ceragon networks ltd. - · pdf file2 ceragon networks ltd. quarterly consolitated statement of...

Ittai [email protected]

George [email protected]

Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. Asa result, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision. See "Important Disclosures and Certifications" section at the end of this report forimportant disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risksto Price Target" sections at the end of this report, where applicable.

Stock Price Performance

Q1 Q2 Q3 Q1 Q24

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2011

1 Year Price History for CRNT

Created by BlueMatrix

Company Description

Ceragon is a leading designer and

manufacturer of advanced, high

performance digital microwave radios

and other products for use in

communication systems and data

networks.

June 23, 2011 TECHNOLOGY/COMMUNICATION TECHNOLOGY

Stock Rating:

OUTPERFORM12-18 mo. Price Target $16.00

CRNT - NASDAQ $11.30

3-5 Yr. EPS Gr. Rate 20%

52-Wk Range $14.34-$7.13

Shares Outstanding 33.4M

Float 25.3M

Market Capitalization $377.8M

Avg. Daily Trading Volume 187,696

Dividend/Div Yield NA/NM

Fiscal Year Ends Dec

Book Value $5.04

2011E ROE 2.0%

LT Debt $0.0M

Preferred $0.0M

Common Equity $179M

Convertible Available No

EPS ProFormaQ1 Q2 Q3 Q4 Year Mult.

2008A 0.13 0.13 0.11 0.09 0.45 25.1x

2009A 0.03 0.03 0.05 0.10 0.20 56.5x

2010A 0.11 0.13 0.15 0.17 0.55 20.5x

2011E (0.02)A (0.03) 0.03 0.13 0.10 NM

2012E 0.15 0.19 0.24 0.32 0.90 12.6x

Revenue

($/mil)

Q1 Q2 Q3 Q4 Year Mult.

2008A 47.2 55.2 58.1 56.8 217.3 0.4x

2009A 43.9 42.2 44.7 53.4 184.2 0.4x

2010A 59.7 60.9 62.9 67.0 249.9 0.3x

2011E 100.3A 106.1 113.9 123.4 443.8 0.2x

Prior (E) 100.3 -- -- -- -- 0.2x

2012E 124.3 128.4 134.9 141.6 529.2 0.2x

Ceragon Networks Ltd.No News Is Good News

SUMMARY

Based on our channel checks we believe Ceragon will post largely in-line 2Q11

results as well as provide in-line 3Q11 guidance. We expect this to be viewed

positively by investors considering the still high number of moving parts related to

Ceragon's Nera acquisition and the initial disappointment from Nera's higher than

expected expense levels. Our checks suggest Ceragon has largely completed its

planned head count reduction and continues to gradually convert Nera short-haul

customers to its own short-haul products. With a solid quarter of execution and no

"surprises," we believe investor confidence in the company's ability to turn Nera

around will rise. We maintain our Outperform rating and $16 price target.

KEY POINTS

■ Expect in-line results and guidance. Based on our checks we believe

Ceragon's quarter has progressed to plan with balanced demand across

Ceragon's various regions. We'd look for management to stick to its acquisition

and business targets and believe the company is positioned to guide in line with

consensus.

■ Head count reductions largely complete. Based on our checks we believe

Ceragon has nearly completed its planned head count reductions following

Nera's acquisition. We expect Ceragon to hold its OpEx levels stable at $35M

for 2-3 quarters despite unfavorable FX movement.

■ Nera short-haul conversion continues. We believe Ceragon has managed to

convert additional Nera short-haul customers to Ceragon's platform. We believe

that by year-end all of Nera's key customers would transfer, which should set

the tone for a gradual gross margin improvement as the conversion ensues.

■ Long-haul customers also sticking. Our checks suggest Nera's long-haul

customer base is also seeing no meaningful disruption from the acquisition. The

key here is continued product development to add features and optimize cost,

which is on track for helping margins in 2012.

