Ladies and gentlemen, thank you for standing by and welcome to the Ceragon Networks' Q2 2022 Earnings Call. Our presentation today will be followed a question-and-answer session. [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. Before we start, I would like to note that certain statements made on this call including projected financial information and other results and the company’s future initiatives constitute 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. Ceragon intends forward-looking terminology such as believes, expects, may, will, should, anticipate, plans, or similar expression to identify as forward-looking statements. Such statements are subject to risks and uncertainties which could cause Ceragon’s actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include but are not limited to those that are described in Ceragon’s most recent Annual Report on Form 20-F and as maybe supplemented from time to time in Ceragon’s other filings with the SEC all of which are expressly incorporated herein by reference. Forward-looking statements relate to the date initially made, do not purport to be predications of future events or results and there can be no assurance that they would prove to be accurate. And Ceragon undertakes no obligation to update them. 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. To kick things off, as you may recall from earlier discussions we outlined three strategic pillars to propel our business forward. Our first strategic pillar relates to our core business which is the best in class all outdoor, microwave and millimeter-wave market segment. Our second strategic pillar involves the expansion of our business into open network architecture domains. Our flagship product in this domain is our new virtual indoor unit, a first in the market that can also be used as a cell site router. And our third strategic pillar focuses on strengthening our managed services offering to deepen our relationship with our customers. In the second quarter of 2022 we experienced gains in market share particularly at the high end of the market. According to our estimates, Ceragon makes up approximately 25% of the market for best of breed solutions, the largest and fastest growing market segment driven by increasing demands of networks as they transition to 5G. This is the result of the execution of our strategic priorities. Starting with our first pillar, we witnessed the strength of our core business and wireless backhaul. A leading tier one global operator serving multiple countries in Asia, Africa, and Latin America selected our wireless backhaul solutions to expand their coverage to remote islands and strengthen their transport network. We also signed a new frame agreement with the Pan African tier one operators for the first time in our history and we have already run a POC with them on our unique advanced space diversity feature. Having true global operators choose Ceragon is a testament to the reputation and performance of our core business. Our new virtual indoor unit will increase our market potential in our core domain as well as in our second…

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

Great. Can you hear me?

Hey Alex, I can hear you very clearly.

Right. I got a couple of questions. I just wanted to get some general gauge of -- on the first is, the book-to-bill in the quarter and really I'm more interested in the half as opposed to the quarter, because it's a better gauge if you could. How much were the orders up year-over-year and what was the book-to-bill relative to sales in the quarter, can you give us some sense of what -- where your backlog on product stands?

Yeah, so first of all on the first half, our booking were up approximately 15% higher than the second -- the first half of 2021. In terms of backlog, we have a very strong backlog. I will give you an approximate number. We are talking about over 170 million of a backlog. And the more important piece is that we analyze the gross margin of this backlog and it is higher than the current gross margins of 30.5%, which is obviously very important. And that's even before some of the initiatives and actions we are taking to improve our gross margin further.

Well, going back to that… Go ahead.

Just in terms of book-to-bill build ratio it's significantly above one.

Just going back to that question on the margin. Obviously you're absorbing cost components and logistics components that are abnormal. Can you quantify, give us some gauge of the drag on revenues and OPEX associated with the supply chain challenge?

I can give you some sort of high level magnitude. I think that we are more or less I think that we are more or less 10% lower in terms of revenue achievement versus more normal condition, even a bit higher than that. I think we could be at the range of $80 million per quarter, if not having all these challenges of the supply chain. In terms of gross margin, as I said more than once we're talking about 3% to 4%, sometimes even 5% GAAP depends on the mix of the revenue by region and also the software element that is always added to our product revenue.

So, if you're talking about the margin on the backlog being higher than the current margin, would it be reasonable to think that as the component costs come back in that it's actually equivalent to somewhere in the 33 to 35 range, given that…?

