Ceragon Networks Ltd. (CRNT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Ceragon business update. [Operator Instructions] I must advise that this call is being recorded. I now would like to hand over the call to our first speaker, Rob Fink, Head of Investor Relations. Rob, please go ahead.

Thank you, operator. Before we begin today, please note that today's discussion includes forward-looking statements within the meaning of the Securities Act of 1933, as amended, Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, projected financial performance, future initiatives, business outlook, development efforts, anticipated results, time lines, and other matters. Forward-looking statements are based on current expectations and assumptions and involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, among others, global and regional economic conditions, conditions in Israel and the region, customer concentration and ordering patterns and supply chain challenges as further detailed in Ceragon's most recent annual report on Form 20-F and other documents that are filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made, 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 also on Ceragon's website at ceragon.com. With that, I will now turn the call over Doron. Doron, the call is yours.

Thank you, Rob, and thank you, everyone, for joining on short notice. This morning, we disclosed preliminary Q4 revenue and outlook for 2026, and we wanted to take the opportunity to provide context on what we are currently seeing in our business and to share more details pertaining to our outlook for 2026 ahead of the upcoming Needham Conference. Before I get into our outlook for 2026, I'll start with a brief update on Q4. In the final weeks of the quarter, a single large North American customer shifted a portion of deliveries that had been scheduled to be delivered within December into 2026. This directly impacted Q4 revenue versus our prior assumption. Our current expectation is that fourth quarter revenue will be in the range of $81 million to $83 million. Although the previous guidance we shared with the capital markets already accounted for potential variability from this customer based on prior experience, the magnitude of the shift was larger than what we had embedded in our assumptions. Importantly, this was exclusively a timing matter. The underlying demand from this important customer continues to be strong. This is reinforced by the fact we received additional new orders of significant value from this customer in Q4, while orders in our backlog remained intact. In fact, the timing shift increased our backlog entering 2026, and we are actively coordinating delivery plans with the customer. We expect most of this revenue to be recognized during 2026. More broadly, bookings in North America remained strong in Q4. As a result, our North America backlog exiting 2025 almost doubled compared to the level at the end of 2024. In general, in Q4, we continued making progress in expanding our presence with private networks, increasing our penetration within existing CSP customers and strengthening our position with new customers globally, including opportunities beyond our historical focus areas. In fact, during 2025, we have added more than 30 new customers, of which over 75% were private network customers. The momentum we are seeing reinforces one of our ultimate goals in our strategy, to reduce customer concentration and the associated impact a small number of large projects that can have meaningful swings in our periodical results. This is a gradual transition, but the direction is clear. We are building a more diversified business with a resilient growth profile, aiming to improve visibility and stability over time. Reaching a critical mass of projects across a more diversified base will enable us to reduce the quarter-to-quarter variability of our project-oriented business. Turning to full year 2026. We expect revenue to be in the range of $355 million to $385 million. Our revenue assumption is based on the conversion of the delayed deliveries from Q4 as well as the following conditions. In North America, we entered 2026 with a strong backlog and continued to make progress across both CSPs and private networks. Currently, we have multiple opportunities in advanced stages, and we anticipate converting them into new business in 2026. In India, we start 2026 with an annual revenue run rate of approximately $100 million, primarily driven by 2 main customers. We do see other opportunities to expand within these 2 customers, which would slightly increase our annual run rate. This incremental revenue is included in the low end of our guidance. Since we are optimistic about winning a significant portion of other customers' RFPs that are expected to be awarded in India in the first half of 2026, we believe that India can contribute to more meaningful growth with such wins. For the rest of the world, we are assuming a measured recovery in other regions. Timing of closure and execution of multiple opportunities can work both for us as well as against us, but we remain optimistic and are becoming more confident in our strategy. We intend to provide more details on our business model and profitability when we report our fourth quarter results in February. But at a high level, we assume the following for 2026: additional improvement of approximately 1 percentage point in our gross margin at the midpoint of our revenue range for the full year, primarily driven by improved revenue mix between North America and India as well as additional cost reduction initiatives we are working on. On the OpEx side, the impact of the Israeli shekel exchange rate is expected to represent an approximate $5 million headwind should it remain similar to the average levels we have seen in recent month. In general, we continue to invest in R&D and in sales and marketing based on the momentum we see in the market. We intend to launch 4 new products in 2026 and expect initial revenue from some of them this year. All of the product introductions are driven by specific demand we have recently seen in the addressable market, and are critical to our future growth as they are expected to be ahead of the competition and enable us to win evolving new use cases. On the sales and marketing front, we have increased our investment, predominantly in regions where we see more growth opportunities. A significant portion of this increase is in variable compensation, and therefore, will be results driven. All in all, we expect our non-GAAP operating margin to be between 6.5% to 7.5% at midpoint of the revenue range or at 8% to 9% excluding the assumed Israeli shekel exchange rate impact. Generally speaking, when neutralizing the ForEx impact, we see a certain increase in our investments and expenses, but a large portion of this increase will be driven by shifting the budget between units and regions to focus on areas we believe will drive significantly better ROI. In this respect, we have recently recruited a very accomplished Chief Technology Officer with vast experience in radio and chip domains, working for blue chip companies, recently on 6G research, to further strengthen our technology leadership. In summary, we continue to navigate through near-term revenue timing volatility while building a more resilient and diversified growth profile. The pieces of our strategy are coming together. Our differentiated offerings are resonating with customers, and we are seeing positive traction across North America and other regions, evidenced by successful POCs, award declarations and initial orders. While timing of closing deals as well as delivery schedules can still influence our revenue, we believe our outlook for 2026 reflects a stronger foundation of backlog in certain regions and continued progress in building stronger earnings profile. Finally, together with the Board and as part of the development we see in our business environment and our performance, we also regularly discuss our capital allocation strategy. We intend to remain disciplined in our approach, prioritizing investments to accelerate the transformation I have discussed. At the same time, we continue to evaluate return on capital to shareholders and inorganic growth opportunities. With that, I'd like to open the call for questions.