■ Bottom line. With Nera's high expense levels now addressed, we believe

investors can now focus on the pace of margin improvement. We're comfortable

that the short-haul customer conversion is going well—a key gross margin

driver—and believe the long-haul product development is on schedule for

driving improvements in 2012. Maintain Outperform.

EQUITY RESEARCH

COMPANY UPDATE

Oppenheimer & Co Inc. 300 Madison Avenue New York, NY 10017 Tel: 800-221-5588 Fax: 212-667-8229

2

Ceragon Networks Ltd.

Quarterly Consolitated Statement of Income ($ in Thousands, Except Per Share Data)

1Q11A 2Q11E 3Q11E 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E

2010A Mar-11 Jun-11 Sep-11 Dec-11 2011E Mar-12 Jun-12 Sep-12 Dec-12 2012E

Ceragon core $249,852 $70,218 $70,921 $75,176 $80,814 $297,129 $80,814 $83,238 $87,400 $91,770 $343,223

Nera acquired 0 30,094 35,210 38,730 42,604 146,637 43,456 45,194 47,453 49,826 185,929

Total Revenue $249,852 $100,312 $106,130 $113,906 $123,418 $443,766 $124,270 $128,432 $134,854 $141,597 $529,152

Cost of Revenues 160,155 67,833 72,036 76,990 82,682 299,541 82,822 84,944 88,242 91,658 347,666

Gross Profit $89,697 $32,479 $34,094 $36,917 $40,736 $144,225 $41,447 $43,488 $46,612 $49,939 $181,486

Research and Development, net 23,150 11,041 12,311 12,302 12,342 47,996 12,303 12,586 13,081 13,593 51,563

Selling and Marketing 36,002 16,661 17,830 17,769 17,772 70,032 17,771 17,724 18,205 17,841 71,541

General and Administrative 10,428 4,592 4,882 5,012 5,122 19,608 5,095 5,137 5,259 5,522 21,014

Operating Income (Loss) $20,117 $185 ($929) $1,834 $5,500 $6,589 $6,279 $8,041 $10,066 $12,982 $37,368

Other Income (Expense) 1,255 (447) (450) (450) (450) (1,797) (425) (400) (400) (400) (1,625)

Pretax Income $21,372 ($262) ($1,379) $1,384 $5,050 $4,792 $5,854 $7,641 $9,666 $12,582 $35,743

Taxes 1,178 595 (138) 138 505 1,100 585 764 967 1,258 3,574

Net Income (Loss) $20,194 ($857) ($1,241) $1,245 $4,545 $3,692 $5,269 $6,877 $8,700 $11,324 $32,169

Diluted Pro Forma EPS $0.55 ($0.02) ($0.03) $0.03 $0.13 $0.10 $0.15 $0.19 $0.24 $0.32 $0.90

GAAP Expenses (6,132) (20,519) (500) (500) (500) (22,019) (500) (500) (500) (500) (2,000)

GAAP Net Income (Loss) $14,062 ($21,376) ($1,741) $745 $4,045 ($18,327) $4,769 $6,377 $8,200 $10,824 $30,169

Diluted GAAP EPS $0.38 ($0.60) ($0.05) $0.02 $0.11 ($0.51) $0.13 $0.18 $0.23 $0.30 $0.85

Shares Outstanding 36,592 35,604 35,604 35,604 35,604 35,604 35,604 35,604 35,604 35,604 35,604

Source: Company data, Oppenheimer & Co. Inc.