Yeah, I think it's a reasonable assumption subject to the success of all of our initiatives.

Okay. Going back to the shekel for a second, you guys hedged the shekel, I believe coming into the New Year around the January timeframe, you're fully protected against the shekel through the calendar year. If you were to look at the shekel where it is today, which is where you will reset on December 31st looking out into 2023, what would be the impact of the shekel relative to your cost structure?

I think it would easily hedge between $0.01 to $0.02 to our EPS.

It seems like a small number given the 15% to 20% swing in the exchange rate, can you explain why that wouldn't be larger impact on your OPEX?

First of all let's not forget I was talking about EPS and obviously you have also the impact of the financial expenses that are actually also being hedged in our balance sheet. So all in all, I think $0.01 to $0.02 on our EPS is reasonable. Yes, it could be higher.

Just going back to the point though, aren't your financial balance sheet exposure constructed in a period that would be paid out before year end given the DSO timeline, I would think that you would be paid out by year end, therefore that shouldn't impact 2023, right?

Yes, that's correct. But, I'm looking at Q3 sorry, Q2 numbers and we actually had an opportunity to enjoy the weakening shekel against the U.S. dollar. But the fact that we are also hedging our balance sheet has actually negatively impacted our numbers. All in all the hedge on our expenses, primarily salary and other fixed expenses in shekel is indeed hedged for a full year. And the balance sheet is basically hedged on between monthly to quarterly basis.

But, but again, that's a headwind to 2022. It falls out in 2023 because you pay out all of those, you get paid that stuff before year end. Therefore, assuming your future at the current level, that shouldn't be a factor, right, I mean, it sounds like that should be a positive dear EPS in 2023, not a negative, can you -- [Multiple Speakers]. Hold on, hold on. Just ignore the financial services side of it, ignore the balance sheet. What is the impact on just the OPEX, if we use this exchange rate versus what you’re experiencing in 2022, in 2023, how big a positive is it because it's a -- should be a pretty material positive to your expenses, right?

Yes. If you're talking only on the operating numbers, indeed, it's going to be a couple of millions for the whole year.

Great. That's what I was looking for. Thank you very much. Yeah, I'll see the floor.

Thank you, Alex.

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

Hi, George.

Thank you for taking my questions Doron. When you look at your 2023 and your five-year targets, can you give us a sense of how that's made up, like how much of that is coming from existing business, how much is coming from market share gains, and how much is coming from your new initiatives?

So in terms of five-year horizon, in terms of our core business, we expect a growth of a mid-single-digit percentage, which is slightly above the expectations of the industry growth. And on top of that, we expect a very significant growth in managed services and in the cell site router domain that will bring us to a CAGR of approximately 10% or a little shy of 10%.

Okay. When you look at the competitive environment, can you give us a sense of like the momentum you're seeing in North America, what's driving that, how do you feel about competition on a global basis?

So let's start with North America. We are very, very satisfied with our performance in North America and not only by the recent orders we've been receiving from one of the three tier one operators in this region. We are actually making additional steps in gaining more business from other operators with our unique solutions that can also fit into the concept of open run. And therefore we believe that this trajectory of taking very nice business in the tier one operators in North America will continue. We are also taking market share in tier two and tier three. Part of it is on account of existing competitors and actually beyond the growth that is reflected in this market due to the 5G rollout. When looking at the worldwide, I think that we see a very similar trajectory, but I would say that it is a bit still behind in terms of turning into orders. Just to give you an example with our IP-50FX, this virtual indoor unit, we're getting a lot of traction in Europe, but also in other regions such as APAC. It doesn't turn into solid orders yet, but we are in a very advanced phases where we are showing different architectures and concepts of deployment that can save for the big operators a lot of money and improve their TCO dramatically. Obviously in India, the spectrum bid was just finished. And we are in multiple discussions with all of our existing customers of starting to provide with E-band solutions in accordance with their need. So all in all, we see a very strong traction to our products. Obviously the competition is there, it's not that it is evaporated, but I think once again, our superior technology and the mindset of serving the customer's needs is giving us many opportunities sometimes ahead of the competition.

