2013 will not be remembered fondly by Ceragon Networks Ltd. (Nasdaq: CRNT; TASE:CRNT), but, if the company’s forecasts are realized, 2014, or at least its second half, will be different. If Ceragon displayed weak financial performance in 2013, began a reorganization process, and saw its stock price drop 33% (despite the positive trends in financial markets), then the arrival of 2014 has brought about a few factors that are meant to lead to a market opening, and an improvement in the company’s condition.
Cergaon provides high-capacity wireless communications solutions, intended for communications between base stations and base station controllers (backhaul). In January-September, 2013, the company’s revenue contracted by 20% to $272 million, and the net loss widened to $32.1 million ($15.9 million non-GAAP).
Following this, the company announced a streamlining plan in September, to save $25 million a year, which included firing 200 workers (60 in Israel), and pay cuts. “The streamlining process was carried out quickly, and it has ended,” said Ceragon CEO Ira Palti told “Globes.” “It’s not easy to say, but we, as part of the industry, are experienced at it. In high-tech, there are periods of strong growth, and periods of contraction, and it is important to know how to grow quickly, as well as how to contract. It is not a linear industry.”
The bulk of the layoffs took place in Norway, where Ceragon has been operating since acquiring communications equipment manufacturer Nera in 2010, for $48.5 million. Because we expect the market will grow, we tried not to cut customer-facing positions,” said Palti.
How is morale these days?
“Lower, right now, but on an upward trajectory. It’s a painful process, but it’s part of the industry’s cyclical nature. One of the more interesting issues is that if we fired someone, and he was then hired at a different high-tech company, which in macro terms is correct, because it is mobilizing resources towards efficiency. The question is whether Israeli high-tech will continue to create jobs.”
And what’s your answer?
“It has become very expensive to employ people in Israel. The dollar is dropping, and the cost of employment has effectively risen by 8-9% per year. Norway has an abundance of gas, which has caused the need for work to drop, and the cost of work to rise, and, today, it is very expensive to employ workers there.”
Do you imagine that this is Israel’s future as well, due to the discovery of natural gas?
“The discovery raises a difficult question about the future of our economy. The shekel is strengthening because of the gas exports issue, and, over time, it will reduce the competitiveness of the state. Let’s say there will be 50,000 workers in the gas industry, but the Israeli economy’s engine is high-tech, and that, as previously mentioned, has become expensive and problematic. This is the background for the layoffs we carried out in Norway.”
Three years after acquiring Nera, how would you summarize the process?
“Purchasing Nera was a fantastic success. We didn’t buy the operations in Norway, rather market share in South America and in Africa. South America already accounts for nearly a third of our operations, and Africa for 20%, and we have not lost a single customer. It was a growth engine when the classic geographical areas in which we were operating contracted, and, today, some 60% of our customers are from Nera.”
Despite this, a few months ago, Ceragon sued Eltek, the company from which it bought Nera, claiming damages of $21.5 million for breaches of representation and commitments in the deal. Palti said that the process is ongoing, and he expects that the matter will take time to resolve.
”We would be happy for Vodafone to be a client”
Ceragon expects that the market in which it operates will grow again in 2014, as communications providers around the world advance to the next generation of networks (primarily LTE). The expectation is for a rise in the number of orders at the start of 2014, and an improvement in financial results in the second half of the year. There has been talk of the LTE market reviving for years, but, according to Palti, this time, there is both technological and financial maturity.
“With almost every technology, the hype arrives before the technology is ready,” says Palti. He brings the recently launched iPhone 5s, which is the first device to provide an LTE solution to the world, as an example of technological maturity. Plati’s example of financial maturity is Vodafone, “which is not our client, but we would be happy if it were.”
Vodafone sold its share in a joint venture it had with Verizon, and decided to invest part of its profit, tens of millions of dollars, in upgrading its European networks to LTE. “From the moment Vodafone upgrades, all the European networks will upgrade, because it is a competitive environment,” says Palti, “LTE pushes networks and upgrades worldwide. In Brazil, for example, there is a massive upgrade in anticipation of the World Cup and the Olympics, and it will create a ‘Latin ego contest,’ because the neighboring countries will not accept Brazil having LTE while they do not. Even in Israel there have already been announcements of shared networks between the cellular companies. This is a good trend, as far as we’re concerned, because even if the number of base stations drops because of the cooperation, the traffic will grow significantly.”
Where do you come into this picture? “It is very simple: it doesn’t matter what the communications providers do, the traffic at every base station is growing, and, therefore, it is necessary to upgrade networks and equipment, and we are world leaders in high-capacity solutions. The entrance to LTE will raise the level of use of our products.”
It has been said that communications equipment has become a commodity. How is it possible to compete with the prices that Chinese companies, such as Huawei, offer?
“Communications equipment is a commodity, or a “high-tech commodity.” I won’t argue with that. But a television is also a commodity, and Sony manufactures them, as do Chinese manufacturers, and Sony still makes a lot of money. As for competition with the Chinese, our cost of production is actually lower than theirs, because of the technology. Because of the perception that it is a commodity, we do massive internal work on functionality, scope of geographic deployment, and manufacturing costs. We design chips, hardware, software, installation - virtual integration allows us to streamline the product cost. So the Chinese competition is similar to competition with Ericsson to us. In any event, for the most part, Huawei sells the whole network, and we specialize in a certain part, so we almost never compete head-to-head.”
Ceragon recently raised $31 million in a secondary offering when its stock was at a low, but it has recovered slightly since then. According to Palti, “We raise money when we can.” The company’s stock is traded on the Nasdaq and on the TASE. In contrast to Mellanox Technologies Ltd. (Nasdaq:MLNX), which delisted from the TASE, Palti is not bothered by the regulation, and does not plan to delist from the exchange. “We have no problem with the regulation, or with Amendment 20,” he says.
What do you think about Ceragon’s stock price today?
“I don’t pay attention to the stock price. My job as CEO, and our job as a company, is to bring results and profit. The fact that the company is losing money - that makes us unhappy, and we are working hard to bring profitability back.” It will happen, according to forecasts, in the third and fourth quarters of 2014.
Published by Globes [online], Israel business news - www.globes-online.com - on January 8, 2014
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