All right. Welcome, everyone, to Needham's 27th Annual Growth Conference. I'm Ryan Koontz. I cover the networking and communication sectors here at Needham. Really excited today to be joined by Ceragon Networks. We have CEO Doron Arazi, and CFO Ronen Stein. How are you, gentlemen?
Fine.
I'm fine. Good.
Great. Excellent. Well, lots to talk about, lots to unpack. Let's start with the announcement yesterday that you guys made an acquisition in the integrator space, I think. Can you tell us about that?
Yeah, sure. This is part of our strategy, and we have actually a single slide that can tell the story, so this definitely is part of our strategy to increase our presence in the private networks market, and the go-to-market strategy is not just to provide with our specific technology, but it is to become some sort of end-to-end solution provider to this market, and in this respect, end-to-end is a great fit for us. The three main assets that we are actually requiring are: A, market share, customers; B, system integration capabilities and experience; and C, which is very unique about this company, is their proprietary software that is being used to basically manage the networks and the different elements of the private networks, and in fact, this software is not just sold as part of their offering.
They are actually OEMing this software with a relatively big equipment provider to that specific industry that is selling their software all over the world.
It's primarily the utility space is where they're focused?
Yes, primarily energy and utility space. We are also strong in the energy, but we sell mostly offshore solutions. They are very strong at onshores. And in this situation, it creates a very nice synergy where we can go to the same customer and sell both offshore and onshore solutions.
Got it. And can you expand a little bit on the software capabilities in terms of what kind of is the scope of the management software?
Generally speaking, the software is, I would say, technology or vendor agnostic. And it can manage all the elements in the network, all the way to the sensors and IoT elements that sit at the edge of the network. And that provides with very good visibility and operational capability for the customer. And this is exactly what many of the potential customers are looking for, which is not just to have the network working, but also to be able to manage the network and to operate it in an efficient way, not using many network manager systems that are separate and heterogeneous for each and every element in the network.
Got it, so besides the software, do they also have a services business then?
Yes. They are very strong in providing services, starting from consultation and design of the network, and all the way of procuring the different elements of the network for the customer and deploying it, as well as, in some cases, they are also operating the network for the customer.
Sounds like a great fit. You've talked about expanding your presence in private networks. This is going to give you a great boost there.
Yeah. First of all, for us, it's a very important step to increase our market share in North America specifically. But with their expertise and their software capabilities, we believe that we can leverage that also to the segments of energy and utilities outside North America.
Got it. And so what type of revenue contribution are you expecting then from this company?
We expect the first year, the contribution to be between $15-$19 million.
Fantastic, and what type of margins does their business typically have?
Obviously, system integration margins are lower than our margins because they don't own the vast majority of the IP. With certain synergies that we see, I think that their margins will get closer to our average corporate margin towards the second part of 2025.
Today, do they already focus on your microwave sort of links networks?
They are also selling our equipment.
Oh, I see.
But they are also selling the access because they are providing with a full network solution to their customers.
Got it. Sounds like a really great fit. Congratulations.
Thank you.
Thank you. Maybe stepping back a little bit and talk at a high level, can you speak at a high level about the main drive, the main applications and drivers of your business globally from an application perspective?
Yeah.
Market verticals?
So generally speaking, I think we need to start with looking at our strategy and what we were able to achieve during the last two years, more or less. So the change we are driving is from being just a very strong radio provider primarily to the public network operators, especially the bigger one. We're basically augmenting this strength with some new business that we believe that is increasing our TAM. It will enable us to have a more sustainable growth that is less depending or impacted by the cyclical pattern of buying radio equipment by the big operators. And the main focus areas are actually two. In terms of customers, as I said, we are increasing our presence in the private network business. And in terms of technology and kind of business, we want to move more to solutions.
We want to offer more technologies that are beyond the point-to-point technology. We also want to increase our involvement in network operation by using software-led services that will create higher recurring revenue and better margins.
And so within those, let's kind of unpack that there in terms of the global operators. These are primarily mobile operators looking at backhaul. Is that the main driver?
Yeah. Yes.
In terms of geographies, can you walk us through a little bit in terms of the trends you've seen in the different global geographies there for backhaul?
