Ladies and gentlemen, thank you for standing by and welcome to the Ceragon Networks' Q1 2022 Earnings Call. [Operator Instructions] I would like to hand over the call now to our first speaker today, Ms. Maya Lustig, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I am joined by Doron Arazi, Ceragon's Chief Executive Officer; and Ran Vered, Ceragon's Chief Financial Officer. Before we start, I would like to note that this call includes information that constitutes forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be obtained or that any deviations there from will not be material. Such statements involve risks and uncertainties that may cause future results to differ materially from those anticipated. These risks and uncertainties include, but are not limited to, such risks, uncertainties and other factors that could affect our results, as detailed in our press release that was published earlier today, and as further detailed in Ceragon's most recent Annual Report on Form 20-F, and in Ceragon's other filings with the Securities and Exchange Commission. Such forward-looking statements represent our views only as of the day they are made and should not be relied upon as representing our views as of any subsequent date. Such forward-looking statements do not purport to be predictions of future events or results, and there can be no assurance that they would prove to be accurate. Ceragon may elect to update these forward-looking statements at any point in the future, but it specifically disclaims any obligation to do so. Ceragon's public filings are available on the Securities and Exchange Commission's website at www.sec.gov, and may also be obtained from Ceragon's website at www.ceragon.com. Also, today's call will include certain non-GAAP numbers. For a reconciliation between GAAP and non-GAAP results, please see the table attached to the press release that was issued earlier today. I will now turn the call over to Doron. Please go ahead.

Thank you, Maya, and good morning, everyone. We began the year with strong momentum that has built up since beginning of 2021, especially in North America and Europe. We saw exceptionally strong bookings in Q1 2022, the highest in the last 4 years, and on par with second quarter of last year. We continue to make good progress in all three of our strategic pillars together, which constitutes our growth strategy, as you may recall from earlier discussions. Our first strategic pillar has to do with increasing our traditional business which is the best-in-class all-outdoor microwave and millimeter wave market segments. With the massive ongoing 5G network rollouts in North America and Europe, we received significant value of orders this past quarter. Our second pillar involves expanding our business into Open Network architecture domains. Our IP-50FX Disaggregated Cell Site Gateway or DCSG solution, launched in the first quarter, uses best-of-breed software and hardware to integrate a cell site router and a radio indoor unit, offering both in a single solution. This quarter, we already received a PO for IP50 FX from a large Tier 1 operator in Latin America. And our third pillar is strengthening our Managed Services offering to deepen our relationships with our customers. This offering has garnered considerable attention from operators, private networks, and carriers in North America, Latin America and Europe. In fact, the results of our most recent customer survey which was conducted in the first quarter demonstrate that 28% of our existing customers would be interested in our Managed Services. And we are ready -- already seeing this interest turn into POCs and orders for NOC support, connectivity as a service, and more, across different regions. Our customer survey also shows that our product satisfaction rate stands at a competitive 85%; that 85% of…

Thank you, Doron and good morning, everyone. To help you understand the results, I will be referring mainly to non-GAAP numbers. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today’s press release. Like Doron mentioned, during Q1 2022 we saw strong bookings coming from North America, Europe, India and Latin America. We see strong continued demand overall. Let me now review the actual numbers with you. Revenues for the first quarter were $70.3 million, up by 2.9% compared with $68.3 million in Q1 last year, somewhat lower than expected. In Q1 we experienced several challenges, which included delivering some of our products on time due to component shortages and supply chain disruptions. That said, as I mentioned earlier demand continues to be high. Our strongest region in terms of revenues for the quarter is India with $15.6 million, reflecting ongoing deliveries for our main customers and in line with the strong demand we see in this region. Our second and third strongest regions in terms of revenues for the quarter were Latin America and North America with revenues of $13.9 million and $13.3 million, respectively. As Doron mentioned, in Latin America the pandemic seems to be behind us, and business is recovering. We had two above 10% customers in the first quarter. Gross profit for the first quarter on a non-GAAP basis was $19.5 million, giving us a non-GAAP gross margin of 27.7%, lower by almost 2% than the first quarter of 2021. The relatively low gross profit is mainly due to expedite costs derived from component shortages and increased shipping costs. Operating expenses on a non-GAAP basis for the first quarter were $20.1 million, in line with our expectations. Research & development expenses for the first quarter on…

[Operator Instructions] Our first question today will come from the line of Alex Henderson from Needham. Please go ahead.