3


Quarterly Margin and Growth Analysis



Margin Analysis

Ceragon Core Proforma Gross Margin 35.9% 37.3% 37.3% 37.0% 36.7% 32.5% 36.5% 36.5% 36.5% 36.5% 34.3%

Nera Proforma Gross Margin 20.8% 21.7% 23.5% 26.0% 27.5% 29.0% 31.0% 33.0%

Blended Gross Margin 32.4% 32.1% 32.4% 33.0% 32.5% 33.4% 33.9% 34.6% 35.3% 34.3%

Research and Development, net 9.3% 15.7% 11.6% 10.8% 10.0% 10.8% 9.9% 9.8% 9.7% 9.6% 9.7%

Selling and Marketing 14.4% 23.7% 16.8% 15.6% 14.4% 15.8% 14.3% 13.8% 13.5% 12.6% 13.5%

General and Administrative 4.2% 6.5% 4.6% 4.4% 4.2% 4.4% 4.1% 4.0% 3.9% 3.9% 4.0%

Proforma Operating Income 8.1% 0.2% -0.9% 1.6% 4.5% 1.5% 5.1% 6.3% 7.5% 9.2% 7.1%

Pretax Income 8.6% -0.4% -1.3% 1.2% 4.1% 1.1% 4.7% 5.9% 7.2% 8.9% 6.8%

Tax Rate 5.5% -227.1% 10.0% 10.0% 10.0% 23.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Net Income 8.1% -1.2% -1.2% 1.1% 3.7% 0.8% 4.2% 5.4% 6.5% 8.0% 6.1%

Sequential Growth Rates

Ceragon Core Revenue 4.8% 1.0% 6.0% 7.5% 0.0% 3.0% 5.0% 5.0%

Nera Revenue 17.0% 10.0% 10.0% 2.0% 4.0% 5.0% 5.0%

Ceragon Revenue 49.8% 5.8% 7.3% 8.4% 0.7% 3.3% 5.0% 5.0%

Gross Profit 30.7% 5.0% 8.3% 10.3% 1.7% 4.9% 7.2% 7.1%

Operating Income -97.1% -602.2% -297.4% 200.0% 14.2% 28.1% 25.2% 29.0%

Net Income -114.0% 44.8% -200.3% 265.0% 15.9% 30.5% 26.5% 30.2%

Year-over-Year Growth Rates

Ceragon Revenue 35.6% 68.1% 74.3% 82.9% 84.3% 77.6% 23.9% 21.0% 18.4% 14.7% 19.2%

Gross Profit 46.6% 58.9% 58.3% 61.4% 64.0% 60.8% 27.6% 27.6% 26.3% 22.6% 25.8%

Operating Income 221.3% -95.5% -120.2% -64.0% -12.9% -67.2% 3294.1% -965.5% 449.0% 136.0% 467.1%

Net Income 177.8% -121.5% -127.0% -77.2% -25.9% -81.7% -714.8% -654.1% 598.6% 149.2% 771.3%

EPS 176.6% -122.2% -127.6% -76.8% -23.0% -81.2% -714.8% -654.1% 598.6% 149.2% 771.3%



4


Quarterly Consolidated Balance Sheet ($ in Thousands)



Assets

Cash, Deposits and Securities $68,445 $71,349 $7,859 ($7,748) ($23,471) ($23,471) ($19,955) ($21,799) ($26,437) ($29,067) ($29,067)

Inventories 65,921 114,770 173,467 186,177 201,722 201,722 203,115 209,919 220,415 231,436 231,436

Trade Receivables, net 88,074 125,780 133,574 142,759 153,314 153,314 153,574 157,508 163,624 169,957 169,957

Other Current Assets 19,482 33,612 33,612 33,612 33,612 33,612 33,612 33,612 33,612 33,612 33,612

Total Current Assets $241,922 $345,511 $348,511 $354,800 $365,177 $365,177 $370,346 $379,240 $391,214 $405,938 $405,938

PP&E, net 16,211 26,605 26,955 27,305 27,655 27,655 28,005 28,355 28,705 29,055 29,055

Goodwill and Intangible assets, net - 51,740 51,740 51,740 51,740 51,740 51,740 51,740 51,740 51,740 51,740

