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INTRODUCTION
Definitions
In this annual report, unless the context otherwise requires:
| · | references to “Ceragon,” the “Company,” “us,” “we” and “our” refer to Ceragon Networks Ltd. (the “Registrant”), an Israeli company, and its consolidated subsidiaries; |
references to “Ceragon,” the “Company,” “us,” “we,” “our” and the “registrant” refer to Ceragon Networks Ltd., an Israeli company, and its consolidated subsidiaries;
| · | references to “ordinary shares,” “our shares” and similar expressions refer to the Registrant’s Ordinary Shares, NIS 0.01 nominal (par) value per share; |
references to “ordinary shares,” “our shares” and similar expressions refer to our Ordinary Shares, NIS 0.01 nominal (par) value per share;
| · | references to “dollars,” “U.S. dollars” and “$” are to United States Dollars; |
references to “dollars,” “U.S. dollars”, “USD” and “$” are to United States Dollars;
| · | references to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency; |
references to “shekels” and “NIS” are to New Israeli Shekels, the Israeli currency;
| · | references to the “Companies Law” are to Israel’s Companies Law, 5759-1999; |
references to the “Companies Law” are to Israel’s Companies Law, 5759-1999;
| · | references to the “SEC” are to the United States Securities and Exchange Commission; and |
references to the “SEC” are to the United States Securities and Exchange Commission; and
| · | references to the "Nasdaq Rules" are to rules of the Nasdaq Global Select Market. |
references to the "Nasdaq Rules" are to the rules of the Nasdaq Global Select Market.
Cautionary Statement Regarding Forward-Looking Statements
This annual report on Form 20-F includes certain statements that are intended to be, and are hereby identified as, “forward-looking“forward-looking statements” forwithin the purposesmeaning of the safe harborSecurities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events.
Forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “assume,” “expect,” “anticipate,” “estimate,” “continue,” “believe” or other“believe,” “potential,” “possible,” “intend” and similar expressions butthat are intended to identify forward-looking statements, although not the only wayall forward-looking statements contain these statements are identified.identifying words. These forward-looking statements discuss future expectations, plans and events, contain projections of results of operations or of financial condition or state other “forward-looking” information. When a forward-looking statement includes an underlying assumption, we cautionThey involve known and unknown risks and uncertainties that while we believemay cause the assumptionactual results, performance or achievements of Ceragon to be reasonable and make it in good faith, assumed facts almost always varymaterially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause our actual results andto differ materially from those projected in the difference between a forward-looking statement and actual results can be material. Forward-looking statements may be found in include, without limitation, the risk factors set forth under “Item 3. Key Information Risk Factors,” the information about us set forth under Item 4. “INFORMATION ON THE COMPANY” and , the information related to our financial condition under Item 5. “OPERATING AND FINANCIAL REVIEW AND PROSPECTS”, and information included in this annual report generally. Our actual results could differ materially from those anticipated in these statements as a result of various factors, including all the risks discussed in “Risk Factors” and other cautionary statements in this annual report. All of ourAny forward-looking statements are qualified byrepresent Ceragon’s views only as of the date hereof and should not be read in conjunction with those disclosures. Exceptrelied upon as may berepresenting its views as of any subsequent date. Ceragon does not assume any obligation to update any forward-looking statements unless required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this annual report might not occur.law.
PART I
ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERSITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE3.KEY INFORMATION
A. Selected financial data
[Reserved]
B.Capitalization and indebtedness
Not applicable.
ITEM 3.KEY INFORMATIONC.Reasons for the offer and use of proceeds
Selected Consolidated Financial DataNot applicable.
The selected financial data set forth in the table below have been derived from our audited historical financial statements for each of the years from 2013 to 2017. The selected consolidated statement of operations data for the years 2015, 2016 and 2017, and the selected consolidated balance sheet data at December 31, 2016 and 2017, have been derived from our audited consolidated financial statements set forth in Item 18. “FINANCIAL STATEMENTS.” The selected consolidated statement of operations data for the years 2013 and 2014 and the selected consolidated balance sheet data at December 31, 2013, 2014 and 2015, have been derived from our previously published audited consolidated financial statements, which are not included in this annual report. This selected financial data should be read in conjunction with our consolidated financial statements and are qualified entirely by reference to such consolidated financial statements. We prepare our consolidated financial statements in U.S. dollars and in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”). You should read the consolidated financial data with the section of this annual report entitled Item 5. “OPERATING AND FINANCIAL REVIEW AND PROSPECTS” and our consolidated financial statements and the notes to those financial statements included elsewhere in this annual report.