[Operator Instructions] Our first question will come from Scott Searle from ROTH Capital.

Doron, maybe just to start off, could you talk a little bit about immediate seasonality as we're going into the first quarter and first half of the year? It sounds like there're certainly a lot of positive elements that are going on, certainly to the upper end of the range. But when do you expect some of those to start to hit? And in terms of absolute sales, are we expecting things to be sequentially down as we go into the March quarter? And as a follow-up on the OpEx front, I just want to clarify, the currency headwinds on the shekel, I think you quantified at $5 million. So is that in absolute dollars, the base case of OpEx being up $5 million versus 2025? Or is there going to be some other optimization that's in there that will, at the lower end of the range, from a sales perspective, reduce some of that OpEx? Just can you give us some idea about how we're thinking about it? I know you gave an operating margin target, but that's still a lot of variability given the revenue range for the year.

Okay. So thank you. I will start with the first question. We all know that usually Q1 tends to be seasonably lower. And I would probably think that this could be the case. I must tell you that with the large backlog we have in North America and with the other behavior of certain big customers, I don't think it will be prudent enough to give you a trend. Things might continue slipping in between quarters, and therefore, the bottom line is that I think we should account for certain seasonality, but it's very hard for me at this point to be more precise in this respect. As to the second question, first of all, the $5 million is an assumption -- or not assumption, it's the analysis that is relevant to a full year as compared to 2025. And it means that, obviously, it goes both to the low end and also to the high end of the range. The only thing that could happen is that at a certain point of time, there will be a significant change in the ForEx, and based on our current policy, it could create some sort of an upside. At the same token, we see that the recent shekel is even slightly stronger. So this is a very basic assumption. In terms of our ability in the OpEx generally speaking, as I said in my prepared notes, there's a big portion of our ability that is associated with predominantly booking and operating profit achievements. And obviously, that will move up or down within this range according to the actual achievements.

Okay. And Doron, maybe if I could quickly just follow up. Looking to the second half of this year, if you start off with traditional seasonality, there's still a pretty wide range out there. And given where consensus expectations are, it implies that you're getting up to $100 million or so a quarter in the third and fourth quarter. What's the biggest swing factor to make that move? Is it India? Is it continued strength with the North American customer? Or is it just a combination of items?