Yeah, so generally speaking, our main regions are India and North America, at least for the last two years or so. In India, we see a huge, I would say, upgrade trend where companies like Vodafone Idea, BSNL, and to a certain degree, Bharti are continuously upgrading their network. Some of them are still working on upgrading from 3G- 4G, and some of them are already deploying 5G. So that's a trend where we are having very good years because of our relatively strong presence there. I think that we own more or less 60% of market share of the microwave and the millimeter wave business in India, which is a very sizable business for us. In terms of the trend, as I said, we saw a very nice ramp-up or pickup in 2024 because of these upgrade projects.
We believe that 2025 could be at least as good as 2024.
In India?
In India. In North America, the general market is relatively soft. Our position with one of the Tier 1 operators that believes and invests a lot in wireless transport is very strong, and in fact, we own very, very sizable market share there, and at least what we are seeing is that their intention is to continue with their plans, so while not exactly knowing when within 2025, we believe that 2025 is going to be more or less as good as 2024. The rest of the business in North America is impacted by many macroeconomic aspects, and generally speaking, the 5G rollout is not as people were expecting, so obviously, that impacts our business in North America as well. As for the rest of the regions, the rest of APAC looks quite good for us in relative terms.
We believe that 2025 can be also at least as it was in 2024 and maybe even better. As for the rest, which is primarily EMEA and Latin America, in Latin America, the business is very difficult in the CSP domain, primarily because of very high pressure coming from the Chinese.
Of course.
And the same situation we have seen in Africa that is part of EMEA. And obviously, these two things, plus the geopolitical situation in EMEA and the macroeconomy, are driving us to be very cautious about the business size that we'll see in both regions, Latin America and EMEA.
Got it. That's really helpful. Great overview. Let's talk about the stock a little bit. The stock's had a really nice move, almost a double here in the last couple of months.
Yeah.
What do you think's behind that?
First of all, I think that we have been constantly executing more or less since I joined back. We had a year and a half, the second part of 2021 and 2022, as very tough years, primarily because of the supply chain issues and the component issues that many of the other players in our industry suffered from and also in some other industries. We were able to kind of change the trajectory starting 2023. And I think that 2023 and 2024, obviously subject to Q4, were good years where we executed against our projections. And I think that this builds the confidence that management is strong and know what we are doing. More importantly, we are trying to come to the market and explain that our strategy of this relatively veteran company has changed.
And up until I came back to the company, the focus was the strongest radio selling primarily to the public networks, primarily to the big guys that have a lot of advantages, but also have some disadvantages. We are trying to basically diversify our business and augment this strength with some additional business that is based on our technology and capabilities that will create a more, I would say, stable and sustainable business for Ceragon. And I think this is the story that we are trying to convey to the market. We are also trying to show the progress, whether it's announcement of different wins, whether it's showing some indications about the progress in terms of numbers. And obviously, the recent deal of E2E is just another attestation that we are heading in this direction. Now, this is a big change.
It doesn't happen within a day, but we see very good signs that we are headed in the right direction, and it is successful for us, and this is why we believe that this story can change the mindset of potential investors about the potential of Ceragon.
I would just add that also from a financial point of view, our balance sheet improved along the way, that we also improved our operational leverage, our operating margins. I think it also has.
Can you walk us through a little bit of those numbers, Ronen, in terms of?
Yeah. If you can switch to the numbers slide, you can see that we slowly improved our operating margins, our Non-GAAP operating margins. We started in 2022 when Ron said that there were problems there with less than 5% around the very low operating margins. And then we constantly increased it to 7% and 8%. And we now target the 10% margin. And we also improved our gross margins. It fluctuates more than the operating margin, but still, we improved that. And when you look on the next slide on the balance sheet, you also see that in Q3 2024, we became also cash positive.
Fantastic.
Net cash positive.
How are you funding the acquisition of E2E?
So we can fund it from small acquisitions, both Siklu and E2E that we did now. We fund it from our internal funds, from the fact that we have enough room in our credit facilities, and it looks okay.
Great. Let's maybe shift to talking about technology a little bit and some of the newer innovations that you've discussed. I think you had a couple of new products come to market in 2024 and maybe some plans for 2025. Can you walk us through that?