| | Year ended December 31, | |
Consolidated Statement of Operations Data: | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | |
| | (In thousands of dollars, except share and per share data) | |
| | | | | | | | | | | | | | | |
Revenues | | | 361,772 | | | | 371,112 | | | | 349,435 | | | | 293,641 | | | | 332,033 | |
Cost of revenues | | | 249,543 | | | | 286,670 | | | | 246,487 | | | | 194,479 | | | | 224,698 | |
Gross profit | | | 112,229 | | | | 84,442 | | | | 102,948 | | | | 99,162 | | | | 107,335 | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Research and development | | | 42,962 | | | | 35,004 | | | | 22,930 | | | | 21,695 | | | | 25,703 | |
Selling and marketing | | | 67,743 | | | | 56,059 | | | | 40,816 | | | | 39,515 | | | | 41,656 | |
General and administrative. | | | 26,757 | | | | 23,657 | | | | 21,235 | | | | 20,380 | | | | 18,576 | |
Restructuring costs | | | 9,345 | | | | 6,816 | | | | 1,225 | | | | - | | | | - | |
Goodwill impairment | | | - | | | | 14,765 | | | | - | | | | - | | | | - | |
Other income | | | (7,657 | ) | | | (19,827 | ) | | | (4,849 | ) | | | (1,921 | ) | | | (1,746 | ) |
Total operating expenses | | | | | | | | | | | 81,357 | | | | 79,669 | | | | 84,189 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | | (26,921 | ) | | | (32,032 | ) | | | 21,591 | | | | 19,493 | | | | 23,146 | |
Financial expenses, net | | | (14,018 | ) | | | (37,946 | ) | | | (14,738 | ) | | | (6,303 | ) | | | (5,889 | ) |
Income (loss) before taxes. | | | (40,939 | ) | | | (69,978 | ) | | | 6,853 | | | | 13,190 | | | | 17,257 | |
Tax on income | | | (6,539 | ) | | | (6,501 | ) | | | (5,842 | ) | | | (1,761 | ) | | | (1,697 | ) |
Net income (loss) | | | (47,478 | ) | | | (76,479 | ) | | | 1,011 | | | | 11,429 | | | | 15,560 | |
| | | | | | | | | | | | | | | | | | | | |
Basic net earnings (loss) per share | | $ | (1.23 | ) | | $ | (1.22 | ) | | $ | 0.01 | | | $ | 0.15 | | | $ | 0.20 | |
Diluted net earnings (loss) per share | | $ | (1.23 | ) | | $ | (1.22 | ) | | $ | 0.01 | | | $ | 0.15 | | | $ | 0.19 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average number of shares used in computing basic earnings (loss) per share | | | | | | | 62,518,602 | | | | | | | | | | | | | |
Weighted average number of shares used in computing diluted earnings (loss) per share | | | 38,519,606 | | | | 62,518,602 | | | | 77,296,681 | | | | 78,613,528 | | | | 79,942,353 | |
| | Year ended December 31, | |
| | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | |
| | (In thousands of dollars) | |
Consolidated Balance Sheet Data: | | | | | | | | | | | | |
Cash and cash equivalents bank deposits, short and long term marketable securities | | | 52,337 | | | | 42,371 | | | | 36,318 | | | | 36,338 | | | | 26,873 | |
Working capital | | | 106,765 | | | | 87,748 | | | | 81,957 | | | | 95,950 | | | | 105,362 | |
Total assets | | | 365,971 | | | | 341,873 | | | | 267,249 | | | | 244,225 | | | | 253,593 | |
Total long term liabilities | | | 52,498 | | | | 31,822 | | | | 19,915 | | | | 17,555 | | | | 14,245 | |
Shareholders’ equity | | | 135,078 | | | | 104,552 | | | | 102,821 | | | | 116,164 | | | | 133,898 | |
D.Risk Factors
The following risk factors, among others, could affect our business, results of operations or financial condition and cause our actual results to differ materially from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and we assume no obligation to update this information. You should carefully consider the risks described below, in addition to the other information contained elsewhere in this annual report. The following risk factors are not the only risk factors that the Company faces, and as such, additional unknown risks and uncertainties that we currently deem immaterial may also affect our business. Our business, financial condition and results of operations could be seriously harmed if any of the events underlying any of these risks or uncertainties actually occur. In such an event, the market price for our ordinary shares could decline.
Below are some, but not all, of the main risks factors and challenges that we have been facing and may further face, which could have an adverse effect on our business, results of operations and financial condition (the list below is not exhaustive, and investors should read this “Risk factors” section in full):
the effects of global economic trends, including recession, rising inflation, rising interest rates, commodity price increases and fluctuations, commodity shortages and exposure to economic slowdown, on our and our customers’ business, financial condition and results of operations;
the impact of delays in the transition to 5G technologies and in the 5G rollout on our revenues if such transition is developed differently than we anticipated, either in terms of technology, use-case, timeline or otherwise;
the effect of the concentration of a major portion of our business on large mobile operators around the world from which we derive a significant portion of our ordering, that due to their significant weight compared to the overall ordering by other customers during the same time period, coupled with inconsistent ordering patterns and volume of business directed to us (which may deviate as a result of parameters such as buying decisions, price lists, roll-out strategy, local market conditions and regulatory environment), creates high volatility with respect to our financial results and results of operations, including our revenues, gross margin and cash flow;
the effects of volatility in our revenues, margins and working capital needs and the incurrence of substantial losses and negative cash flows that we have experienced in recent years, which if continue, would adversely affect our business and financial condition and in such case we cannot assure that we will be able to maintain improving trends (such as the increase in our booking and backlog during 2021 and 2022) and convert our current backlog into profitability and positive operating cash flows;
if we fail to effectively cope with the high volatility in the supply needs of our customers, we may be unable to timely fulfill our customer commitments (for example, delivery issues due to long lead time and availability of components and manufacturing power), and may be obligated to pay expediting fees to our contract manufacturers, penalties to our customers for delays, and may be subject to order cancelation, all of which would adversely affect our business and results of operations for a certain quarter;
we may be exposed to inventory-related losses on inventory purchased by our contract manufacturers and other suppliers, or to increased expenses should unexpected production ramp up be required due to inaccurate forecasts or business changes. In addition, part of our inventory may be written off, which would increase our cost of revenues;
we rely on third-party manufacturers, suppliers and service providers; such reliance may disrupt the proper and timely management of deliveries of our products, a risk that is intensified in the case of a single source supplier;
the global supply of electronic components, including integrated circuits has experienced a sharp increase in demand in the past several years, coupled with a lack of sufficient production capacity, and effect the lead-time for our components and their prices;