Right. And Doron, how do you feel about pricing, are you able to pass through any of the costs from either a one-time basis on the shipping side or having constructive discussions on the overall supply chain challenges you're having with your customers?

So, so it eventually, it's a combination. First of all, we issued a letter of surcharge towards the end of Q2 to all of our customers. And obviously as good partners we are in dialogue with them. So far, the initial signs are very positive. Customers are receptive to the situation, understand that this is a strategic partnership that should last long, and the fact that they are very satisfied with our products and with our innovation gives us some sort of a benefit to discuss this situation calmly. In addition, obviously in new RFPs, as well as in specific deals we are discussing higher prices based on the current macro environment, especially looking into the increase in the shipping costs and obviously the component price increase that increased our bond [ph]. So all in all, it's not an easy process. Our customers are usually very, very big and their buying power is by far stronger than our selling power. But I think that due to our success in demonstrating time and again that our products are in most cases better with higher technology and higher capabilities is giving us some sort of a tailwind to discuss this situation calmly with the customers that tend to understand and to accommodate at least part of our requests.

Okay. And my last question, just on the OPEX side, do you feel you've made all the hiring that you have to on the sales side and you're at a headcount level that you're comfortable with right now or do you need to add any more people in any areas?

At this point based on our plans for 2022 I think we're in good shape. I would just mention in North America, once again, seeing the huge demand and trying to basically capitalize on it, we have even slightly increased our salesforce there beyond our budget plan, because we see the very strong demand and a very positive trend in this North America region.

Thank you.

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

Great, thanks. I actually have two different tangents of questions I wanted to ask about the -- first one is, as you've been talking to your customers given the macro conditions, have you seen any hesitancy, have you seen any pullback, have you seen any change in the number of signatures needed for closing deals, have you seen any stretching of duration, any impact on the macro front that's showing up in your pipeline?

The short answer is no, not at this time. Obviously we are watching this thing very carefully because obviously things might change. It looks to me that the digitization and the 5G rollout, especially in those places and customers that decided to start moving forward is continuing. And at this point it's even beyond, so to speak initial recession signals we have seen in many parts of the world. But we are very cautious and watching that carefully.

The second one is really on the Aviat situation. Obviously it's fluid, obviously there's been a lot of tit to tat on the PR side of the equation. How should we characterize the ongoing negotiations and discussions with them, is it just in the public press or are you actually still having a back channel conversation with them, is it something that is predicated only on getting the sale -- the shareholder vote done on the Board seats at this point, or is there more ongoing conversation that we should be anticipating that is showing some progress? And how would you describe their willingness to contemplate that three and a quarter plus kind of a category on price that they had put out earlier, obviously, if they were comfortable with three and a quarter in November, one would think they would be even more so given how strong your backlog is built?

Alex, first of all that was a very long question and I'm trying to adopt the very good culture and DNA of the Americans to not interrupt it. But I do need to apologize. As I mentioned in my prepared remarks, we are here to discuss our business and earning results. And we ask that you keep your questions focused on these topics. We will not be commenting further on Aviat at this time. I apologize, Alex.

That's fine. Thanks for listening. Thanks.

You have no further questions, please proceed.

Thank you. In closing, I’d like to reiterate that we are effectively executing our growth strategy. The initiatives we have taken and the tough decisions we have been making to improve our financial performance have begun to bear positive signs. We will continue to implement measures aiming to mitigate the impact of the ongoing supply chain disruptions and component shortages. Like with any large well-established company, this was not the first storm we have faced, and I doubt that it will be the last. With strong market and technology drivers, skillful people, and a robust growth strategy, we remain confident about our short and long-term business potential. I look forward to updating you further on our next call. Have a good day everyone.