Yeah. So generally speaking, in Q2 2024, we came with new versions of our all-outdoor products in both millimeter wave and in microwave. And obviously, the new product in microwave is doing great. This is the product that won the vast majority of the business for us in India. And we know that India is not an easy region in terms of price performance. And it was very, very well received. In the E-band, we came up with a new product that is called IP-50EX. It's a new design of product that maintains very strong capabilities, 10 gigabit per second, and things that are the current high end of the market. But at the same token, the design is such that I believe it's probably the lowest cost product in the market.
And while we came with this product, more or less launched it by mid of 2024, we started seeing demand and we started seeing some orders. And I believe that this product will help us take a bigger market share in this particular microwave market, millimeter wave market, sorry, in 2025. Actually, there's two new versions coming of this product. One is a long-distance product that can basically, with millimeter wave, multiply the distances. And this is a demand that we have seen from many of the public network operators that are looking for the benefit of the capacity that millimeter wave can give, but also for longer distance so their TCO will go down. And we have found a solution for that. And this is coming very soon.
Last but not least, by more or less mid of 2025, we'll have another version that fits very well into the India E-band demand. This basically is going to be a very compelling product. We already closed a framework agreement with some of the big operators in India that is talking about delivering this product that will make a big difference in terms of cost benefit also for the Indian market. Beyond that, as I said, we are investing in software. We came out with a smart key activation software. In essence, this is a solution that enables the operators to make changes in each and every box in the network remotely, increase capacity, use security, close security, and also configure and implement multiple boxes in one click.
And that is also a very strong baseline for software as a service or capacity as a service, to be more precise in the future, because through this software, if someone wants to buy our equipment, not as an equipment, but as a capacity as a service, we can meter and measure the performance of each and every box and actually send an invoice to the customer at the end of the month or at the end of the quarter based on the usage of the different features and the level of the capacity. So this is a revolutionary approach. We started seeing a lot of interest in it. There's at least one deal where we sold a time-based license rather than a perpetual license. And obviously, this is a very compelling event for us if we want to move more and more into a recurring business model.
As to 2025, there's a lot of things in our funnel. First of all, we intend to launch the first new product that will be based on our Neptune chip that we finished the development and the testing, and this is going to be a 100E product. This is going to be its name. It will be able to generate 25 gigabit per second in a relatively small box, and in terms of bomb cost, it will be probably the lowest cost and the cheapest bomb cost in the industry because of our chip's capabilities. We already started seeing some uptick in the interest in this very strong product.
So your ASICs there would give you a cost advantage?
Yes.
For BoM cost?
Yes. So eventually, we will be able to sell for a price that is probably lower than what the competition has today and with even slightly higher capacity by more or less 20% than the capacity that most of the competition are suggesting. But the cost for the customer will be by far lower because of the design of the product and because of our own chip. And moreover, the fact that it is a lower price to the customer doesn't mean that our gross margin is going to be eroded. It's the other way around. One more thing that is coming, obviously after a few years that we did not invest in split-mount solutions, we are coming with a new split-mount solution that we believe will be very competitive in the market.
There's more other things that we are going to do in 2025 that we are going to disclose as we move along and as we launch these products.
Yeah. Exciting things coming. That's great.
Sure.
Maybe shift into kind of the go-to-market motion and how you plan to address the traditional service provider market, and is that a different go-to-market motion than the private network opportunity you're pursuing?
Yeah. So the go-to-market of our core business has not changed significantly. I think we'll promote very strongly our millimeter wave because the combination of relatively longer distances and higher capacity are of probably the highest interest in the CSP domain. On top of that, because we also have a very strong platform that we developed for many years with one of our customers in Latin America, we have a very strong platform for providing managed services. It's what we call the Network Digital Twin. The idea is that this software platform can connect to any element in the transport network, whether it's fiber, wireless, whether it's our product or competitor product, and generate very important data so that the operator can analyze the full picture of the transport network and not via silo getting into each and every network management system of each and every element in the system.
And with this big picture, you can drive network efficiency. You can take tactical decisions. You can take strategic decisions. And obviously, this is part of our long-term strategy to become more involved in the operation of the network.
Sure. Getting better.