the expansion of our service offering to new areas, including managed services, software-based services (SaaS) and solutions for wireless communication networks design, might pose product development, marketing, sales, operation, implementation and support challenges that might result in significant losses and may adversely affect our financial results;
risks related to the rapid change in the markets for our products and in related technologies and operational concepts development;
risks related to our forward-looking forecasts, with respect to which there is no assurance that such forecasts will materialize as we predicted;
competition from other wireless transport equipment providers and from other communication solutions that compete with our high-capacity point-to-point wireless solutions;
the award of Design Wins may not assure or secure the materialization of an actual sale;
sensitivity to changes in demand in the wireless communication market domain and market segment at which we have focused our business until recently, and related risks if this segment should experience a decline in demand, while our new offering that is aimed to include, among other things, also WISPs (wireless internet service providers), private networks, software based solutions and disaggregated cell-site routing, will take time to materialize and mature and they may not be accepted by the market and have a significant impact on our results that could compensate for the aforementioned risk;
risks relating to the failure to attract or retain qualified and skilled “talents” and personnel and the intense competition for such “talents” and personnel;
difficulties in predicting our gross margin as it is exposed to significant fluctuations as a result of potential changes in the various geographical locations where we generate revenues;
our engagement in providing installation or rollout projects for our customers, which are long-term projects that are subject to inherent risks, including early delivery of our products with delayed payment terms, delays or failures in acceptance testing procedures, credit risks associated with our customers and their ability to manage the projects to a timely collection from their end customer, and potential significant collection risk from our customers all of which may result in substantial period-to-period fluctuations in our results of operations, cash flow and financial condition;
the current effect of the COVID-19 pandemic (“COVID-19”) on the global markets, on the markets in which we operate and on our business and operations;
changes in privacy and data protection laws and increased breaches of network or information technology security along with an increase in cyber-attack activities, which is enhanced, among other things, as a result of the application of remote operation mode (associated with COVID-19 and current labor market trends), could have an adverse effect on our business;
the impact of complex and evolving regulatory requirements in which we operate, on our business, results of operations and financial condition;
risks relating to macro and micro adverse effects on the global and European markets in which we operate due to the invasion of Ukraine by Russia, such as, among others, cancellation or suspension of orders placed by Russian customers or for Russian end-users, disruption of delivery of raw materials, oil and gas, goods, and supplies’ price increases, disruption to deliveries, shipping and transportation, imposition of sanctions, export control restrictions and embargoes, loss of business, cyber-attacks, commodity shortages and other effects that could have an adverse effect on us, our business, suppliers and customers;
risks related to fluctuations in currency exchange rates and restrictions related to foreign currency exchange controls;
the occurrence of international, political, regulatory or economic events in emerging economies in Latin America, India, Asia Pacific and Africa, where a majority of our sales are made;
the effect of business practices in emerging markets on legal and business conduct-related regulatory risks to which we are exposed; and
risks relating to attempts for a hostile takeover, or shareholder activism, which may, divert our management’s and Board’s attention and resources from our business and could give rise to perceived uncertainties as to our future direction, could result in the loss of potential business opportunities, limit our ability to raise funds and make it more difficult for us to attract and retain qualified personnel for positions in both management and Board levels.
These and other risk factors are further described and elaborated herein below. You should carefully read and consider the full description of the risk factors as described below, in addition to the other information contained elsewhere in this annual report:
Risks Relating to Our Business
A significant portionOur global operation exposes us to the effects of global economic trends, including recession, rising inflation, rising interest rates, commodity price increases and fluctuations, commodity shortages and exposure to economic slowdown.
The global nature of our activity and our global presence and operation in different countries, regulatory, legal and financial regimes, exposes us to a wide spread of customers, suppliers, subcontractors and contractors, and, in turn, to global and local macro and micro developments. Such developments might have direct or indirect impacts on our business concentratesand results of operations, which are hard to predict, monitor or assess, causing uncertainties and high volatility with respect to our estimated or expected results of operations, and, could have an adverse effect on our business, results of operations and financial condition. Our business, and our customers’ businesses, are sensitive to macroeconomic conditions. Economic factors, such as interest rates, inflation, currency exchange rates, changes in certain regionsmonetary and more considerablyrelated policies, market volatility, customer confidence, recession or recessionary indicators, supply chain issues, unemployment rates and real wages, are among the most significant factors that impact customer spending behavior. Recent increases in India, where twointerest rates and weak economic conditions, has reduced, and may continue to reduce, the amount of disposable income customers represent a significant portionhave, which, in turn, reduces customer spending. This has had, and may continue to have, an adverse effect on our business, financial condition and results of operations.
The recent increase in inflation rates in the markets in which we operate may lead us to experience higher labor costs, energy costs, water costs, transportation costs, wafer costs and other costs associated with raw materials from suppliers. Our suppliers may raise their prices, and in the competitive markets in which we operate, we may not be able to make corresponding price increases to preserve our revenues. Such concentrationgross margins and profitability due to market conditions and competitive dynamics. Additionally, any such increase in prices, even if possible, may not be accepted by our customers. Further, recent increases in interest rates, and any additional increases in interest rates, lead us, and our customers, to experience higher financing costs, which may, in turn, negatively affect our business, financial condition and results of operations, shouldoperations.
