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…

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…

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.