Ceragon Networks Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 7, 2024

Key Takeaways

  • Ceragon’s strategic shift towards private networks is gaining traction, with new private network customers representing over 50% of new accounts and annualized private network bookings up more than 35% year-over-year.
  • Q2 revenue grew 11.5% to $96.1 million, driven by strong demand in India ($35.5 M) and North America ($23.3 M), while non-GAAP operating margin improved to 13.7% and net income reached $9.9 M (EPS $0.11).
  • A $4 million one-time debt collection benefit boosted non-GAAP results, and without this gain EPS would have been $0.07, potentially setting up tougher comps in future quarters.
  • The Neptune in-house chipset remains on track, with post-silicon validation nearing completion and commercial deployment expected in 2025, extending Ceragon’s technology lead.
  • Integration of the Siklu acquisition is effectively complete, and management is pursuing targeted bolt-on M&A opportunities to support growth while maintaining margin discipline.
AI Generated. May Contain Errors.
Earnings Conference Call
Ceragon Networks Q2 2024
00:00 / 00:00

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Operator

Ladies and gentlemen, thank you for standing by, and welcome to Ceragon Networks' earnings call. Our presentation today will be followed by a question and answer session, at which time, if you wish to ask a question, you'll either raise your hand using your mobile or desktop application, or press asterisk on your mobile keypad and wait for your name to be announced. I must advise you that this call is being recorded today. I'd like to hand over the call now to our first speaker today, Rob Fink, Head of Investor Relations. Please go ahead.

Rob Fink
Managing Partner at FNK IR

Thank you, operator, and good morning, everyone. Hosting today's call is Doron Arazi, Ceragon's Chief Executive Officer, and Ronen Stein, Chief Financial Officer. Before we start, I'd like to note that certain statements made on this call, including projected financial information and other results, and the company's future initiatives, future events, business outlook, development efforts, and their potential outcome, anticipated progress and plans, results and timelines, and other financial accounting-related matters, constitute forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities 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, anticipates, plans, or similar expressions to identify forward-looking statements. Such statements reflect current expectations and assumptions of Ceragon management.

Rob Fink
Managing Partner at FNK IR

Actual results may differ materially as they are subject to certain risks and uncertainties, which could cause the actual results to differ materially from those projected in forward-looking statements. Such risks and uncertainties include, but are not limited to, those that are described in Ceragon's most recent annual report on Form 20-F, and as may be supplemented from time to time in Ceragon's other filings with the SEC, including today's earlier filing of the earnings press release, all of which are expressly incorporated herein by reference. Forward-looking statements relate to the date initially made, and they are not predictions of future events or results, and there can be no assurance that they will 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 sec.gov, and they may also be obtained from Ceragon's website at ceragon.com.

Rob Fink
Managing Partner at FNK IR

On today's call, we will include certain non-GAAP numbers. For reconciliation between GAAP and non-GAAP results, please see the table that was attached to the press release that was issued earlier today, which is posted on the investor relations section of Ceragon's website. With all that said, I'd now like to turn the call over to Doron. Doron, the call is yours.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Thank you, Rob, and good morning, everyone. Let me start by providing some context. Over the past year or so, we have been implementing a strategic plan to diversify our business. Under this plan, we intend to increase our market share in private networks and move up the value chain from an equipment provider to assisting our customers with network operation, optimizing their investments, all while maintaining our strong position in Tier 1 carriers. We expect that successful execution of this strategy will result in increased customer diversification, higher levels of recurring revenues, and expanded margins. The second quarter results reflect continued progress in implementing this strategy. We had another quarter of significant bookings from new private network customers. New customers from private networks accounted for more than 50% of our overall new customers, both in number of accounts as well as in dollars.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