Delays in the amounttransition to 5G technologies and in the 5G rollout may negatively impact our revenues, financial condition and results of business comingoperation.
We consider the wireless market transition from these regions4G to 5G technologies to be one of our main growth engines in the foreseeable future. Thus, the development roadmap of our products is designed to introduce to the market 5G-based products. Nonetheless, the pace of the transition to 5G technologies and more specifically5G rollout is hard to predict, as it depends on numerous factors which are uncertain and beyond our control including, economic factors, financial conditions of operators and the development of 5G use cases. Further delays in 5G technologies deployment and rollout, could have an adverse effect on our future revenues, profitability and cash flow and cause our results to materially differ from these two customers, decrease or cease.our expectations.
In 2017,addition, the expected transition from 4G to 5G technologies could lead to an overall slowdown in procurement and capital investments in 4G infrastructure and equipment by our customers.
A major portion of our business concentrates on a limited number of large mobile operators. The significant weight of their ordering, compared to the overall ordering by other customers, coupled with inconsistent ordering patterns, could negatively affect our business, financial condition and results of operations.
A significant portion of our business is concentrated with certain customers. In 2022, approximately 37.9%31.3% of our total revenues came fromwere attributed to two customers in India.customers. In 2015 and 2016,2021, approximately 21.2% and 24.2%, respectively,28.3% of our total revenues camewere attributed to two customers and in 2020, approximately 19.7% of our total revenues were attributed to one customers. The loss of significant customers or any material reduction in orders from them, in the absence of gaining new significant customers to replace such lost business, has adversely affected, and in the future could adversely affect, various aspects of our results of operations and our financial condition.
In addition, we have difficulty in projecting future revenues from these two customers, in India. Oursince (i) our sales are mostly generated from standardcase-by-case purchase orders rather than long-term contracts. Accordingly, these largecontracts, our customers are not obligated to purchase from us a fixed amount of products or services over any period of time, from us, and may terminate or reduce their purchases from us at any time without prior notice or penalty. We therefore have difficulty projecting future revenues from these customers. The losspenalty; (ii) customers might not be bound by any minimum quota; (iii) the ordering pattern and volume of thesebusiness directed to us by such customers may fluctuate as a result of numerous parameters, including changing spending policies, changes in prices, rollout strategy and local market conditions and (iv) the delivery schedule to such customers may be changed by them. Any credit crunch, distressed financial situation or any material reduction in ordersinsolvency on the part of such customers, may adversely affect our ability to collect the balance due from them and further expend the variation in our revenues and operating results. This risk is heightened in India, in which government actions relating to the absencerollout of gaining new significantcellular networks affect the demand for our products from customers replacing them, could adversely affect different aspects of our results of operations, including cash flow and financial condition. In addition,increase the difficulty to project future revenues from these customers, could have, and had in the past, an adverse effect on our reported revenues, profitability and cash flow.revenues.
Furthermore, concentrationsince a significant portion of our business inis derived from specific geographic regions entails risks in casecountries, our business could be negatively impacted should certain events occur in these regions,countries, such as a slowdown in investments and expansion of communication networks due to the cyclical characteristic of the investment in this industry, as well as changes in local legislation, changes in governmental controls and regulations (including those specifically related to the communication industry), changes in and tariffs and taxes, as well as trade restrictions, a downturn in economic or financial conditions, or an outbreak ofnatural calamities. Also, an outbreak of hostilities, political or economic instability, as well as any other extraordinary events having an adverse effect on the economy or business environment in this region, which willthese countries, may harm the operations of our customers in these regions,countries, and result in a significant decline of business coming from that region. We have experienced the realization of some of these risks in India as well as in Africa and in Latin America in previous years, and further realizationthose countries.
Realization of any of these or other risks could result in a material reduction in orders and could adversely affect our results of operations, including gross margin and cash flow, and our financial condition.
We sell a single family Although some of products and have been focusing onthese risks derive inherently from the “best-of-breed” segmentconcentration of our business, certain risks may be attributed also to the wireless backhaul market,geographical territories in which we believe hasoperate as detailed under the most profit potential. Selling a single family of products and focusing on one segment of the market, may result in sensitivityrisk “Due to the changesvolume of our sales in demand for this segment. If this segmentemerging markets, we are susceptible to a number of the market will experience decline in demand it may negatively affectpolitical, economic and regulatory risks that could have a material adverse effect on our business, reputation, financial condition and results of operations.operations”.
We mainly attributeIn recent years we experienced volatility in our improvement in profitability to the continued implementation of our business strategy, a key element of which is the focus on the best-of-breed segment of the wireless backhaul market. However, while focusing on this one market segment led in 2017 to a growth in sales, primarily in India, in 2016revenues, margins and 2015 it led to a decline in sales. Hence, if this segment of the market would enter into aworking capital needs, incurred substantial losses and generated negative cycle, or our share in it shrinks, our sales and revenues may decline andcash flows. If these trends continue, our results of operations and cash flow may be significantly adversely impacted. Although we were able to increase our booking and backlog during 2021 and 2022, we cannot assure you that we will be able to maintain this improving trend and convert such backlog into profitability and positive operating cash flows.