Great. Can you hear me?

Hi, Alex.

Hi, Alex.

So, a couple of quick questions. One, if you were not supply constrained in the quarter, what kind of revenue could you have produced? And two, on the gross margins? How much of the pressure was a function of the inflation in shipping costs and parts that might be mitigated in future periods? In other words, -- do you expect the parts prices that are increasing to stay up at these levels? If that's the case, then don't back that out. But if you expect some improvement in parts that you're not expediting, do back that out?

Yes, so let's start one by one. First of all, our plan at the beginning of the quarter was to generate $75 million or even more. And in terms of the impact of the shipment costs, and the expedite fees that we're paying for components, the impact in terms of percentage on gross margin this quarter was something between 3% to 4%.

Okay. So just going back to your comment about $75 million plus, to be clear, that still was a supply constrained guide. So, had you been fully available to buy any part you wanted to and ship anything you wanted to, I assume that it would have been higher than the $75 million, is that correct? And …

Yes.

… so what kind of -- I'm just trying to get a gauge of what the true underlying revenues were when had it not been for the supply constraints?

Yes, let me kind of back up for a second. Our backlog is great. It's huge. What's holding us is all these constraints. And originally, we planned in our AOP for even higher revenue than the $75 million. Once we move forward and had to provide with our projection, in the last call, in the previous call, we took some prudent steps and said, okay, let's reduce a bit. And then we reached to $75 million. And even that was not able to be achieved only because of the constraints that we have in terms of our component shortages. And obviously, even the part that we are able to overcome, the shipment costs went up dramatically, because we wanted to supply to our customers on time. And we had in some cases, to use more air than sea.

Just -- Alex, just to compliment on Doron, if I may, the part of a -- the erosion in the gross margin, the rise for our decision to expedite shipments in order to satisfy the customer. So, I will say that part of it is in our control in order to make sure that our customers are provided by the equipment as part of their deployment plan and it's in our control. Yes, it cost us money. But we do think that we're -- we're taking the right decisions because we know in this market, the cost of gaining new customers is by far higher than maintaining customers and with our Tier 1 long standing customers relationship, we thought that this quarter that it's the right decision to pay these expedite fees in order to maintain our market share in these customers.

Yes, that's a great point. And I want just to add to it, it's not that we are blindly doing that across the board. We are making decisions on the spot and obviously it's very difficult to see the end result picture of the quarter while you are in the -- within the quarter making decisions day by day. But we're making a very, I would say, conscious decisions where we want to spend the extra amount to keep maintaining our -- and maintain our market share in some cases even increase it as opposed to the option of losing customers to the competition.

A couple of quick questions. Any exposure to Ukraine, Russia as a result of the war? And then second, has there been any change in the demand as a result of that, particularly in EMEA or other markets that might be impacted by the economic consequences of that war?

So, I will pick up the first one, Alex, and will let Doron to comment on the second. So, almost, I will say zero impact of the war in Russia and Ukraine, both I will say on the business side of things, and also on the balance sheet. Because we have a negligence, I will say, amounts in our real [ph]. In regards to these customers and the level of activities, we have is also very small. So, I will say almost zero impact on these customers on this -- with -- when it relates to Russia and Ukraine.

Yes. And regarding your second question, Alex, so far, we haven't seen any impact. Actually, Europe, this quarter came very, very strong with a record booking quarter for the last 2 years. So far, we don't see the impact on rest of Europe.

Okay. One last question, then I'll cede the floor. The DISH win, obviously, congratulations, that's great news. Can you give us some sense of the scale of that on an annual basis, as you're rolling out that program? What it could be this year, what it could be, say 3 or 4 years from now? What's the size of this transaction?

Based on what we've seen so far, and the initial orders we have started receiving, I think, this year could probably add something within more or less a two digit $10 million of booking this quarter. I think that it's also yet to be seen, because this is just the first stage. So, it's very unclear how things will play out later. But if you ask me, I would assume double-digit amount of millions of dollars, single -- low double-digit.

So just to be clear, the gross margins in the U.S tend to be higher, this should be consistent with that? And then second, are you the lead supplier to DISH?

