The economic slowdown in the US, the negative impact of the strengthening of the shekel on bottom line figures, and the sharp fall in share price; in a certain sense, all these could be the typical profile of just about any Israel technology company currently traded on US markets. In this case, the company in question in Ceragon Networks Ltd. (Nasdaq: CRNT; TASE:CRNT), which is traded on Nasdaq at a market cap of $209 million.
Ceragon, a RAD Group company, provides high capacity wireless backhaul solutions for telecommunications providers and private enterprises. The company's backhaul solutions are designed to eliminate the capacity bottleneck caused by the increase in data transmission on networks. The expansion of the cellular market and the transition to IP networks have, over the years, become the company's principal growth engines.
Ceragon is currently marking a year since its secondary offering on Nasdaq. It was exactly a year ago that it seized the opportunity in the bullish market, raising $102.5 million at $13.50 a share - more than twice its current price. The offering also included an offer to sell by one of its shareholders - Yehuda Zisapel - who sold $8 million worth of shares. The share has lost approximately 60% over the past year, hardly an achievement to be proud of, and a figure that unquestionably reflects ill on the offering of a year ago.
The negative sentiment that has dogged the share recently stems from the earnings warning Ceragon issued for the third quarter of the year, as well as the lowered guidance for next year - growth of 10-20% instead of 25%. Despite this, company president and CEO Ira Palti says he's "cautiously optimistic." "The key trends still point to an increase in our activity," he says in an interview with "Globes", marking a year since the secondary offering. "The first trend is the increase in user numbers, principally in the Asia Pacific countries, and the other is the increase in data transmission among users in developed countries - an increase that is not about to come to a grinding halt. So for us, the slowdown changes nothing - telecommunications providers have no alternative. They have to keep moving forward and expanding to generate more and more profit."
Not tied to Nokia-Siemens
In the past year, the first of the two aforementioned trends was the dominant one at Ceragon, with the company reporting a considerable number of project wins in developing countries, and the Asia Pacific region accounting for more than half of its revenue in the third quarter. "At one of the conferences I recently attended, someone asked me why the average citizen in a developing country earning low income, should want a mobile phone at all," says Palti. "I told him that spending on telecommunications in the third world is a basic necessity, not a luxury. I was in Nigeria a few weeks ago, and everyone has cell phones there. The vendor at the market stall uses his cell phone to contact the delivery man on his tricycle."
Globes: If the trend is positive, why did you lower your guidance?
Palti:"To be realistic. It was an act of caution. We most certainly were expecting to grow 25% after a year of substantial growth (the guidance for the current year is 35% growth, S.H.V.), but we will still grow even if the figure is smaller. We still don't see any indication that the crisis is having an effect on us, but we expect that some customers will be putting off their decisions and that will lower our growth rate."
So for the time being, the economic crisis hasn't affected you?
"The crisis so far has been largely financial, with a nominal impact on the real world. This has been a good year for us, and we've felt the crisis on and off. Our sales in the US fell significantly in the first quarter, but we haven't felt the crisis anywhere else. The growth rates in Asia and Europe were quite impressive. In the final analysis, the economic crisis is here, and we are listening to what our customers are saying, and monitoring the market."
In any event, it was the global crisis that made Ceragon issue the earnings warning for the third quarter. Part of its sales through OEMs (original equipment manufacturers) increased, and because the profit margin on these sales is lower, Ceragon's profitability was hit, causing gross margin to narrow to 31.5%. "We didn't use the state of the markets as an excuse for the earnings warning, and we explained exactly what had happened and how we intend to put it right," Palti notes. "In the last two quarters we found ourselves in a situation where we recognized quite a lot of revenue from OEM sales, yet despite this, direct sales also rose, and they will be recognized in the coming quarters, which will lift us back to a gross margin of around 35%."
Ceragon's largest OEM customer is telecommunications equipment giant, Nokia-Siemens, which accounted for more 10% of its revenue. "We are not excessively dependent on Nokia-Siemens," Palti insists. "On average, I expect the OEM portion of our revenue, including from Nokia-Siemens, will be in the region of 25-35%."
Fewer jobs in Israel
You originally set an operating profit target of 10% of turnover as early as from the fourth quarter of 2008, and at the conference call this was pushed off to 2009.
"Our profit margins are already good now, even though the target margin is higher. We have the highest profit margins in the industry and even in difficult countries like India, where the pricing is lower, our profit margins are good. At the same time, we're constantly working on ways to cut costs, including the development of new products at a lower cost."
Will the cost cutting also include lay-offs?
"I'm happy to say that our streamlining has been natural. The company has grown at a fast rate, but the growth in manpower was slower than that of the company itself. It's not that we weren't efficient before, but we are now redoubling our efforts on this. These are organizational changes that stem from experience. We're hiring fewer people in Israel today, but we have grown in the Asia-Pacific region."
Ceragon currently employs around 400 people, half of them in Israel. The company's principal competition comes from two companies much larger than itself - Ericsson (Nasdaq; SAX: ERIC), and NEC Electronics Corp. (TSE: 6723). "In high capacity, we're number three with a market share of 14-17%. In IP migration, a market that is only just beginning to take off, we're the leaders. Large competitors such as Ericsson and Alcatel-Lucent frequently come to tenders with solutions on paper, rather than finished products," says Palti.
So how does Ceragon handle the competition with the giants? Palti has no doubt in his mind that Ceragon's products are simply better than theirs. Aside from that, he says, "Our solutions are cost effective for customers. We measure up, both in terms of technology requirements and price." And in any case, he adds, "Being number three in this market is no small feat. In the market we're in, we're a key player."
Ceragon held the secondary offering a year ago, with the aim of bolstering its positioning. "The goal was to strengthen our balance sheet," says Palti. "We're now aiming for larger deals with larger customers, and the state of the supplier's balance sheet is important to them, especially at a time like today when people are apprehensive,. At the same time, we have been very tentatively looking at various options for the acquisition of complementary technologies, or expansion of our sales channels."
You can't deny the fact that since then the share price has fallen heavily. Those investors who bought shares might be having second thoughts now.
"You'll have to ask them directly. It is very much a question of psychology. We made the offering because we thought, at that point in time, that we were right to raise funding to support our goals. We want to strengthen our balance sheet and expand our capabilities, regardless of whether the share fell or rose."
An inkling of Ceragon management's belief that its share is underpriced came at the end of last month, when it announced a share buyback up to a total of $20 million. But anyone who expects Palti to declare that the market has not priced Ceragon correctly is in for a disappointment. "I'd rather not comment on the share price, but on the real world only. The share price is affected by the company's performance, which has been very good, and on the other hand, by the state of the market as well. Ultimately, the investors make up their own minds."
Published by Globes [online], Israel business news - www.globes-online.com - on November 12, 2008
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