In 2020, we incurred a net loss of $17.1 million, in 2021 we incurred a net loss of $14.8 million and in 2022 we incurred a net loss of $19.7 million. We have also experienced positive cash flow from operations of $17.2 million, in 2020 and negative cash flow from operations of $15.0 million, and $4.9 million in 2021 and 2022, respectively. Our losses resulted from, among other things, decreases in revenues, decreased gross margins, decline in procurement and capital expenses related to 4G products by our customers, slow ramp-up of 5G rollout and new ordering, health and economic implications of the COVID-19 pandemic, the significant expenses, costs and charges associated with the global semiconductors and electric components shortage and increase in price of such components, increase in logistical supply chains’, shipment and delivery costs and an extension of delivery timelines, expediting fees and increased inventory expenditures, all as further detailed in this Annual Report on Form 20-F and in our Annual Reports on Form 20-F for the years 2020 and 2021.
While in 2022 we have taken measures to improve our gross profit, reduce our operating expenses, improve our working capital management and secure 5G design wins and booking, the implementation of such measures is lengthy, may be delayed as a result of the other risks and uncertainties detailed in this Annual Report on Form 20-F and there is no assurance that such measures will be sufficient or successful or that we will not continue to experience a decline in our revenues, incur substantial losses and generate negative cash flows or that such decline, losses and negative cash flow will not intensify. In the event that our revenues decline and that our losses and negative cash flow increase, our results of operations will be significantly adversely affected.impacted. In such a case, we may need to take additional measures such as reduce costs, which may impact our ability to compete in the market and serve our working capital needs as planned. Furthermore, our working capital needs may require additional or alternate cash resources. If we are unable to obtain such resources nor generate an improved cash flow from our operations, our liquidity and ability to fund operations could be impaired.
We experience high volatility in the supply needs of our customers, which from time to time lead to delivery issues due to long lead time and availability of components and manufacturing power. If we fail to effectively cope with such volatility and short-noticed supply demands of our customers, we may be unable to timely fulfill our customer commitments which would adversely affect our business and results of operations for a certain quarter.
The delivery requirements of our customers are unevenly spread throughout the year. We may receive very large orders that were not forecasted, or that were expected with a different timing requirement. In addition, we offer our products to our customers in a wide variety of product variations and configurations, and our inability to forecast the quantities or mix of the delivery demands for our products may result in underestimating our material purchasing needs, as well as production capacity requirements. If we fail to effectively manage our deliveries to the customers in a timely manner, or otherwise fulfill our contractual obligations to them - for example if we are unable to synchronize our supply chain and production process in cases of rapidly increasing production needs - the cost of our material purchasing, manufacturing and logistics may increase and we may also be obligated to pay expediting fees to our contract manufacturers or penalties to our customers for delays, and may be subject to order cancelation, all of which would adversely affect our business, financial results and our relationship with our customers. This risk is heightened with the expansion of our service offering, which allows us to access new customers, whose business practices and supply needs we are not familiar with yet.
Due to inaccurate forecasts or business changes, we may be exposed to inventory-related losses on inventory purchased by our contract manufacturers and other suppliers, or to increased expenses should unexpected production ramp up be required. In addition, part of our inventory may be written off, which would increase our cost of revenues.
Our contract manufacturers and other suppliers are required to purchase inventory based on manufacturing projections we provide to them. If the actual orders from our customers are lower than projected, or the mix of products ordered changes, or if we decide to change our product line and/or our product support strategy, our contract manufacturers or other suppliers will have excess inventory of raw materials or finished products, which we would typically be required to purchase, thus incurring additional costs and our gross profit and results of operations could be adversely affected. For example, given the significant increase in components lead time (see below under “The global supply of electronic components, including integrated circles, has experienced, and may continue to experience, a sharp increase in demand, while production capacity remains limited, which had, and may continue to have, an adverse effect on the lead-time for our components and increase in their prices”), and in order to minimize disruption to our business, we increased our forecast horizon to 12-18 months. As a result, our inventory level increased significantly and risk of inventory write-offs due to, among other factors, missing our forecast, has increased. Any such write-off may negatively impact our gross profit, working capital and cash flow.
Further, we require our contract manufacturers and other suppliers from time to time, to purchase more inventory than is immediately required and with respect to our contract manufacturers, to partially assemble components, in order to shorten our delivery time in case of an increase in demand for our products. In the absence of such increased demand, we may need to make advance payments, compensate our contract manufacturers or other suppliers, or even buy the redundant inventory, as needed. We also may purchase components or raw materials from time to time for use by our contract manufacturers in the manufacturing of our products. This may cause additional write offs and may have a negative impact on our results of operations and cash flow.
Alternatively, if we underestimate our requirements and our actual orders from customers are significantly larger than our planned forecast, we may be required to accelerate the production and purchase of supplies, which may result in additional costs of buying components at less attractive prices, paying expediting fees and excess shipment costs, overtime and other manufacturing expenses. As a result, our gross margins and results of operations could be adversely affected.
Inventory of raw materials, work in-process or finished products located either at our warehouses or our customers’ sites as part of the network build-up may accumulate in the future, and we may encounter losses due to a variety of factors, including:
new generations of products replacing older ones, including changes in products because of technological advances and cost reduction measures,measures; and
the need of our contract manufacturers to order raw materials that have long lead times and our inability to estimate exact amounts and types of items thus needed, especially regarding the frequencies in which the final products ordered will operate.
