The Wall Street Journal-20080213-Ceragon Sees Growth Prospects
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Ceragon Sees Growth Prospects
Full Text (898 words)Ceragon Networks Ltd. loves seeing people glued to their cellphones as they text friends, surf the Internet or download video clips.
That's because more wireless activity means a larger burden on the wireless-service providers carrying that traffic. Enter Ceragon, an Israeli company that provides cost-effective microwave radios and other equipment that can help ease that load.
The stock took a hit recently because investors weren't pleased with the company's full-year forecast. But Ceragon sees a number of growth opportunities, including emerging markets and new wireless technology WiMax. After falling 60% from its year-high in October, the stock looks cheap.
"The growth prospects for Ceragon, as well as the microwave-backhaul industry as a whole, are really the best in the wireless infrastructure area," said Pacific Crest analyst James Faucette, who has a buy rating and $13 price target on Ceragon.
Wireless backhaul is the portion of the network that connects cellular towers to the carrier's main switch. It is a cost-effective alternative to digging and installing fiber and copper lines in the ground, particularly in rural and emerging markets.
While it may not be considered the sexiest investment out there, wireless backhaul networking is becoming increasingly important to carriers as demand for data devices and smartphones -- such as Apple Inc.'s iPhone and Research in Motion Ltd.'s BlackBerry -- increases.
When Ceragon reported its 2007 earnings Jan. 28, the company said full-year sales increased 49% to $161.9 million from the previous year. But shares fell 17% as the company maintained its revenue forecast of 25% to 30% growth in 2008. To be sure, investors have become accustomed to Ceragon historically beating analyst expectations and raising its forecast, so sticking to its original estimates created the sell-off.
Shares have fallen more than 60% since hitting a 52-week high of $21.89 on Oct. 2. The company priced a secondary offering in November, which may have put some pressure on the stock, Morgan Joseph analyst Kevin Dede said. In addition, investors realized the credit crunch was going to have a global impact as the year progressed, hurting small- cap tech stocks, he added. Yesterday, shares of Ceragon were down 15 cents, or 1.8%, to $8.35 in 4 p.m. composite trading on the Nasdaq Stock Market.
Ceragon has faith its wireless-backhaul equipment will continue to grow in emerging markets, where subscriber growth is rampant.
"In the developing world, where most of Ceragon's products are used, we are still in early- to mid-innings in terms of new network deployments and capacity upgrades," said analyst Matthew Robison of Ferris Baker Watts.
Subscriber growth in emerging markets is one of the key drivers for Ceragon. The Asia Pacific region accounted for 49% of its 2007 sales. The company has five customers in India, which make up the majority of its revenue. But there are additional opportunities in Pakistan, Indonesia and Malaysia, whose booming populations are consistently adding new subscribers.
"Those countries are very under-penetrated in terms of telecom services," said Collins Stewart analyst Rich Church. The region is adding millions of subscribers a month on basic voice services alone. Three of the customers in India are direct customers. In the other two deals, Ceragon licenses its equipment to Nokia Siemens Networks, which is a joint venture between Nokia Corp. and Siemens AG, through an original-equipment-manufacturing, or OEM, deal.
Ceragon's global presence has helped shield it from a consumer slowdown or possible recession in the U.S., said Ceragon Chief Executive Ira Palti. Only 15% of Ceragon's 2007 sales came from the North American region.
"We don't foresee a slowdown going forward," Mr. Palti said in an interview. "From a global economic perspective, we are less vulnerable to any specific economy."
Mr. Church said the company has already shipped trial systems to three wireless service providers in Europe and is in discussions with multiple carriers in North America.
However, there are concerns surrounding Ceragon's OEM partners, which accounted for only 11% of its fourth-quarter revenue, compared with 33% in the year-earlier period.
Mr. Palti said Nokia Siemens Networks is typically Ceragon's largest OEM partner. Some industry observers are concerned that the Nokia Siemens joint venture will hurt Ceragon. Siemens offers high-speed radio transmitters that Nokia could use, making Ceragon's products irrelevant. Mr. Palti said sales from Nokia Siemens are expected to be flat in 2008 compared with the previous year.
Pacific Crest's Mr. Faucett said he doesn't see a Nokia Siemens microwave product impacting Ceragon until late 2009 at the earliest.
Ceragon is keeping close tabs on the Sprint Nextel Corp. WiMax project. Sprint recently rekindled talks with Clearwire Corp. to build a high-speed wireless network using WiMax technology. If plans for the network go through, Ceragon could provide Sprint with backhaul links for the network.
WiMax is designed to provide wireless Internet access for laptops and mobile devices at speeds comparable to land-line connections.
Mr. Dede of Morgan Joseph said Ceragon's microwave units would help Sprint manage surging bandwidth needs on its WiMax network. Sprint will probably allocate contracts based on geography, so there will be many contracts divvied out across the U.S., he added.
Microwave units are useful if there isn't copper or fiber laid in the ground, which is common in rural and suburban areas. Ceragon units are generally irrelevant in cities because carriers can use the existing fiber.
There is no guarantee the joint venture will materialize as other potential deals have been scrapped.