Long-Term Deposits and Securities 19,127 6,789 6,789 6,789 6,789 6,789 6,789 6,789 6,789 6,789 6,789

Severance Pay Funds and Def. Taxes/Other 9,922 19,813 19,713 19,613 19,513 19,513 19,413 19,313 19,213 19,113 19,113

Total Assets $287,182 $450,458 $453,708 $460,247 $470,874 $470,874 $476,293 $485,437 $497,661 $512,635 $512,635

Liability & Shareholders' Equity

Trade Payables $40,537 $72,485 $76,977 $82,270 $88,352 $88,352 $88,502 $90,769 $94,294 $97,944 $97,944

Deferred Revenues 20,661 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078 51,078

Other Current Liabilities 13,215 68,387 68,387 68,387 68,387 68,387 68,387 68,387 68,387 68,387 68,387

Total Current Liabilities $74,413 $191,950 $196,442 $201,735 $207,817 $207,817 $207,967 $210,234 $213,759 $217,409 $217,409

Accrued Severance Pay 8,600 12,960 12,960 12,960 12,960 12,960 12,960 12,960 12,960 12,960 12,960

Other Long-Term Liabilities 0 66,273 66,273 66,273 66,273 66,273 66,273 66,273 66,273 66,273 66,273

Total Liabilities $83,013 $271,183 $275,675 $280,968 $287,050 $287,050 $287,200 $289,467 $292,992 $296,642 $296,642

Shareholders' Equity 204,169 179,275 178,034 179,279 183,824 183,824 189,093 195,970 204,669 215,993 215,993

Total Liabilities and Equity $287,182 $450,458 $453,708 $460,247 $470,874 $470,874 $476,293 $485,437 $497,661 $512,635 $512,635



5


Quarterly Consolidated Ratios ($ in Thousands, Except Per Share Data)



Profitability Ratios

Annualized Return On Equity 9.9% -1.9% -2.8% 2.8% 9.9% 2.0% 11.1% 14.0% 17.0% 21.0% 14.9%

Annualized Return On Assets 7.0% -0.8% -1.1% 1.1% 3.9% 0.8% 4.4% 5.7% 7.0% 8.8% 6.3%

Annualized Return On Net Assets 10.1% -1.1% -1.6% 1.6% 5.7% 1.2% 6.5% 8.4% 10.4% 13.2% 9.4%

Efficiency Ratios

A/R Days Sales Outstanding 96.3 147.1 147.1 147.1 147.1 247.8 147.1 147.1 147.1 147.1 246.1

A/P Days Sales Outstanding 92.4 96.2 96.2 96.2 96.2 107.7 96.2 96.2 96.2 96.2 102.8

Inventory Turns 1.8 2.2 2.2 2.2 2.2 2.0 2.2 2.2 2.2 2.2 2.0

Days of Inventory 200.7 166.9 166.9 166.9 166.9 186.8 166.9 166.9 166.9 166.9 178.4

Liquidity Ratios

Current Ratio 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.9

Quick Ratio 1.1 1.1 1.1 1.0 1.0 1.1 1.1 1.1

Net Working Capital $153,561 $152,070 $153,065 $157,360 $162,379 $169,006 $177,455 $188,529

Long-term Debt/Equity 7.2% 7.3% 7.2% 7.1% 6.9% 6.6% 6.3% 6.0%

Total Debt/Equity 35.7% 36.0% 35.7% 34.8% 33.9% 32.7% 31.3% 29.6%

Book Value and Cash

Book Value Per Share $5.04 $5.00 $5.04 $5.16 $5.31 $5.50 $5.75 $6.07

Tangible Book Value Per Share 4.84 4.81 4.84 4.97 5.12 5.31 5.56 5.88

Cash Per Share 2.19 0.41 ($0.03) ($0.47) ($0.37) ($0.42) ($0.55) ($0.63)

Net Cash Per Share 0.40 ($1.39) ($1.83) ($2.27) ($2.17) ($2.22) ($2.35) ($2.42)