Further, our inventory of finished products located either at our warehouse or our customers’ sites as part of a network build-up may accumulate if a customer were to cancel an order or refuse to physically accept delivery of our products, or in rollout projects, which include acceptance tests, refuse to accept the network. The rate of accumulation may increase in a period of economic downturn.
Relying on third-party manufacturers, suppliers and service providers may disrupt the proper and timely management of deliveries of our products, a risk that is intensified in the case of a single source supplier.
We outsource our manufacturing and the majority of our logistics operations and purchase ancillary equipment for our products from contract and other independent manufacturers. Although our policy is to maintain a second source for all of our products’ components, disruption in deliveries or in operations of these and other third-party suppliers or service providers, as a result of, for example, capacity constraints, production disruptions, price increases, regulatory restrictions, force majeure events, decreased availability of raw materials or commodities, as well as quality control problems related to components, may all cause such third parties not to comply with their contractual obligations to us. This could have an adverse effect on our ability to meet our commitments to customers and could increase our operating costs. Such risk is intensified when there is a sharp increase in demand for components throughout the electronic industry. For additional information see “The global supply of electronic components has experienced, and may continue to experience, a sharp increase in demand, while production capacity remains limited, which had, and may continue to have, an adverse effect on the lead-time for our components and increased their prices”.
Although we believe that our contract manufacturers and logistics service providers have sufficient economic incentive to perform our manufacturing and logistics services requirements, the resources devoted to these activities are not within our control. We cannot assure you that manufacturing, or logistics problems will not occur in the future due to insufficient resources devoted to our requirements by such manufacturers and logistics service providers, or due to insolvency or other circumstances that could have a material adverse effect on those manufacturers and logistics service providers’ operations. In addition, we cannot assure that we will have the ability or be in the position to demand from our contract manufacturers to assume our obligations to our customers, apply the same terms back-to-back to our contract manufacturers and suppliers, a risk that is intensified in the case of a single source supplier.
In addition, some of our contract manufacturers currently obtain key components from a limited number of suppliers. Our contract manufacturers’ dependence on a single or sole source supplier, or on a limited number of suppliers, subjects us to the following risks:
The component suppliers may experience shortages in components and interrupt or delay their shipments to our contract manufacturers. Consequently, these shortages could delay the manufacture of our products and shipments to our customers.
The component suppliers could discontinue the manufacture or supply of components used in our systems. In such an event, we or our contract manufacturers may be unable to develop alternative sources for the components necessary to manufacture our products, which could force us to redesign our products or buy a large stock of the component into inventory before it is discontinued. Any such redesign of our products would likely interrupt the manufacturing process and could cause delays in our product shipments. Moreover, a significant modification in our product design may increase our manufacturing costs and bring about lower gross margins. In addition, we may be exposed to excess inventory of such component, which we will have to write-down in case the demand is not as high as we anticipated at the time of buying these components.
The component suppliers may significantly increase component prices at any time and particularly if demand for certain components increases dramatically in the global market which would have an adverse effect on the Company’s business.
The component suppliers may significantly increase the time to produce and deliver their components at any time resulting in an immediate effect, as evidenced recently with respect to the semiconductors foundry industry. These lead time increases would delay our products’ delivery timetable and could expose us to shortage in supply or late supplies that may trigger penalties, orders cancellation and losing some of our customers.
The component suppliers may refuse or be unable to further supply such component for various reasons, including, among other things, their prioritization, focus, regulations, force majeure events or financial situation.
The materialization of the risks detailed above could result in delays in deliveries of our products to our customers, which could subject us to penalties payable to our customers or cancellation of orders, increased warranty costs as well as increases in manufacturing and shipment expenses in the case of expedited deliveries, and damage to our reputation. If any of these problems occur, we may be required to seek alternate manufacturers or logistics service providers and we may not be able to secure such alternate manufacturers or logistics service providers that meet our needs and standards in a timely and cost-effective manner. Consequently, such occurrences, extra costs and penalties could significantly reduce our gross margins and profitability. The above-mentioned risks are exacerbated in the case of raw materials or component parts that are purchased from a single-source supplier.
The global supply of electronic components, including integrated circles, has experienced, and may continue to experience, a sharp increase in demand, while production capacity remains limited, which had, and may continue to have, an adverse effect on the lead-time for our components and increase in their prices.
The global demand for electronic components, including digital components, chipsets and semiconductors, has experienced a sharp increase in the past several years, with a growing number of industries increasing their demand and consumption. This, together with the effect of COVID-19 and trade embargos, have led to longer lead-time of electronic components, with many cases of a lead time longer than a year. The lack of sufficient production facilities and capacity of the semiconductor foundry industry to meet such demand, which created a shortage in chipsets, electronic equipment and components, has already caused, and may to continue to cause, price increases and extensions of delivery time. As a result of this situation, we may be unable to obtain essential components in a timely manner and at a reasonable cost that is necessary for us to remain competitive. During such times, supplier-specific or industry-wide lead times for delivery can be as long as twelve months or more. If we are unable to obtain components in a timely manner to fulfill our customers’ demand, or at a reasonable cost, we may be unable to meet commitments under our contracts with customers, which could expose us to substantial liquidated damages and other claims and could materially and adversely affect our results of operations, financial condition, business and prospects. Additionally, the increase in lead time and the shortage in chipsets may result in delays in the delivery of our products and in meeting the timetables for the execution of our projects, which may trigger penalties, cancellation of orders and loss of some of our customers or market share. This has adversely impactaffected, and may continue to adversely affect, our costs (including a significant increase in production costs) and to erode our gross margin. Furthermore, as our new Systems-on-Chip (SoC) commercialization and commencement of mass production is highly dependent on the timely delivery of the chipsets, these delays may also adversely affect the commercialization and mass production timetable, causing a delay in our ability to timely introduce the new SoC-based products to the market and safeguard and maintain our position and market share as leaders in the introduction of advanced 5G solution.