To the best of our knowledge, we are the lead supplier. Actually, we have the lion's share on the equipment and in this round, probably 100%. And we are leading the installation, and providing with the services as well as providing with managing all the boxes using our NMS system. That is where we are at this point. In terms of the margin, generally speaking, you are right. Margins are -- U.S. margins are higher. Just bear in mind that with the services since we are in a ramp up stage, because up until now, we did not have a significant services business in the U.S. The fixed part of our cost is probably going to be a little burden on our gross margin in the near future. But we do see some more opportunities of these kind of services both to other Tier 1s as well as Tier 3, Tier 4 and critical infrastructure. And as we move along, the services part will increase and as a result of that the fixed cost will basically become a lower portion improving our gross margins.

Got it. Thank you very much for the response. I will get back in queue. Thanks.

Thanks.

Thanks, Alex.

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

Hello, Doron and Ran. Can you hear me?

Yes.

Hey, George, how are you?

All right. Thank you. So, kind of picking up on Alex's questions, when you look at the supply chain and visibility as the year progresses, it looks like your adjustments to the annual guidance is mostly related to the first quarter. But do you see improvement in the second quarter or is most of the revenue growth anticipated to come in second half of the year?

At this point, because we're in the midst of the storm, we assume we are very prudent, we're trying to kind of be very careful. We assume that the second part of the year is where we are going to see a bigger portion of the growth.

Okay. When you …

As well as improvement in the gross margin, of course, as a result of that.

Yes.

Okay. When you have discussions with your suppliers, what kind of visibility are they giving you and to the timing of availability?

Yes, let me explain to you the situation. You get, I would say a reasonable visibility and we thought it's improving. However, there's two things that are impacting this visibility and can create surprises to us. And this is why we're very cautious. One, even if the component vendors commit to a certain specific day, they may decline this commitment sometimes as late as 2 weeks before delivery date. Now, we are working primarily with a contract manufacturer in Singapore that buys most of the components, the regular components for us. If he faces this kind of situation, he has nothing to do with it, he just can let us know that this is happening, and that's it. Said that, we think that they can improve the visibility as opposed to what we've seen in the last couple of quarters. And by the way, one of the goals I have is to meet with them this quarter, and discuss how we can improve the visibility coming from them. So that we can come up, I would say, with better estimations about the revenue we'll be able to generate.

When you look at the pricing environment and the expedite, extra costs from a shipping perspective, how much are you able to either transfer some of those costs, or have discussions with your customers on the potential to raising prices and/or like temporarily offsetting some of the shipping costs?

I would say that this is an ongoing discussion with all of our customers. And as you can understand every day is a new day. And just looking on the graph of the increase in air freight and sea freight just in the last couple of months, you can understand that the environment is very, very volatile. I can tell you that we have successes, almost in each and every region we have successes of either increasing prices, or doing some changes in shipment terms. But it's not a walk in the park because let's not forget 70% of our business is coming from Tier 1 operators and Tier 2 operators which are by far a bigger and their leverage in a commercial power over Ceragon, not only Ceragon, its big and obviously the competition is waiting aside and I've not seen a very intensive price increase coming from the competition. So, we're doing it one by one. I can tell you that I'm quite satisfied with the progress we've made. But now after seeing the ship -- the shipment cost increase, we might make a decision to go back to our customers for a second in the third round.

All right. And Doron, can you give us a bit more of an update on the 5G side, whether you added any incremental design wins? And then from a product innovation standpoint from the new chipset, where are you -- what kind of timetable should we expect?

So, I mentioned on the conference call, actually, the interest we've seen with our new IP50 FX is in the realm, which is basically -- the software is basically a virtual indoor unit, it's amazing. We were very surprised by the level of fracture. And we are making a lot of progress with some of the biggest players, customers, potential customers actually in Europe. In terms of other areas also this particular disaggregated cell site router is getting a lot of interest in Latin America. And to some -- to a certain degree, we are considering launching a lower cost of this product in the future. And this also gets a lot of traction in India. So, this product is showing very, very strong initial signals of success, obviously, it's yet to be seen. As for the chip, generally speaking, we are moving forward more or less in accordance with our plan. We are in the productization phase, we're about to start all the validation tests soon. And we do hope to finish the product -- productization phase at the end of 2022. Basically, this part is competing with many other chip designers on a substrate, on a manufacturing queue, and so on so forth. So, I'm saying that very carefully, I hope to really finish the productization in 2022. But the situation in the component, in the chip market could create some delays, which we hope will be minimal. Obviously, once we're in a position where we can start working with the chips and move forward fast with our new 100 series, we will do that. And at this point, it is our estimation that we'll start basically launching our new products under the 100 series probably at the beginning of 2024.

