Description

Ceragon Networks (CRNT)

Price:  $3.00

Shares Out: 85MM

Market Cap: $255MM

Ent Val:  $259MM

EV / 2024 Sales / EBITDA:  .7x / 5.2x

NT / LTM EBITDA:  .1x

18-mo Price Target:  $5.50 (83% upside)

Situation Analysis

Ceragon Networks (“CRNT” or the “Company”) is a supplier of wireless backhaul solutions including radio units, management systems, small cell hauling, packet and hybrid microwave and long-haul solutions.  CRNT’s products enable customers to transition their networks toward 5G high-capacity connectivity. 

Customers include wireless service providers, public safety organizations, government agencies and utilities.  CRNT solutions are deployed by more than 460 service providers and hundreds of private network owners in more than 130 countries.  CRNT is headquartered in Israel.

Geography:  34% India, 27% North America, 13% LatAm, 11% Europe, 8% Africa, 7% APAC.

Key competitors include Aviat Networks (AVNW) and Airspan Networks.  In Q322, AVNW made an unsolicited offer to acquire CRNT at $3.08 / share (upsized from $2.80 / share).  The offer was rejected by the Company as the offer was deemed insufficient.

Some historical knocks on the Company in years past has been its disproportionate (and lower gross margin) business outside of North America, extended cash conversion, supply chain constraints, lumpiness in its order book as well as its Israeli domicile.   Currently, CRNT is increasing its penetration of North America which features higher gross margin business (typically 5-10% higher).

We think the market is overlooking several positive trends and developments over the past couple quarters that should continue to drive growth, margin expansion and free cash flow generation:

• Improved Growth and Margin Profile:  LTM y/y revenue growth of 12% y/y, gross margin expansion of ~300bps (34%) and EBITDA margin expansion ~300bps (10%). 
  • The last three quarters of CRNT’s performance have been remarkably solid with 16% y/y top line growth and EBITDA margins north of 10% the past three quarters.
• Large Contract Wins and Robust Backlog: Management recently signed a $150mm multi-year contract with a Tier 1 India operator which will create a revenue tailwind over the next 7-9 quarters starting around CYQ3 of this year.  While India gross margins have been historically lower than corporate average (mid 30s) this should allow the Company to leverage its SG&A.
  • Even with the margin dilutive India contract, management has indicated it expects revenue growth to exceed 10% and gross margins to exceed at least 36% (up from 34% LTM) as it converts a robust backlog of higher margin North America private network wins.
• Accretive Inorganic Growth: CRNT recently acquired Siklu Networks (“Siklu”), a provider of multi-Gigabit “wireless fiber” connectivity which should add ~$25-29MM of incremental revenue with consolidated gross margins significantly higher than CRNT’s historical gross margins.
  • While consideration for Siklu was undisclosed, we assume that CRNT acquired the working capital of Siklu, as Siklu was capital and product constrained to supply customers.  CRNT sees quick wins in micro and millimeter wave products and Siklu was unable to offer microwave products from its portfolio.
• New Product Introductions to Enhance Competitive Advantage:  CRNT has launched two new competitive radio products which are expected to deliver high performance in a compact form factor.  CRNT can make these products at a 30-40% lower cost to manufacture, which should provide an additional tailwind to gross margins. 
  • CRNT is also currently designing a System on a Chip (SoC) radio design (named Neptune) that will be capable of delivering best of class wireless bandwidth (up to 100-gigabit per second wireless transport link).   The launch of this product is expected to occur by the end of 2024.
  • Management thinks their innovative products and designs will help CRNT not only improve gross margins but also allow CRNT to gain further market share.
• Improved Balance Sheet and Cash Flow Characteristics:  Balance sheet has attained close to a net cash position and management has indicated the Company will generate free cash flow from this point forward.  LTM free cash flow was approximately $.10 a share and should inflect higher with accelerating growth and margin expansion.   We think it is reasonable that CRNT can double FCF this year and potentially triple FCF in 2025 from its current growth and margin expansion outlook.  

What is It Worth?

• Near Term Outlook:  Management has guided to 2024 revenue will be $385-405MM (inclusive of $27MM of Siklu revenue at the MP) with operating margins of at least 10%.  This translates into ~$50MM of EBITDA for an implied value of 5.2x EV / EBITDA.
• Long Term Outlook:  $500MM of revenue by 2026 (on year ahead of original plan) with gross margins of at least 35-38%, up from 34-36% prior.  Assuming 12% operating margins, this should translate into ~$70MM of EBITDA for an implied value of 3.7x EV / EBITDA.
• Not assuming heroic assumptions or a takeover premium, we think that CGNT should trade closer in line to its peers (7-9x).  AVNW currently trades at 8.5x 2024 EBITDA.
• Assuming 8x on EBITDA of $60MM (MP of short- and long-term guidance) translates into an intermediate-term share price of $5.50 per share, approximately 83% higher from current levels.  This price target excludes a takeover premium and / or a favorable utilization of capital to drive further value.

Risks

• Global economic slowdown.  Inability to collect from int’l customers in a timely manner.
• Contract delays, lumpiness of earnings.
• Continued political instability (Israel).

Catalyst

• Continued improvement of growth and margin profile.
• Botched integration of Siklu.
• Deployment of FCF (buybacks, accretive M&A, etc.).
• Takeout from larger competitor.  Synergies from the AVNW combination were contemplated to be ~$35MM.