6


Quarterly Consolidated Cash Flow Statement ($ in Thousands)



Cash Flow from Operations

Net Income $20,194 ($857) ($1,241) $1,245 $4,545 $3,692 $5,269 $6,877 $8,700 $11,324 $32,169

(Inc.) Dec. in Inventories 4 (48,849) (58,697) (12,710) (15,546) (135,801) (1,393) (6,804) (10,496) (11,021) (29,713)

(Inc.) Dec. in Trade Receivables (19,622) (37,706) (7,794) (9,185) (10,555) (65,240) (260) (3,934) (6,116) (6,333) (16,644)

(Inc.) Dec. in Other Current Assets (8,528) (14,130) 0 0 0 (14,130) 0 0 0 0 0

Inc. (Dec.) in Trade Payables (12,361) 31,948 4,492 5,293 6,083 47,815 150 2,267 3,524 3,650 9,591

Inc. (Dec.) in Deferred Revenues 2,113 30,417 0 0 0 30,417 0 0 0 0 0

Inc. (Dec.) in Other Current Liabilities 3,368 55,172 0 0 0 55,172 0 0 0 0 0

(Inc.) Dec. in Op. Working Capital ($35,026) $16,852 ($61,999) ($16,602) ($20,018) ($81,767) ($1,503) ($8,471) ($13,087) ($13,704) ($36,765)

Net Cash Flow from Operations ($14,832) $15,995 ($63,240) ($15,356) ($15,473) ($78,075) $3,766 ($1,594) ($4,388) ($2,380) ($4,596)

Cash Flow from Investing Activities

Cap. Ex. (Net of D&A) (4,402) (10,394) (350) (350) (350) (11,444) (350) (350) (350) (350) (1,400)

(Inc.) Dec. in Other Long-Term Assets (2,062) (49,293) 100 100 100 (48,993) 100 100 100 100 400

Net Cash Flow from Investing (6,464) ($59,687) (250) ($250) ($250) (60,437) ($250) ($250) ($250) ($250) (1,000)

Cash Flow from Financing Activities

(Inc.) Dec. in Long-Term Liabilities 1,426 70,633 0 0 0 70,633 0 0 0 0 0

Other Equity Activity 3,069 (24,037) (0) 0 0 (24,037) 0 0 0 0 0

Net Cash Flow from Financing Activities $4,495 $46,596 ($0) $0 $0 $46,596 $0 $0 $0 $0 $0

Beginning Cash Balance $85,246 $68,445 $71,349 $7,859 ($7,748) $68,445 ($23,471) ($19,955) ($21,799) ($26,437) ($23,471)

Total Change in Cash (16,801) 2,904 (63,490) (15,606) (15,723) (91,916) 3,516 (1,844) (4,638) (2,630) (5,596)

Ending Cash Balance $68,445 $71,349 $7,859 ($7,748) ($23,471) ($23,471) ($19,955) ($21,799) ($26,437) ($29,067) ($29,067)



7

Ceragon Networks Ltd.Company Details ($ in Thousands)



Sales by Geography:

North America $13,041

Europe, Middle East and Africa 40,125

Asia-Pacific 17,053

Latin America 30,094

Total $100,312

% of Total:

North America 13.0%

Europe, Middle East and Africa 40.0%

Asia-Pacific 17.0%

Latin America 30.0%

Total 100.0%

Revenue Breakdown:

Cellular Backhaul

Metro Area Networks

Private Networks

Total

% of Total:

Cellular Backhaul

Metro Area Networks

Private Networks

Revenue Breakdown:

IP Solutions

SDH-Related

Total

% of Total:

IP Solutions

SDH-Related

Customer Data:

Nokia

Customer B

Customer C

* = Less than 10% of total revenue

Revenue Breakdown:

OEM $7,022

Carrier/Other $63,197

Total $100,312

% of Total:

OEM 10.0%

Carrier/Other 90.0%



8

Ceragon Networks Ltd.Company Details ($ in Thousands)



Guidance

Revenue $100 - $110

Actual/Model $106.1

EPS NA

Actual/Model ($0.03)



9

Investment Thesis

We view Ceragon as well positioned to benefit from increased wireless broadband traffic and the upcoming 4G transition. We believe

backhaul is one of the most common bottlenecks in wireless network performance and that increased spending in this area to relieve

pressure will benefit Ceragon.