Okay. Two more questions. So, Ran, you mentioned that R&D is expected to increase in the next quarter. How do you look at your overall OpEx spend? Are you able to maybe save a little bit on the G&A side?

Yes. So, thanks for the question, George. The answer, the simple answer is yes. We are going and we already take a relook on our OpEx expenses and try to be able to say a more, a discipline in terms of OpEx spending mainly on the G&A side of things. And we are going to keep it for the next quarters, especially with the volatile market in terms of gross margin. We are going -- we already do some more disciplined OpEx expenses in particular, on the G&A side of things.

Okay. And last question. So, Ran, thank you for the conversations and all the work over the years. And I wish you well. So, Doron, how is the CFO transition search going? Can you give us an update on what you're looking for?

Yes, we have, basically -- obviously, in the midst of the process of search. I think we've identified a couple of very good candidates. And obviously it's a process that it's not only me who is involved, also some of our Directors from the Board of Directors will interview the candidates. I hope that this -- that we are relatively in the last, I would say, stages of this process. But yet it may take us some more time. Generally speaking, the profile is of people who have business experience and are not just very much focused on the accounting and financial because people who knows Ceragon know that the impact of finance on the success of the business is very significant. So, we're looking for this kind of profile. And obviously, if this person also is coming from some experience, in particular, in the telco industry or vendor, or equipment vendors to this industry, that would be nice to have.

Just -- can I compliment for -- just for a second. So, George, first, thanks for the warm words. Just two more comments from me on that. First, I may leave, but I have a very, very strong team that I -- some of them, I recruit myself, some of them the one recruit on his previous role here as a CFO, and we're able to maintain them. Second, even after my departure, I have my commitments to Doron and the Board to have a transition with a new CFO. So, I guarantee a smooth transition on that respect as well.

Thank you very much.

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

Great. Thanks. Clearly, the supply chain issues have been a big problem in the rearview mirror, but looking in the headlights there's a lot of risk coming out of China these days, locking down. I don't know, what is it $400 million in Shanghai, and now they're doing Beijing, I don't know whether they get a lockdown 800 or what, but I can't imagine living in an environment where somebody from the government comes and padlocks you into your office or your apartment. But those points aside, what's the impact do you think of this on you and how much have you been able to diversify away from that risk?

Yes. So, I need to distinguish between a direct impact and an indirect impact. When I'm saying direct impact, I refer to some Chinese vendors who are supplying to us certain elements of our solution directly. In this respect, the exposure at this point is low. At least one of the vendors have two sides, one of them is out of China, and we were able to remove most of the activity to the site that is out of China. And with the other one we have started and embarked a process of ultimate solution outside of China. And at this point, assuming the lockdown is not going to linger forever, the direct impact is not big. The indirect impact is something that we cannot access and I will explain to you why. If our -- a contract manufacturer buy certain components from the Chinese market, we are not aware of each and every nitty gritty element and a component in our solution, and it could be that they may have some, I would say, challenges. So far we haven't seen a big deterioration coming from the CM and based on that we assume that the impact, if any, is already included in their estimations.

So, it sounds like the exposure on parts is lower. What about on the travel side of it, the freight side? Do you expect the freight costs to start to trim down? Or do you expect the problems in Russia/China to cause freight to stay a big problem in through the second quarter at least?

Frankly, it's very hard to tell. I can tell you that for example, we've seen an increase in the freight cost for -- to India in the first quarter and now it looks like there's certain relaxation in this cost. The rest, it's very difficult to say our assumption at this point and based on that we gave our revised, so to speak, outlook for the year is that this situation will continue for a while and the relaxation will come later in the year, but not in, I would say, steep improvement.