This, in terms of go-to-market strategy to our bigger CSPs, this is one of the things that we are promoting very, very aggressively. In fact, we have a few POCs with very prominent operators across the world that are running as we speak. I believe that we'll also have some success and get some business in this regard in 2025.
Got it. So will that show up as a services line, services product?
It will be, yes. It will be a services business.
Similar to your acquisition?
The acquisition is still more on the project model.
Right. Okay.
But this is a pure recurring business where you sell ongoing services that is a combination of a software platform and a certain level of support, sophisticated support by engineers that are driving the different use cases the customer wants them to drive.
Exciting, and so with regards to kind of your core business still in the 5G build, is the main driver there? It's rural coverage that really, as you look to expand coverage to rural areas, that's the main driver?
Yeah. I think the main opportunities at this point for us in the 5G is covering better the rural, plus helping with backhauling of the fixed wireless deployment. We just have a few cases where the fixed wireless generates a relatively sizable traffic. And the first backhaul piece is driven by either millimeter wave products that we are selling or microwave products.
Got it. And that fixed wireless, is that primarily for your own fixed wireless sales or also even other vendors?
Yes. It's primarily for others. We are running a very interesting discussion with one of the operators that is looking for a fixed wireless solution that is not as costly as the classic standard 5G fixed wireless access, and we believe that using the technology we acquired from Siklu, we can bring a much cheaper fixed wireless access technology at 26 gigahertz, 28 gigahertz. These are more or less the frequencies that are of an interest for fixed wireless solution. Time will tell whether we are going to embark on this journey, and I hope that within a couple of months, we'll know better. If this is of an interest, it will be another target addressable market for us that will give us even bigger opportunity to grow in the longer future.
Exciting. Maybe touching on competition a little bit in your primary markets here, North America and India. What sort of changes have you seen and who are your biggest names you compete with?
The main competitors in most cases are predominantly Nokia and Ericsson. Obviously, in the regions I mentioned, primarily Latin America and Africa, it's the Chinese domain.
Sure.
Every now and then, we see Aviat. I would say that we see Aviat and Nokia more in the private networks domain.
Yeah. I think Aviat's had some success in kind of the public safety, right?
Yes.
That's kind of in their lane. How about other emerging technologies? Are you seeing much of a threat from satellites or LEOs? Are any of your customers bringing those up as threats or opportunities? How do you think about that, the big picture?
This is something that internally we are discussing a lot. Look, the LEO could become a threat at a certain point. But I think that at least when looking, I don't know, five years ahead, the LEO cannot provide, even with all the installations that are planned by the LEO players, based on some analysis that we looked into and we have done, it cannot cover the whole population. So there is a threat there, but it's not going to create a situation where suddenly the traditional networks are redundant and are not needed to. So it's a threat to a certain degree.
Long-term?
Yes. Yet. We also need to emphasize that at least today, the level of capacity that LEO can provide, and more importantly, the reliability is not even close to the traditional networks, including obviously our wireless technology, and this is why we believe that at least in the coming years, we'll see the LEO as more of a backup or as a residential solution to very remote areas. At least at this point, it's hard for me to see how an enterprise that needs multiple gigabit capacity with very high level of reliability goes with a solution that used LEO, so for the longer term, for sure, it's something that we are looking at very carefully, and actually, there could be also an opportunity because these guys eventually need to connect to the ground, and they're using radios, and for that, we have seen a few opportunities.
We had multiple discussions with some of the players. I don't think it's, I would say, at the level of seriousness that they can say, "Wow, there's a breakthrough there." But long-term, it could be also an opportunity for us.
Excellent. We have a few minutes left. Any questions from the audience? Yes, sir.
What percentage of your business today is recurring? I guess where do you see that going over the next two, three years?
The question was, what percentage of the business today is recurring, and how do you see that evolving in the future?
Yeah. The current recurring business is, I would say, a few percent low-end, and with the new strategy, we are pushing to get to something that will be significant, which means anything between 20%- 30% in the long-term will be a great success for us.
Any other questions? Great. Would you like to say anything to wrap up, Doron?
Yeah. Look, we continue to execute in line with our strategy. It's a big change, and there's a lot of things going on within the company. It is taking time, obviously, because it's not an insignificant move, but the signs are very good, and we hope to continue in this trajectory of delivering to our expectations.