we have the sufficient liquidity to operate.

Great, guys. Thanks and congratulations again.

Thanks, Lance.

Thanks, Lance.

Our next question is from the line of Alex Henderson.

I just wanted to go back to the new system on a chip. I assume that you’ve shown this technology to your service providers. And I’m sure that they are very excited about it. So, as we’re thinking about the timing of availability, I would think that the question then would become to what extent the technology that you’re implementing on this product would be directly tied into the IP-50, and to that extent capable of being upgraded in the field as part of that deployment that may go on in front of the availability of that. So, is this technology therefore already impacting the demand, and therefore, there shouldn’t be a kink in the curve as it becomes available, or should we think of it as there’s good demand for what we have today, but they’re going to wait for this thing and there might be a little bit of a dip as it becomes almost available in first half of ‘22? How do you think the customers are going to behave relative to the availability of this product?

Okay. Because of the way an experience in the past of moving those, I don’t expect it. Let’s remember that we are usually with technologies about 12, sometimes 18, months ahead of the curve on the need with the customer. So, what will happen is the same way that we saw. Most of our sales today are with our IP-20C product, which is 6, 7, 8 years old. And driving the networks, yes, we advanced the product. We came out with the 50C with additional capabilities towards the edge of 5G, which meets the current and probably the next three or four years of main deployment of 5G, and it’s creating the demand there. The next set of products, which will not be the IP-50, pick a name for it. And then, we have internal names for it, but that doesn’t matter, which will come out. We’ll be ahead of the curve for requirements of 50 and 100 gigs in the year as 5G base stations, both macro, small cells and others will require those. So, I see those as layering on top and really pulling the demand through out there. I don’t expect a dip.

So, second question is, I remember very distinctly getting very excited about the 4G upgrade cycle years back. And you guys had the most advanced product with all of the bells and whistles. And what ended up happening was people didn’t want to buy bells and whistles, and it put gross margin pressure on the Company, which you then had to convince them that they weren’t going to get discounts. And that caused a big dip in your business temporarily as people tried to gain your availability. And the result of all of that was a little bit of a disappointment on that product cycle launch for about 1.5 years before the customers determined that you weren’t going to give way. And by the way, that was the right decision not to give way. But that point aside, are we comfortable here that the 5G cycle is one that needs these functionality capabilities and that they’re willing to pay for it?

The answer is yes because -- and that’s why I said, I think a minute ago, that we still sell a lot of IP-20C. If a customer does not need the functionality, they want to stay with the less of a functionality, IP-20C is an excellent horse to ride. And I think the people who want the fast sources for 5G are attaching them self to IP-50. And I see that in different places around the world, and that’s what we said.

Gunther, you’re on?

Yes. Can you hear me?

Yes.

Great. First of all, I have a thank you for outstanding service getting the Company through difficult times. And Doron, welcome again. Hello. How are you?

Very well. Thanks.

The question I have is regarding the cash. It was mentioned before, somewhat of a $10 million reduction. I’m a little unclear as to where that reduction came from.

There is no $10 million reduction, Gunther. On the first quarter, we had cash breakeven. If you take the cash from investing and operation activities, it was down $3.7 million, which was offset by $3.7 million cash from financing activities. All-in- all, net cash position of cash minus the loans that we have stayed the same in Q1 as in Q4.

Thank you. And the other question is the verticals. Do you see -- you mentioned this actually in the presentation. Do you see a growth in the verticals in various markets going forward?

The answer is yes. We focus on in the conversation mainly on the mobile, but we do put a huge effort around verticals. We are putting a huge effort in verticals also mainly in the North American market, but in other places. Look at -- we announced last quarter a deal in Africa, and we’re announcing in other places. The market verticals, by the way, behave differently. What we sell in the verticals is our equipment but with a lot of integration services and capabilities to really provide a working network. And the interesting part that we start seeing, although verticals are not there yet, they are started talking about 5G and being ready for 5G. And the capabilities and our experience with the mobile operators on 5G put us in a good position to start taking market share there, mainly in the U.S. market.

All right. Thank you. And finally, there was a question regarding 5G. Do you see an early movement toward applications in the IoT area?

The mobile operators that we work with today are investigating all areas of 5G. Pick the operator, you’ll see different things that they do with the 5G. Some of them will go for mobile and a lot more broadband. Some of them do play with IoTs. Some of them play more enterprise and industrial in the way they approach the market. At the end of the day, similar technology, a little bit of different way you spread the network and you do things. But otherwise, all of them drive the 5G requirements.

Thank you. And best of luck.

Thank you very much, Gunther. Okay. I would like to close the call. First, I’d like to thank Ran for being with me, for Doron being with me, for both of them for learning new tricks and doing it on 5G and mobile and video. It was not easy to do that transition. I look forward to hearing from all of you next quarter with us. And in between, if anyone wants to ask questions and contact us, please feel free. Thank you very much.

That does conclude our call for today. Thank you very much for attending. Have a great rest of your day.