For further evidence, our first half annualized booking in private networks was up more than 35% versus last year, and we are growing our funnel of opportunities. The integration of the recent Siklu acquisition has continued in accordance with our plans and has been helping to enhance our competitive position with ISP and private networks customers. In our journey to generate higher software-led recurring revenue, we also started generating meaningful adoption of our Smart Activation Key software, as well as creating opportunities for our Network Digital Twin solutions, leading to proof of concept engagements. All of that while continuing to maintain and even increase our market share in Tier 1 operators, primarily in India and North America. To summarize, each of these initiatives is showing progress, and this progress is increasing our confidence in our strategy.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Demand for our solution from our customers remained strong across the globe, and we were able to gain new customers, primarily in private networks. Our dependency on 5G-related spending is decreasing as we are focusing on increasing our market share in private networks and as significant spending is ongoing in 4G for upgrades and expansions, primarily in rural areas. In fact, our backlog, especially in North America and India, gives us confidence that we can continue with our growth momentum into the second half of the year. As expected, our new offerings have started to translate to bookings and revenue. For example, some of the new solutions in our portfolio that are worth highlighting include: the IP-50AX, or sorry, IP-50EX, which continues to garner customer interest.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

This is an ultra-compact, high-capacity E-band radio, which is ideally suited for a variety of use cases, especially when small size and low OpEx are priorities. In addition, our recently introduced Smart Activation Key software has generated meaningful customer adoption. Tens of thousands of licenses have been secured by several customers across multiple regions within the first half of the fiscal year. This innovative software simplifies the activation process for network radios and their various licensable features, allowing customers to activate and upgrade thousands of devices simultaneously, significantly enhancing operational efficiency and reducing costs. Importantly, this software solution is a major step in our initiatives to drive recurring revenue, reducing the volatility inherent with project-based, non-recurring revenue. Over time, we anticipate solutions like this to become an increasingly important contributor to our revenue.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

We continue to release more frequencies of our 50CX, a solution that has already demonstrated huge success in India. These additional bands will enable us to cover additional market needs and meet demand in other regions. I'd now like to provide an overview for our Q2 highlights by region, noting that on today's call, we will focus primarily on activities in North America and India, the two regions that have, and we expect will continue to have, the greatest impact on our results in the near term. In North America, revenue was $23 million. This was a strong quarter for our private network group as we added nine new customers and generated substantial private network bookings. In the first half of 2024, on an annualized basis, we have delivered tremendous growth from private networks, with bookings up more than 45% of our 2023 booking.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

We also had another strong quarter selling and delivering Siklu by Ceragon products, primarily to ISPs. Overall, we continue to maintain strong booking and revenue levels in North America, and the growing contribution of private network and ISP business has smoothed out natural fluctuations related to Tier 1 service providers' CapEx trends. This result was exactly our objective: to diversify our revenue and smooth out the impact of large project-based orders from Tier 1 customers. We were successful in this quarter, and we are encouraged by the trends. In India, revenue was $36 million. As a reminder, in Q1, we had record bookings related to the large agreement we disclosed in the fourth quarter, as well as a high value of orders received from one of our long-standing customers.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

As expected, delivery and deployment of the new customer orders began in the second quarter, and deployment is expected to take approximately two years, with about 75% of the $150 million project value expected to be recognized during this timeframe. Overall, in India, we are benefiting from 4G expansion in rural areas, as well as certain 5G upgrades. Key customers continue to invest heavily in both phases of this capacity upgrade, and we are growing our market share in this regard. We are also seeing large opportunities, which can fuel our business in 2025 and working to win them against competition. Clearly, we have continued to be successful in India and North America, and this has been facilitating our growth and profitability. As a last comment, I would point to our success in other regions as further evidence of success regarding our new strategy.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

I'd note that in the first half of 2024, other regions, notably Latin America and APAC, have also seen the benefits of this new strategy with significant growth in private network business. This is very encouraging, especially in light of the fierce competition against Chinese vendors in those regions.... With that, I'll turn the call over to Ronen Stein, our CFO, to discuss the results in more detail. Ronen, over to you.

Ronen Stein
Ronen Stein
CFO at Ceragon Networks

Thank you, Doron, and good morning, everyone. As Doron outlined, we're continuing our progress towards our stated strategy. Simultaneously, we continue to deliver on our growth plans and improve our operating leverage on a non-GAAP basis. To help you understand the results, I will be referring primarily to non-GAAP financials. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today's press release. Let me now review the actual results. Revenues were $96.1 million, up 11.5% from $86.2 million in Q2 2023. Our strongest regions in terms of revenues for the quarter were India and North America, with $35.5 million and $23.3 million, respectively, in line with the continuous strong demand we see in these regions.