The bottom line is that it's a combination. I would even dare saying that our internal plans are even more aggressive. But we're trying to be very prudent because of the fact that the nature of our business is such that just because of a blink of an eye $4 million or $5 million could move from 1 quarter to another. And this is why we are taking a very prudent approach. I think that we are building on gradual improvement in all regions, but predominantly in North America as well as in India.

But let me add one thing. Generally, we have already communicated in previous calls that we have certain POCs and RFPs out there that we build on also in our growth and it takes time for them to convert. So obviously, if things goes well, it should convert also to the second half.

Our next question is from Christian Schwab from Craig-Hallum.

Great. As far as the gross margin expansion that we expect on a year-over-year basis, is that suggesting 1% growth? Does that mean we exit the year with a much better mix and gross margins above the 1%? Or is it pretty linear through the quarter? How should we think about that, Doron?

I think that -- it's Ronen. Thank you for the question. I think that the way to look at it is to look at the average that we had in the 9 months. And I don't want to yet predict or to give any forecast for Q4 at this stage. But to take the 9 months and our expectations for Q4 are not expected to materially change that, and then you can add to it the 1%. This is more or less how you have to look at it.

Just adding to the point you may have raised in terms of how it's going to spread between quarters. It's really driven by -- predominantly driven by 2 factors: the revenue level and the split between North America and India in terms of contribution to the revenue. So I don't think we have any more accurate answer than that, saying that, on average, this is what we expect for the year. And it might be slightly volatile based on the mix on each and every quarter.

Great. And then regarding backlog in North America, which has doubled versus '24, can you quantify the dollar amount of backlog that you have in North America currently for us?

We're not giving that number, and we don't intend to start giving it, at least not in the near term. All I can say that is -- it's significant, and this obviously drive part of the optimism about 2026.

Our next question is from Ryan Koontz from Needham.

I wanted to ask about the rationale for the pushout. I assume it's not a share issue. Is this more just about project execution from your customer or inventories or anything you can share at a high level about the pushout?

Yes. I think we said that very loud and clear on the prepared remarks. It's not anything that is associated with our very strong position in this customer. It's associated with internal decision that were made on the last minute, and more so, to the best of my understanding, it was not only applied on us, but it was applied on many other CapEx vendors due to some internal decision made by the leadership of this customer.

Got it. Really helpful. And then on the -- you mentioned the shift away from project-based business. Can you maybe expand on that, like how do you envision that change in the kind of the business model?

So to be more accurate, and maybe I take the blame here for not being that clear. We didn't say that we shift away from project because most of the nature of the business is project. What we said is that when we expand our outreach into private network segments, the nature of the projects in this domain are such that are creating more diversity. So it's -- these are sometimes smaller projects, I would say, in the million of dollars per project and the process of recognizing revenue and rolling out these project is longer and it includes a lot of services elements that is smoothening the recognition. And because of that, if we have more like that in our backlog and we are less dependent on a very large product-driven projects like we have today with the CSP domain, we still remain a project-oriented company, but at the same token, the diversity of customers will enable us to smooth our revenue recognition. On top of that, when we go in this direction, we are also pushing very strongly to business models like managed services and connectivity as a service. And while this may create some headwind in terms of revenue in the first part of executing on such projects, this will also help us to smoothen our revenue recognition over time and by that reduce the volatility.

Super helpful, Doron. And the last one, if I could. Just any update on -- I know it's only been probably 1.5 months or 2 since Nokia's announcement, but any changes in the competitive landscape or field activities are picking up relative to the competitive landscape would be great.

I would just say that we are seeing some initial signs. I think that it will not be right for me to disclose what these signs are. But all in all, so far, I can see more positive than negative for Ceragon.

Our next question is from Gunther Karger. Doron, we have no further questions. I'd like to hand the call back to you.

So thank you, everyone, for joining on such a short notice, and hope to see many of you in the Needham conference. Thank you so much.