Ceragon sees annual losses...keeps up pressure on Aviat Networks

Shares of wireless equipment maker Ceragon Networks Ltd. edged higher Tuesday even as the company reported broadening losses. Ceragon Networks makes equipment used in high-capacity back-end networks that connect wireless towers to the Internet and other central telecommunications networks.

The company recorded $14.4 in charges from the acquisition of Norway's Nera Networks AS in a $48.5 million deal. "Overall Ceragon remains on track with the Nera integration, which should lead to significant benefits in 2012," said Jefferies & Co. analyst Peter Misek. "Also, our checks indicate that wireless backhaul remains one of the main bottlenecks for surging data traffic, and we believe Ceragon will be a key beneficiary."

The company reported a net loss of $17.4 million, or 48 cents per share, on $110.4 million in revenue for the three months ended June 30. That compares with net income of $2.6 million, or 7 cents per shares, on $60.9 million in revenue for the same period a year earlier.

Excluding special items, Ceragon Networks reported a loss of 4 cents per share for the latest quarter. Wall Street on average had expected Ceragon Networks to report a loss of 3 cents per share excluding items on $106.3 million in revenue for the period. Company shares rose 21 cents to $9.75 in midday trading Tuesday.

Revenues for the second quarter of 2011 reached $110.4 million, up 81% from $60.9 million for the second quarter of 2010, and up 10% from $100.3 million in the first quarter of 2011.

Net loss in accordance with US Generally Accepted Accounting Principles (GAAP) for the second quarter of 2011 was ($17.4) million or $(0.48) per basic share and diluted share, compared to net income of $2.6 million in the second quarter of 2010, or $0.07 per basic share and diluted share.

On a non-GAAP basis, net loss for the second quarter, excluding (a) $1.4 of equity-based compensation expenses, and (b)$14.4, million charges related to the Nera acquisition and integration plan, was ($1.6) million , or $(0.04) per basic share and diluted share. Non-GAAP net income for the second quarter of 2010 was $4.6 million, or $0.13 per basic and diluted share (please refer to the accompanying financial tables for reconciliation of GAAP financial information to non-GAAP).

Gross margin on a GAAP basis in the second quarter of 2011 was 21.4% of revenues. Gross margin on a non-GAAP basis was 31.9% of revenues. Operating loss on a GAAP basis in the second quarter of 2011 was ($16.2) million. On a non-GAAP basis operating loss was ($470,000).

The wireless backhaul business, although decades old, has found some new life in the past few years as cellular carrier companies are having to ramp up their data capacity rapidly to accommodate smartphones and iPads. At the same time, most carriers are planning to convert to HSPA and LTE and while carriers are upgrading their cell towers, they tend to upgrade their backhaul at the same time.

Maravedis, a market research company that has long focussed on the backhaul market reported in May,2011 that the microwave backhaul equipment market is expected to surpass US$ 12 billion by 2016. During 2010 they stated PtP microwave backhaul market reached US$ 4.74 billion.

They also estimated that “During the next 5 years the microwave market will continuously grow, mainly driven by the need for operators to deploy new base stations to provide good quality of experience over LTE networks.”

Aviat Networks has a small but significant share of in the wireless backhaul business. They have lost share to the likes of Ceragon and Dragonwave who focused on IP packet transmission while companies like Aviat were making the majority of their revenue from transmitting the legacy TDM circuits that have been typical in the telco industry.

However, the older line companies are gradually getting caught up as they produce more competitive and more IP oriented products. Aviat has lost market share during the past five years, but still is one of the larger shareholders in the industry. They have continued to invest in R&D, while restructuring the business and reducing expenses in other parts of the business.

According to VineSecurity.com, Aviat still has a relatively healthy balance sheet. "IF our optimistic assumptions for growth and profitability could be achieved, we believe the stock could justify price in the $7 range. This indicates that the stock price has already been discounted to reflect recent poor performance" said the report. At current prices near $4.20 the market is already being cautious about Aviat." We agree with the market and we plan to wait and see how the new management executes. If we see a couple of quarters of steady handed execution, we would consider buying at current prices".