Ronen Stein
Ronen Stein
CFO at Ceragon Networks

Our third strongest region in terms of revenues was EMEA, with $19 million. We had one customer in the second quarter that contributed more than 10% of our revenues. Gross profit for the second quarter on a non-GAAP basis was $33.8 million, an increase of 11.1% compared to $30.4 million in Q2 2023. Our non-GAAP gross margin was 35.2%, compared with gross margin of 35.3% in Q2 2023. We continue to achieve high gross margins within the guidance range, despite the fact mixture changed and revenues from India increased significantly. We achieved this by increasing revenues and recognizing continued improvement in product costs. We also maintained control over our fixed costs, all of which had a positive effect.

Ronen Stein
Ronen Stein
CFO at Ceragon Networks

Our gross margins may continue to fluctuate from quarter to quarter due to changes in product and regional mix. As for our operating expenses, in general, operating expenses in 2024 fully include the impact of the Siklu acquisition at the end of 2023 and thus impact the comparison to 2023 operating expenses. Research and development expenses for the second quarter on a non-GAAP basis were $8.2 million, up from $7.6 million in Q2 2023. As a percentage, as a percentage of revenue, our R&D expenses were 8.5% in the second quarter, compared to 8.8% in the second quarter last year. Sales and marketing expenses for the second quarter on a non-GAAP basis were $11 million, up from $9.4 million in Q2 2023.

Ronen Stein
Ronen Stein
CFO at Ceragon Networks

As a percentage of revenue, sales and marketing expenses were 11.5% in the second quarter, compared to 10.9% in the second quarter last year. General and administrative expenses for the second quarter on a non-GAAP basis were $1.4 million, compared to $6.1 million in Q2 2023. As a percentage of revenues, G&A expenses were 1.5% in the second quarter, compared to 7% in the second quarter last year. The main reason for the reduction in G&A is the impact of a $4 million benefit related to an initial collection from a $12 million debt settlement agreement reached with a South American customer, for which we accounted a credit loss at the end of 2022.

Ronen Stein
Ronen Stein
CFO at Ceragon Networks

This is a great opportunity to note that last week, we collected the second installment of $4 million from this customer, bringing us to a collection of $8 million out of $12 million debt. This recent collection is expected to be reflected in our financials Q3 results. I'd note that our GAAP operating expenses include integration costs related to Siklu. These charges are backed out of our non-GAAP operating expenses. We believe the integration is mostly completed, and we do not anticipate any further meaningful integration charges in future periods. Operating income for the second quarter on a non-GAAP basis was $13.1 million, compared with $7.4 million for Q2 2023. As a percentage of revenues, non-GAAP operating income was 13.7% in the second quarter, compared to 8.5% in the second quarter last year.

Ronen Stein
Ronen Stein
CFO at Ceragon Networks

Without the $4 million debt collection benefit included in the G&A, non-GAAP operating income would be $9.1 million, and as a percentage of revenues, 9.5%. Financial and other expenses for the second quarter on a non-GAAP basis were $2.6 million. Our tax expenses for the second quarter on a non-GAAP basis were $0.6 million. Net income for the second quarter on a non-GAAP basis was $9.9 million or $0.11 per diluted share, compared to $4.4 million or $0.05 per diluted share for Q2 2023. Without the $4 million benefit related to the debt collection included in the G&A, non-GAAP net income would be $5.9 million or $0.07 per diluted share.

Ronen Stein
Ronen Stein
CFO at Ceragon Networks

As for our balance sheet, our cash position at the end of the second quarter was $26.3 million, compared to $28.2 million at the end of 2023. Short-term loans were $28.5 million, compared to $32.6 million as of December 31st, 2023. We believe we have cash and facilities that are sufficient for our operations and working capital needs. Our inventory at the end of Q2 2024 was $59.5 million, down from $68.8 million at the end of December 2023, and down from just over $61 million at March 31st. The reduction is mainly as our efforts during 2023 to streamline inventory levels following the improvement in components availability have materialized, and initial shipments to the larger order in India. We continue to monitor inventory levels, taking into consideration the improvements in availability of components and expected changes in demand.

