Siklu Communication Ltd. (CRNT) Earnings Call Transcript & Summary

Thank you for your patience. Rob, you may begin.

Thank you, operator, and this is obviously certainly unprecedented. Good morning, everyone. Hosting the call today 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, the potential outcome anticipated, progress and plans, results and time lines and other financial and accounting related matters constitute forward-looking statements within the meaning of the Securities Act of 1993 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. Certain uses forward-looking terminology, such as believes, expects, may, will, should, anticipate, plans, or similar expressions to identify forward-looking statements. Such statements reflect only current beliefs, expectations and assumptions of Ceragon's management but actual results, performance or achievements of Ceragon may differ materially and they are subject to certain 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 may be supplemented from time to time in Ceragon's other filings with the SEC including today's earlier filing on the acquisition related press release, all of which are expressly incorporated herein by reference. Forward-looking statements relate to the date additionally made. They do not report to prediction of future events or results and there can be no assurance that they will prove to be accurate. Ceragon undertakes no obligation to update them unless required by law. Ceragon's public filings are available on the Securities and Exchange Commission's website at sec.gov and may also be obtained from Ceragon's website at ceragon.com. I'd like to now turn the call over to Doron. Doron, please go ahead.

Thank you, Rob, and good morning, everyone. Before I start the review of the transaction we have announced earlier today, in the wake of the terrible terrorist attacks by the Hamas against Israel on October 7, I would like to express Ceragon's support for the Israeli people in general, and its Israeli employees, in particular. Ceragon mourns the loss of life of Israelis and sends its condolences to the family's casualties and condemn these acts of terrorism. Thoughts and prayers are with the wounded, kidnapped and absent Israelis and their families. We thank all our partners, investors and customers who have reached out to express their heartfelt support. We are monitoring the situation closely, and we'll provide updates if and when needed. While events in Israel are evolving, our global activities have continued and are expected to continue as planned. Earlier today, we announced that we have entered into a definitive agreement to acquire the assets of Siklu, a provider of multi-Gigabit wireless fiber connectivity in urban, suburban and rural areas. This proposed combination is well-aligned with our strategy facilitating our initiatives to expand our addressable market, both in terms of key regions and new customers. We believe this opportunity also includes significant low-hanging fruit to create value together. Siklu is an innovator in the industry, particularly in the millimeter wave band and in markets such as Fixed Wireless Access and point-to-multipoint connectivity. For many years, Siklu's wireless solution have been used by service providers, primarily Tier 3 and Tier 4 as well as private networks. Siklu has a strong reputation in the marketplace for creative solutions, high-quality technology and easy to deploy products. Based on an analyst report, Siklu has been the market leader in terms of market share in U.S. E-band installation in the last 3 years. Of note, the proposed combination would significantly bolster our competitive position in North America and in the fastest-growing segment of the wireless transport solution market, which is millimeter wave band. Siklu's core customer base is primarily Ceragon's expansion targets, including private networks and Tier 2, Tier 3 and Tier 4 service providers, especially in North America. There is little overlap between Siklu and Ceragon and customers. We expect this proposed combination will accelerate our growth strategy by expanding our presence in these key target customers. Being able to provide these customers with a more comprehensive solution, including both Siklu and Ceragon technology is expected to accelerate this further as we will be able to provide true end-to-end solutions to small service providers and private networks. Additionally, Siklu is strong in North America and Western Europe, but have limited exposure to other regions, including India, Latin America and Asia. We believe this is a compelling strategic opportunity for Ceragon as we expect to bring Siklu solutions to our existing customers and partners in those regions. The 2 companies also have complementary product portfolios with limited overlap. The combination will broaden the solutions offered by Ceragon, including the adoption of point-to-multipoint technology for the access part of networks, primarily Fixed Wireless Access. To summarize, we believe that this acquisition is an excellent fit for accelerating the execution of our strategy, with short and long run benefit by increasing our market share in the main segments of interest and offering broader solutions to our customers. We are excited to add the talented Siklu team to Ceragon. We expect the transaction to close by the end of the calendar year, and anticipate a rapid and smooth integration. Let me now turn the call over to Ronen Stein, Ceragon's CFO, to discuss the combination in more detail. Ronen, over to you.

Thank you, Doron, and good morning, everyone. Doron described the compelling strategic considerations. Let me speak to the financial terms and benefits. We are acquiring the assets of Siklu for an enterprise value of $13 million to $15 million. We will issue approximately 1.5 million ordinary shares to Siklu's shareholders. In addition, we will assume financial liabilities of approximately $10 million to $12 million. Approximately $2.5 million of these liabilities are classified as long-term liabilities. We feel comfortable assuming these financial liabilities, especially after generating positive free cash flow of approximately $10 million in the third quarter in line with our expectation to finish 2023 with significant positive cash flow. We expect this combination to generate approximately $25 million to $29 million in incremental 2024 revenue. In addition, Siklu's gross margins have been significantly higher than Ceragon's historical margins. So we expect this combination to be accretive to our gross margins. We also anticipate additional COGS benefits due to Ceragon's supply chain and buying power. Operationally, Ceragon's ability to provide a working capital infusion to the Siklu business will drive revenue and operational efficiencies with additional benefits related to our working capital management capabilities. We have also identified significant cost synergies largely related to assets such as combining staff in a single location in Israel and other efficiencies. Inclusive of these improvements, we anticipate the transaction to be accretive to non-GAAP earnings by the second half of 2024. Let me now turn the call back to Doron for closing comments.

Thank you, Ronen. As I said, we believe that this acquisition, which is funded mostly with shares and the assumption of debt, will significantly accelerate our growth strategy, giving us scale and advancing our initiatives to expand our addressable market. We also believe that adding the Siklu team to ours will have our long-term product road map and enable us to better serve our customers. We expect to see upsell opportunities for the combined organization, representing meaningful low-hanging fruit. The technologies of the 2 organizations are expected to fit well together, and we think there are significant operational efficiencies we can unlock with the combined R&D function. Strategically and financially, we believe this proposed combination is valuable for our employees, our customers and our shareholders. With that, I now open the call for your questions. Operator?

[Operator Instructions] Our first question today come from the line of Alex Henderson from Needham.

I hope everybody at Ceragon is safe and your families are safe. I wanted to ask a couple of quick questions here. The first one is it kind of looks like this is a carve-out of a company as opposed to a straight M&A transaction. Is that an accurate way to think about it? And if that's the case, was there anything left in the original parent company or you getting all of the operations except for the shell?

We're getting all the operations except of the shell. The carve out is just as a result of the legal structure that Siklu operated under. So basically, we bought all the operational stock.

I see. And so is there any NOLs coming over with the acquisition? And what do the assets look like from a receivable perspective?