We are expanding our service and software offerings to new areas, including managed services, software-based services (SaaS) and solutions for wireless communication networks design, implementation, operation, monitoring and maintenance, either remotely or on premise, which pose product development, marketing, sales, operation, implementation and support challenges that might result in significant losses and may adversely affect our financial results.
We are expanding the services we offer to new areas including the introduction of managed services and software-based tools and services to support design, implementation, operation, monitoring and maintenance of wireless communication networks, either remotely or on-premise. Although we have deployed similar solutions for our own use for many years, the complexity of such solutions, the lack of customer-experience in such SaaS and similar solutions, us having to operate and support such activities vis-à-vis multiple third parties if demand increases rapidly without us having sufficient time to accommodate accordingly, all increase the risk of not meeting our performance obligations. Furthermore, the selling of software solutions includes inherent risks common for such type of activities, such as, among other things, cybersecurity vulnerability, unexpected integration challenges, debugging, upgrading and increased need for version releases and underpricing. In addition, new products and new versions of existing products or tools, are more prone to bugs, software failure and other problems which may, among other things, adversely affect our ability to ramp up this activity or meet our commitments to our customers, and may cause us to incur additional development, debugging and implementation costs. Moreover, the outcome following such projects’ implementation may not be to the full satisfaction of the customer or aligned with their expectations (whether or not justified), who may in turn, impose penalties against us or exercise any other remedy available to it under agreement or law. Any of these risks, among others, may also cause the NRE (Non-Recurring Engineering) and cost of such projects to be higher than planned.
Our planning, shaping and development of these software-based solutions is based on our experience and understanding of the market needs and challenges, and forecasted evolution of market developments, such as market trends, future use cases, business concepts, technologies and future demand. However, there is no assurance that we have successfully forecasted or will continue to successfully forecast such trends and needs, that the markets will accept our solutions as we anticipate or that our service offering will satisfy future demand. A failure in any of the above, may result in significant losses and may adversely affect our financial results and reputation.
The markets for our products change rapidly. If we fail to timely develop, commercialize and market new products and solutions that keep pacewith technological developments, the changing industry standards and our customers’ needs, or if our competitors or new market entrants introduce their products before us, we may not be able to grow, may lose market share or may not be able to sustain our business.
The wireless transport equipment industry is characterized by rapid technological developments, changing customer needs that expect increase in product performance and evolving industry standards, as well as increasing pressure to produce more cost-effective products. These rapid technological developments could either render our products obsolete or require us to modify our products, necessitating significant investment, both in time and cost, in new technologies, products and solutions. Our success depends, among other things, on our ability to maintain an agile infrastructure that is capable of adapting to such changes in a timely manner, developing and marketing new products or enhancing our existing products in a timely manner in order to keep pace with developments in technology, customer requirements and competitive solutions offered by third parties, but we cannot assure you that any such development or production ramp-up will be completed in a timely or cost-effective manner, or how the market will receive or adopt our products compared to our competitors’ products.
We are continuously seeking to develop new products and enhance our existing products. In 2020 we released our IP-50 products’ family, which joined our line of point-to-point wireless transport products, designed to deliver premium wireless transport capabilities. The IP-50 products deliver solutions to various use cases, including 5G scenarios. In addition, we have achieved leadership in technology by innovating through design of state-of-the-art Systems-on-Chip (SoC), which we plan to integrate in the future in the products we provide. While we expect to productize our 5G SoC at the beginning of 2024, we cannot provide assurance that the final post silicon validation tests will pass successfully, which may further delay the productization process and may require additional significant investments. In addition, while we are seeing some relief, if the overloads and continuous delays in deliveries in the semiconductor market continue, this can cause delays in the mass production and productizationof our SoC, and therefore, we cannot assure you that we will be able to successfully commercialize such sophisticated and technology-rich SoC by the time we expected. Also, delays in the production of our SoC may delay the launch of new products and consequently we may lose our competitive advantage. Moreover, we cannot provide any assurance that our new products will be accepted in the market or will result in profitable sales or that such products will not require additional quality assurance and defect-fixing processes. We also record perpetual usage rights of technologies of third parties, as well as part of our R&D operations, marketing and sales activities andinvestments, as assets on our abilitybalance sheet.
Furthermore, as noted above, we consider the wireless market transition from 4G to effectively compete5G technologies to be one of our main growth engines in the market.
Moreover, weforeseeable future. If our competitors or new market entrants will develop and sell one platform of point-to-point wireless backhaul products intofor this best-of-breed market. As a result, we market that are, more likelyor are perceived to be, adversely affected bymore advantageous to our customers from a reductiontechnological and/or financial (i.e., cost-benefit) perspective, or if they introduce and market their products prior to us doing so, they may be able to better position themselves in demand for point-to-point wireless backhaul products in comparison to companies that also sell multiplethe market and diversified product lines and solutions to customers. If technologieswe may lose potential or existing market conditions change, resulting in a decreased demand for our specific technology, weshare, which could likely have a material adverse effect on our business, financial results and financial conditioncondition.