Ronen Stein
Ronen Stein
CFO at Ceragon Networks

Our trade receivables are at $112.9 million, as compared to $104.3 million at the end of December 2023. Our DSO now stands at 114 days. As for our cash flow, net cash flow generated by operations and investing activities in the first six months of 2024 was $1.7 million. We are reiterating our full year outlook. For 2024, we expect revenue of $385 million-$405 million, representing growth of 11%-17% compared to 2023. This guidance includes the contribution from Siklu. Non-GAAP operating margins are targeted to be at least 10% at the midpoint of the revenue guidance. As a result, we expect increased non-GAAP profit and positive cash flow for the full year of 2024. With that, I now open the call for your questions. Operator?

Operator

Thank you. If you wish to ask a question, please raise your hand using your mobile or desktop application or press asterisk on your mobile keypads and wait for your name to be announced. Our first question is from Alex Henderson of Needham & Company. Alex, please go ahead.

Alex Henderson
Alex Henderson
Senior Technology Analyst at Needham & Company

Great, thanks, and nice execution, again, and it looks, sounds like the visibility remains pretty good. I wanted to ask you a question on the competitive front, actually, posed to me by a couple of investors. One of the other people who developed a system on a chip for wireless had in 2022 talked about a, you know, a significant upgrade, but I can't find any evidence of that product in the field. Can you talk about, you know, that upgrade, you know, whether that's out there, whether you're seeing that, or is has that fallen by the wayside?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

So, hi, Alex, this is Doron. We have not seen any actual implementation in the field of new chip that actually allow for very, I would say, significant enhanced capabilities rather than what we are seeing today.

Alex Henderson
Alex Henderson
Senior Technology Analyst at Needham & Company

So that I think it was MaxLinear chip didn't make it into the field or didn't make it into product?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Obviously, we don't know exactly what the MaxLinear plans are, but to the best of our knowledge and based on what we are hearing in the industry, at the minimum, there is no chip available out there from MaxLinear that is enhanced and can be usable immediately.

Alex Henderson
Alex Henderson
Senior Technology Analyst at Needham & Company

Well, great. Sounds good. In terms of the landscape, do you have any exposure in Eastern Europe that might be negatively impacted by increased regulations on shipments into that geography? And similarly, relative to Japan, been a lot of volatility on the ex, you know, the yen exchange rates. Does that have any impact on you guys?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

So our business in the two countries you have mentioned is not high, is not big, and therefore I see any sort of exposure insignificant on our business.

Alex Henderson
Alex Henderson
Senior Technology Analyst at Needham & Company

Okay, as for both the Eastern Europe issue and the Japanese issue, that neither are concern?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

No, there's no concern.

Alex Henderson
Alex Henderson
Senior Technology Analyst at Needham & Company

Yeah.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

We sell in most of the use cases, in good years, $a few million all together. I don't see that as something that is perceived as a significant exposure.

Alex Henderson
Alex Henderson
Senior Technology Analyst at Needham & Company

Yeah, then just talking about the pipeline of activity, are you seeing any change in some of the mechanics there in terms of deal closure rates or, deal sizes, or, you know, how's the pipeline look as we go into the back half of the year and into 2025?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

So, first of all, as I mentioned in our prepared comments, we are seeing the benefits of our decision to increase focus on private networks, and we increased our booking and our deal closure on this side. That is definitely helpful to streamline the total booking that we are seeing because of the Tier 1 and 5G fluctuations and maybe some slowdown. So in terms, but particularly in terms of deal closure, I would say that with the Tier 1s primarily outside India, and to a certain degree, also outside North America, at least for us, we saw certain slowdown. Just to give you a few examples, in Indonesia, for example, the business is going through consolidation.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

There are some consolidation in this particular market, and this slows down the buying patterns. But generally speaking, other than in the Tier 1 and to a certain degree in ISPs, primarily in Europe, we have not seen any significant slowdown.