And then on the T&E side, 3 weeks ago, I hadn't traveled in two years now, I've got 10 trips scheduled over the next quarter. So, I assume that you guys have similar kind of improvement and -- or costs increase to cope with, but also hopefully productivity that you generated from that. Can you talk about what your assumptions are for the year in terms of T&E rebounding? Is it 60%, 70% of where it was 2019? Is that the new normal? How do we think about that?

So, we do -- actually, even in the first quarter, we are seeing some signs of recovery of the T&E. However, not at a great extent, and even when I see the projections of travel, it's by far less than the level of 2018. If I want to give you some ballparked, less than -- more than 50%, less than the level we had in 2019. And even that is -- when we see, it's mainly -- the main factor of our travel is actually travel in continent for installations for a full training, a full knowledge transfer, a less travels we see for internal meetings and things like that, this is still not something that is happening at this point.

So, is that a new normal? Or what do you think the new normal is going to be?

Yes. When we planned 2022, my guidance to management was guys, we got used to close deals via Zoom, via Teams. And I'm not saying that we should stay contained in our rooms forever, but this is a very effective tool. And yes, there is no substitute to physical proximity. And obviously, the more important parts of meeting closing deals and so on so forth, could and should be done face-to-face. But the budget that was instructed is more or less 50% than the level of travel expenses we've seen in 2019. I think that Ceragon has proven itself especially on the OpEx to be a very disciplined company. And this is what I expect from the management and employees.

So, kind of a new normal is a much lower level on it?

Yes.

Going to the exchange rate, can you remind us where you are on the hedging and I mean the shekel has certainly helping things at this point, if you are not shock?

Yes, so unfortunately, Alex, on the -- with some of the expenses side, I say unfortunately, because we already hedge 2022 at an average rate of 3.15 something like that. And since the dollar strategy against the shekel, we are already hedged. It does help us, I will say, for on the balance sheet items that are not hedged and denominated in a shekel and this is why you see also the financial expenses this quarter much lower than in previous quarters.

One more question, then I'll cede the floor again. Churn, staffing churn and wage inflation, what do you see in?

Yes, so first of all, I'm happy to announce that we -- in the first quarter, especially in R&D, we have seen some relaxation in the attrition. And the ratio between recruitment and attrition has improved very significantly. So obviously that's a good news to us. There are some new even I would say articles talking about spike on the demand side for work on employees that is being noticed. So, this gives us some sort of hope that this very challenging situation will start coming down. And obviously, as a result of that, also salaries will get to something that is more reasonable. But I don't think it's coming very soon. I still believe that this year will continue to be a bit difficult. In other main locations, primarily Romania and India, I think we've seen similar situation. In India, we've seen a lot of turnovers. But not only in Ceragon, across the industry, and people are just trying to improve their terms, and so is in Romania to a certain degree. At this point, I think that we're managing this situation very well. It's a combination of sometimes salary increase coming with some efficiency measures, making sure that people are really doing 100%, so to speak, productivity. And so far, this helps us to contain or to keep our budget in accordance with what we planned.

I’ve just one more last question. I apologize, I forgot to ask. So, most of my companies in the networking and telco space have been talking to the magnitude of their backlog on a full year basis. For instance, Ciena is running a backlog that's equal to roughly 100% of its annual product Sales. Juniper's well over 50%. This has become kind of a standard comment. Are you willing to give us some gauge of what your backlog is relative to the full year product revenue guide?

So, Alex, you asked this question so politely, I cannot deny or refuse to answer this. It's -- I would say that it's above 50% and I would say no more.

That's very helpful. Thank you so much for that. And, Ran, I understand you've got a great new gig. Congratulations. I look forward to maybe working with you wherever we end up. Thanks.

Thank you, Alex. It was pleasure working with you as well.

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

Thank you. In closing, we will continue to stay focused in the areas that add value to our business and market leadership in the medium and long-term. We will continue to sharpen our competitive edges, which are our technology leadership, our growing managed services offering and our reputation that spans over 25 years. Our latest product IP50 FX, our newest customers, orders and bookings are all testaments to our strengths and to the trust our customer continue to place in us. As 2022 unfolds, we will continue to build on and amplify these distinctions through our growth strategy and by focusing on the best opportunities in each region. I look forward to updating you further on our next call. Have a good day, everyone.