Price Target Calculation

Our price target for Ceragon is $16.00, which is based on an 18x multiple of our 2012 EPS estimate of $0.90. An 18x P/E multiple is

slightly higher than Ceragon's two-year historical average of 16.5x, but it's well below the low-30x area where Ceragon has traded when

stronger market dynamics were in place.

Key Risks to Price Target

A number of key risks, if they were to come to pass, could change our assessment of the fair value of the stock. Ceragon operates in a

highly competitive market that includes both focused microwave radio companies, as well as much larger and vertically integrated

wireless infrastructure OEMs. Meanwhile, much of the company's growth prospects for IP-oriented radios is contingent on the

development of the 4G LTE and WiMAX markets. The timing and size of 4G deployments and customer wins are likely to be lumpy and

difficult to predict as the market is still early in its life-cycle. Finally, the company has execution risk with integration acquisitions.

Important Disclosures and CertificationsAnalyst Certification - The author certifies that this research report accurately states his/her personal views about the

subject securities, which are reflected in the ratings as well as in the substance of this report.The author certifies that no

part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views

contained in this research report.

Potential Conflicts of Interest:

Equity research analysts employed by Oppenheimer & Co. Inc. are compensated from revenues generated by the firm

including the Oppenheimer & Co. Inc. Investment Banking Department. Research analysts do not receive compensation

based upon revenues from specific investment banking transactions. Oppenheimer & Co. Inc. generally prohibits any

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interest.


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3

6

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2009 2010 2011

10/28/10O:$14

01/19/11O:$16

Rating and Price Target History for: Ceragon Networks Ltd. (CRNT) as of 06-22-2011

Created by BlueMatrix

All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer &

Co. Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price

histories, please write to Oppenheimer & Co. Inc., 300 Madison Avenue, New York, NY 10017, Attention: Equity Research

Department, Business Manager.

Oppenheimer & Co. Inc. Rating System as of January 14th, 2008:

Outperform(O) - Stock expected to outperform the S&P 500 within the next 12-18 months.

Perform (P) - Stock expected to perform in line with the S&P 500 within the next 12-18 months.

Underperform (U) - Stock expected to underperform the S&P 500 within the next 12-18 months.

Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential

conflict of interest.

Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008:

Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments,

and/or the ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector.

Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to

a perceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than

higher rated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy,

aggressive trading accounts might decide to liquidate their positions to employ the funds elsewhere.

Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness

perceived in the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group.


11

Distribution of Ratings/IB Services Firmwide

IB Serv/Past 12 Mos.

Rating Count Percent Count Percent

OUTPERFORM [O] 318 54.60 139 43.71

PERFORM [P] 255 43.80 85 33.33

UNDERPERFORM [U] 9 1.50 1 11.11

Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do not

correlate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assigned

buy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform.

Company Specific DisclosuresOppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3

months from CRNT.

In the past 12 months Oppenheimer & Co. Inc. or an affiliate has received compensation for non-investment banking

services from CRNT.

In the past 12 months Oppenheimer & Co. Inc. has provided non-investment banking, securities-related services for

CRNT.

Oppenheimer & Co. Inc. makes a market in the securities of CRNT.

Additional Information Available

Please log on to http://www.opco.com or write to Oppenheimer & Co. Inc., 300 Madison Avenue, New York, NY 10017,

Attention: Equity Research Department, Business Manager.

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12

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