Alex Henderson
Alex Henderson
Senior Technology Analyst at Needham & Company

So in aggregate, the private networks, combined with a little bit of slowdown in some of the Tier 1, so is a net neutral environment?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

I would very highly say that yes, it's not one-to-one, but generally speaking, the situation is that the private networks can cover, especially the areas that I mentioned in my prepared comments, which is APAC, as well as Latin America, relative weakness in the Tier 1 operators.

Alex Henderson
Alex Henderson
Senior Technology Analyst at Needham & Company

Good. Great, thanks.

Operator

Thank you. Our next question is from Rommel Dionisio, from Aegis Capital. Rommel, please go ahead.

Rommel Dionisio
Managing Director of Equity Research at Aegis Capital Corporation

Yes, good morning. Just a question on the private networks. Obviously, you guys have made significant progress over the last few years in expanding that business. How do you think about, you know, boosting some of the resources behind that business, given the significant opportunities and the momentum that you have there, both in North America and in Europe, and, and elsewhere in the world, that you see opportunities there? Thank you.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

So obviously, while we are executing successfully on our new strategy, we are very attentive to what's happening. And it is our intention to adjust our investments, especially in sales and marketing, accordingly, in order to leverage the momentum. Said that, we are always with a very close eye on our bottom line and our operating expenses, so it is on our intention to do it as needed, but still keep as much as we can with the trajectory of improved operating margins.

Rommel Dionisio
Managing Director of Equity Research at Aegis Capital Corporation

Okay, fair enough, Doron. Specifically, could you just talk about the private networks in Europe? I know that you've made some progress there, but you know, just given some of the geopolitical uncertainty, how what's your kinda outlook for private networks in Europe and signing up some new business there over the next few quarters going forward? Thanks.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Generally speaking, I would say that the funnel we see for the private networks across the world, but specifically also in Europe, to your question, is increasing. Obviously, the environment in Europe is not that, so to speak, friendly in terms of investments, given the situation, but we still see opportunities to increase our private networks business in Europe in the coming quarters.

Rommel Dionisio
Managing Director of Equity Research at Aegis Capital Corporation

... Great. Thank you very much, Doron.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Sure. Thank you, Omer.

Operator

Our next question is from Robert Marcin of TB Partners. Robert, please go ahead.

Robert Marcin
Chief Investment Officer at TB Partners

Hey, guys, congratulations on a good quarter. The revenue growth of nearly 12% was particularly impressive, especially since it was against a 22% comparable last year. I just want to say we noted that. Regarding Neptune, can you give us an update?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Yeah, look, I didn't put too much high focus on Neptune in my prepared comments because nothing has significantly changed since last quarter. But the general comment, I would say, that we continue with the post-silicon validation. It is nearing the end, and in parallel, as we already discussed in previous calls, we have already started developing the first product that will be based on this Neptune chip. So all in all, the bottom line is that we're moving forward as we were expecting, and therefore there's nothing new, so sometimes no news is good news.

Robert Marcin
Chief Investment Officer at TB Partners

Excellent. Regarding software and managed services, the press release of tens of thousands of licenses sounds impressive, Doron, but the real question is, what kind of revenue does that represent? In 2025, if we had to disclose software and service revenue as a percent of revenue, what kind of number could we expect, realizing it's still in the early innings?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

So, first of all, at least so far, it's our policy not to disclose this portion, so you'll have to excuse me for not answering the second part of your question. As to the qualitative question about what is the potential there, I would say that the potential is significant, but it's also entails a market education. Tier 1 operators have their own reasons for buying a CapEx model versus OpEx model. At the same time, they are exploring seriously different use cases where it makes sense for them to pay a periodical fee or based on success, fee, to companies like us for improving also their operating results.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

And so Tier 1 is, is something that, we believe can generate a significant amount of revenues in the future, yet the adoption of this concept is going to take us time. But the fact that the software is already there and available for an immediate use in these models, in my view, is nearing the, the time where we'll be able to use it. If I look at the, other segment, which is the, I would say either smaller players, ISPs, and, also, private networks, I think that the results of, such kind of, capabilities, in terms of, new commercials, recurring models, will come faster.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

As I mentioned also in our press release, one of the customers that adopted this software is a smaller player that decided to go already for a term license. From my perspective, this is a very strong signal that there is a good chance to enjoy the fruits of this kind of technology with a recurring business model.

