Summary
- Ceragon has improved the bottom line in 5 consecutive quarters by instituting aggressive cost-control measures. The company expects to lower operating expenses from $27 to $22 million.
- Ceragon's flagship IP-20 family of products has been gaining market share in recent months. Before 2Q 2015 ended on June 30, Ceragon announced a $13 million contract win.
- Analysts covering CRNT expect a 3c/share profit in 2015 vs a 40c/share loss in 2014. They also expect revenues to increase by 20% and net income to 18c/share in 2016.
- The four analysts covering the stock have a mean price target of $2.65 with a maximum $4 and a minimum $1.3. The company trades at $1.15 and has 50c/share cash.
- The company Chairman has purchased 6.3 million shares in the last 12 months at an average $1.9/share. The last purchase of 1.3 million shares was made in late 2014.
- Ceragon Networks Ltd. (CRNT) is a leading global provider of high-capacity telecom equipment for cellular and fixed wireless operators, enterprises and government organizations. The company had a successful start for fiscal 2015 by improving 1Q 2015 bottom-line compared to previous quarters. This was the 5th consecutive quarter of bottom-line improvement resulting from management's focus on cost control and execution. This can be seen in the following table:
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Revenues, $M 70.5 90.4 99.0 111.2 93.7 Cost of revs, $M 50.1 60.0 73.6 84.0 69.1 Gross profit, $M 16.4 24.4 25.4 27.1 24.6 Gross margin, % 23.3 27.0 25.7 24.4 26.3 Op. profit, $K -10,835 -2,586 64 880 2,512 Op. Margin, % -15.4 -2.9 0.1 0.8 2.7 Ceragon ended 1Q 2015 with $37 million or 50c/share. To preserve this cash, Ceragon's management instituted aggressive manpower cuts and now expects operating expenses to range from $21 to $22 million per quarter down from the recent $25 - $27 million range.
Regarding the outlook for 2Q 2015 and the rest of 2015, Executive Vice President and Chief Financial Officer Doron Arazi stated the following in the company's 1Q 2015 conference call:
"Turning to the specific outlook for Q2, we expect revenue to be in the range of $90 million to $100 million. We expect Q2 to reflect the full effect of our expense reduction measures and we continue to target positive cash flow beginning in Q2. We expect gradual improvement in gross margin during the balance of the year and believe we are on track to reach our target of mid single-digit non-GAAP operating margin by the end of the year."
Ceragon recently announced that it will report its 2Q 2015 financial results on August 13, 2015. Just before 2Q ended Ceragon announced a significant contract worth over $13 million with a Tier-1 mobile in the Southern cone of South America. In the announcement, Ceragon's President and CEO commented:
"We place a great deal of emphasis on anticipating our customers' needs in order to offer a platform with multiple products that meet their current and future requirements, while also leveraging earlier investments. The extension of this longstanding relationship demonstrates our ability to provide lasting value as networks evolve."
In addition to its cost-cutting efforts, Ceragon is also working on improving collections and has shown progress in 1Q 2015 by reporting DSOs of 131 days down from 160 days. CEO Palti has a great incentive for improving on DSO performance as 10% of his bonus (or $16,500) is tied to meeting targets on this metric as shown on page 16 of the mostrecent proxy filed on June 16, 2015.
Because much of Ceragon's revenues come from developing countries(page 36 of most recent 20-F filing with the SEC), the Venezuela experience has made management more cautious and selective. In 4Q 2014 Ceragon took a $19 million dollar charge for dollar-denominated receivables due to the lack of dollars in Venezuela resulting from anti-American government policies there. Ceragon believes that it wil recoup some or of this money in the future because its clients there need Ceragon's technology. The Venezuela experience has forced the company to occasionally turn away potential business in risky countries. Without this limitation revenues would grow at a faster rate. To compensate for this, the company has been focusing its attention on gaining market share in the US. The US has only contributed 10% of the company's revenues in recent quarters.
The company believes that its IP-20 suite of products will gain global market share as mobile networks evolve. In a sector-related January 4, 2015 article, a Dell'Oro expert in the subject predicted that "Point-to-point Microwave Transmission radio unit shipments will grow at an average annual rate of nearly 10% through 2018." This is good news since the demand starting in the second half of 2014 has been flat-to-declining.
Management appears confident about the company's direction as reflected by significant insider buys executed in the least 12 months. According to a December 14, 2014 filing, Chairman Zohar Zisapel added a total of 3.3 million shares (or $1.9/share) and now owns 13.26% of Ceragon.
Conclusion
CRNT has made significant progress in its financial performance as seen in the sequential gains in operating results the last 5 consecutive quarters (see table above). This progress has apparently been noted by institutions as their holdings have increased as of March 31, 2015. Investors however do not seem to appreciate this progress as the stock has drifted South to a near all-time low for unrelated reasons such as the situation in Greece.
I believe that CRNT has the potential to double in short notice. And I am not alone believing as the four analysts covering the stock have a mean price target of $2.65. These analysts expect the company to post a profit for 2015 compared to a 40c/share loss in 2014. They see earnings of 18 cents per share in 2016. This is a significant improvement year-over-year since 2013. Ceragon is currently trading at a P/S ratio of only 0.22 which is very low compared to the sector average of 1.8.
If the company is able to deliver on analysts' expectations of break-even and cash-flow positive for 2Q 1015 to be reported in July 2015, the stock should bounce rapibly from the current dollar/share.
The significant insider buying by Chairman Zisapel should give investors even more confidence that accumulating CRNT shares at current prices is a safe investment with significant upside potential.
Investors interested in CRNT should do their own due diligence by carefully evaluating the risks and uncertainties as detailed in the company's SEC filings. In addition to the risks listed in SEC filings, there are other potentially adverse situations that could cause significant losses: 1) inability to accomplish cost-cutting objectives, 2) intense price competition could erode gross margins, 3) inability to collect in countries experiencing economic hardship, 4) loss of key talent to competition, and 5) failure to deliver products on time.