Robert Marcin
Chief Investment Officer at TB Partners

All right, thank you. Germany passed a rip-and-replace Huawei law, this quarter, or last quarter, excuse me, I believe. Is there any traction with that movement in any other geographies in the world, other parts of Europe or maybe even Southeast Asia, where people are concerned about data security? And is there any opportunity for us to take, you know, that kind of market share back from when they were giving product away 10 years ago?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

The short answer is yes. Just to give you slightly more color, just in Europe, since you mentioned Europe, and you also mentioned Germany, we are engaged with at least two or three new prospects, relatively sizable, that are interested in our solutions as a result of the ban on the Chinese that is starting to take place in Europe. At the same token, I must tell you, and I don't want to offend anyone, the Europeans are so much slower to kind of deploy these instructions, so I think it will take more time. But all in all, we have started discussions with new prospects, which is a good signal for us.

Robert Marcin
Chief Investment Officer at TB Partners

... Thank you. Regarding Tier 1s in the U.S., I believe we only service one. Is there any chance we could get any material business out of the other two?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

So if I need to be very precise, we're not serving just one, but the one—the other one that we are serving, the business there is not meaningful enough to have a grand discussion about it. But I must tell you that in that case, the nice thing about it is that we were the only vendor to resolve a very unique situation for them or a very unique use case to be more precise with them. And that puts us in terms of technology, innovation, and a customer-oriented approach probably in the front line.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

We will continue this dialogue with them, but you need to also bear in mind that the other, I would say, two Tier 1 operators have huge fiber network piece that they own, and therefore, their economics is slightly different.

Robert Marcin
Chief Investment Officer at TB Partners

Thank you. Regarding acquisitions, Siklu's turning out to be a gem. Congratulations on that. The balance sheet can afford some small bolt-on deals if they're done without risk and very accretively. Is there anything in the works for the rest of this year that might give us a little revenue bump for 2025 in the acquisition department?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

I cannot be that specific. I will only say that we continue to pursue opportunities for small M&As, and in order to augment our organic execution of our strategy. And I'm quite encouraged by the funnel, and I would say that this is enough for this question.

Robert Marcin
Chief Investment Officer at TB Partners

Thank you very much.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Sure.

Operator

Our next question comes from Alex Henderson from Needham & Company. Alex, go ahead.

Alex Henderson
Alex Henderson
Senior Technology Analyst at Needham & Company

I just wanted to address the question of the gain that shows up in the G&A, the $0.07 number versus the $0.11 number. Hopefully, everybody will be on the same page, but it seems to me that having a $1 million G&A number in the second quarter just sets up a ridiculous comp into 2025, because obviously, that's, that really is a one-time event. And I don't understand why you didn't back it out of the numbers. Why are we not using $0.07 as the non-GAAP number instead of $0.11?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

We need to be consistent with our accounting also when we are talking about non-GAAP. If you look back into comparative numbers, and that's clearly seen in our investor presentation, and after consulting with our lawyers, an allowance for a credit loss cannot be taken out from the non-GAAP. And when we accounted for that, yes, it was late or beginning of 2023, we had to keep it in our numbers, and you'll see it in our comparable numbers. So we need, when it's positive, to keep it also in the non-GAAP. However, in our prepared comments, we mentioned specifically the results without this one-time item.

Alex Henderson
Alex Henderson
Senior Technology Analyst at Needham & Company

So do you think the Street would be better off using the $0.11 number going forward, or the $0.07 number for the baseline, as opposed to the $0.11, for the simple reason that it sets up a, you know, very odd comparison and overinflates the 2024 numbers, which make the 2025 numbers look a lot, you know, softer in terms of appreciation? It seems to me that the $0.07 number is probably the right number to be using.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

If, from my perspective, the normal course of business, if I need to use this term, because we don't write off $12 million every now and then, the normal course of business should be probably taking the $0.07 and not the $0.11, and therefore, we are paying a lot of attention to this item, and you'll be able to see that in our investor presentation very clearly.

Alex Henderson
Alex Henderson
Senior Technology Analyst at Needham & Company

Okay. Good. I'll, I'll cede the floor back. Thanks.

Operator

Our next question comes from Gunther Karger. Please go ahead, Gunther. Gunther?

Analyst

No. Yes, can you hear me now?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Hi, Gunther. How are you?

Analyst

... Fine, thank you. First of all, congratulations on excellent execution, and particularly hope probably with the advice of Fink. My question is chipsets. You did mention this in your earlier comments, but and on a competitive basis, do you see any other companies coming out with chipsets that would encroach on your expectations for your systems?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

So thank you, Gunther, and thank you for this question. To the best of our knowledge, the Chinese probably have their own chip. And as for the rest of the competition, they use usually MaxLinear chip. I am not aware, at least not at this point, of any development of a chip, of a next-generation chip other than MaxLinear. And as I answered the previous question regarding the chip, we don't really know where MaxLinear is in this development. We still believe that we have probably 2-3 years advantage with our own chip ahead of the competition.

Analyst

Thank you, and to follow up on that, do you still anticipate some of your products coming on later on this year to incorporate your new chip?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

As I said, we will probably start seeing the chip being used, especially for commercial deployments during 2025, and that hasn't changed.

Analyst

Well, fine. Thank you. Thank you very much.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Sure. Thank you.

Operator

The next question will come from Robert Marcin of TB Partners. Please go ahead, Robert.

Robert Marcin
Chief Investment Officer at TB Partners

To follow up on that, Doron, saying that you're going to ship commercially is one thing, but 2% of your product versus 30% of your product is a different thing. Are the shipments using Neptune next year going to be material?

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

So first of all, I want to make sure everybody is on the same page, because it looks to me that we need to put the chip development and commercialization, sorry for that, in context. Look-

Robert Marcin
Chief Investment Officer at TB Partners

Right

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

... it's not the first chip, Ceragon has developed, and it's probably not going to be the last chip. We believe that this chip will create, once again, a significant advantage over the competition for a few years. Would that, change the company totally? No. And therefore, we do expect to see significant business, but the implementation of such chip is gradual. It's not going to make the numbers suddenly become 50% growth, if someone thinks that these are the numbers we should talk, or 50. I think that next year we will start seeing, business. I'm not sure to what extent the business is going to be very significant. Let's not forget, the product, the first product is going to be a 20, at least 25 Gbps in a box. This, this is going to be the first version.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Based on my experience in the industry now, there's hardly need. The most of the use cases are up to 10 Gbps, and therefore, while there is an interest, we'll start seeing the impact gradually.

Robert Marcin
Chief Investment Officer at TB Partners

Okay, so a gradual ramp in 2025 and more impact on the revenue and income statement in 2026 and 2027.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Exactly.

Robert Marcin
Chief Investment Officer at TB Partners

Okay. Excellent. Thank you.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Thanks.

Operator

Okay, there are no further questions. I would like now to hand over the call to Doron for closing remarks.

Doron Arazi
Doron Arazi
CEO at Ceragon Networks

Ceragon's competitive position continues to improve, and we continue to deliver on our strategic plan for growth and profitability. Our new products and solutions are gaining meaningful traction, and our wins in private networks are encouraging. We believe that our new products and solutions, as well as our roadmap, including the Neptune-based future products, are positioning us for long-term growth as they are expected to result in increasing market share in our space. I look forward to updating you, updating you further on our next quarterly call. Have a good day, everyone.

Executives
    • Doron Arazi
      Doron Arazi
      CEO
    • Ronen Stein
      Ronen Stein
      CFO
Analysts
    • Alex Henderson
      Senior Technology Analyst at Needham & Company
    • Rob Fink
      Managing Partner at FNK IR
    • Robert Marcin
      Chief Investment Officer at TB Partners
    • Rommel Dionisio
      Managing Director of Equity Research at Aegis Capital Corporation
    • Analyst
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