Our market is also characterized by a growing demand for more sophisticated and rich software-based capabilities within the network IP layer (layer 3 routing/MPLS), some of which may require us to utilize and embed additional components, either in hardware or software (including third-party software), in the solutions we provide. We cannot assure you that we will continue to be successful in providing these necessary software-based capabilities in a cost-effective manner, which could affect our business performance. Additionally, we have established technological cooperation with third parties to address some of these capabilities, but we cannot assure that such technological cooperation will be successful or achieve the expected results. If indeed such cooperation will not be successful, we shall have to consider other alternatives, and such investigation and entering into new cooperation in lieu of the failed ones, might cause a delay in the introduction of such capabilities.
In addition, new products and new versions of existing products are more prone to technical problems which may, among other things, adversely affect our ability to ramp up and to meet delivery commitments to our customers in a timely manner, and may cause us to incur additional manufacturing, development and repair costs. This may have a material adverse effect on our business and results of operation.
Last, we cannot assure you that we will successfully forecast technology trends or that we will anticipate innovations made by other companies and respond with our own innovation in a timely manner, which could affect our competitiveness in the market.
Our future operations are based on forward-looking forecasts, among other things, on market trends, future business concepts and use cases, and customers’ needs and requirements, while there is no assurance that such forecasts will materialize as we attempt predicted. If we failto address these issues.rightfully identify those needs and trends, we may experience a decline in the demand for our products and our business, financial condition and results of operations could be materially adversely affected.
We have based the future planning of our corporate, business, marketing and product strategies on the forecasted evolution of the market developments, such as market trends, future use cases, business concepts, technologies and future demand, and accordingly shape the development of our networks’ architecture design, technological and operational solutions and service offering, so as to adapt to such estimated needs and changes. As an example, part of our solutions are focused on Open RAN and on disaggregated architecture model. We cannot assure you that the concept of our future planning and service offering (for example, Open RAN and disaggregation) will be accepted, or that we have successfully forecasted or will continue to successfully forecast such trends, that the markets will shape as we anticipated or that our service offering will indeed satisfy the future demand. A failure in any of the above, may result in significant losses and a decline in the demand for our products, and may adversely affect our financial results and reputation.
We face intense competition from other wireless backhaultransport equipment providers.providers and from other communication solutions that compete with our point-to-point wireless products. If we failto compete effectively, we may experience a decline in the demand for our products and our business, financial condition and resultresults of operations wouldcould be materially adversely affected.
The market for wireless backhaultransport equipment is rapidly evolving, highly competitive and subject to rapid changes.
Our primarymain competitors include companies such as Huawei Technologies Co., Ltd., L.M. Ericsson Telephone Company, NEC Corporation, Nokia Corporation and ZTE Corporation, commonly referred to as “generalists”, each providing a vast wireless solutions portfolio, which includes a wireless backhaultransport solution within their portfolio. These generalists may also compete with us on best-of-breed“best-of-breed” projects, in which operators invest resources and efforts to select the best wireless backhaultransport solution. In addition to these primary competitors, a number of smaller microwave communications equipment suppliers,wireless transport specialists, mainly including Aviat Networks Inc. (“Aviat”) and SIAE Microelectronica S.p.A.S.P.A., offer, or are developing, competing products.
In addition, the industry generalists are substantially larger than us, have longer operating histories and possess greater financial, sales, service, marketing, distribution, technical, manufacturing and other resources. These generalists have greater name recognition, a larger customer base and may be able to respond more quickly to changes in customer requirements and evolving industry standards. Many
To our knowledge, many of these generalists also have well-established relationships with our current and potential customers and may have extensive knowledge of our target markets, which may possibly give them additional competitive advantages. In addition, asto our knowledge, these generalists focus more on selling services and bundling the entire network as a full-package service offering, and therefore some of our customers, which seek best-of-breed“best-of-breed” solutions like ours, may prefer to purchase “bundled” solutions from the generalists. Moreover, as these generalists are usually financially stronger than us, they may be able to offer customers more attractive pricing and payment terms, as well as customer credit programs, which may increase the appeal of their products in comparison to ours.
In addition, our products compete with other high-speed communications solutions, including fiber optic lines and other wireless technologies. Some of these technologies utilize existing installed infrastructure and have achieved significantly greater market acceptance and penetration than point-to-point wireless technologies. Moreover, as more and more data demands are imposed on existing network frameworks coupled with growing demand for additional bandwidth as a result of massive use of remote services and work from home modes of operation accelerated by the COVID-19 pandemic, and due to consolidation of fixed and mobile operators, operators may be more motivated to invest in more expensive high-speed fiber optic networks to meet current needs and remain competitive. Some of the principal disadvantages of point-to-point wireless technologies that may make other technologies more appealing include suboptimal operations in extreme weather conditions and limitations in connection with the need to establish line of sight between antennas and limitations in site acquisition for multiple links, or the perception that fiber-optic solutions are more “environmentally-friendly” predominantly in populated areas, favoring other technologies.
To the extent that these competing communications solutions reduce demand for our point-to-point wireless transmission products, there may be a material adverse effect on our business and results of operations.
Moreover, some of our competitors can benefit from currency fluctuations as their costs and expenses are primarily denominated in currencies other than the U.S. dollar. In case the U.S. dollar strengthens against these currencies these competitors might offer their products and services for a lower price and capture market share from us, which might adversely affect our business and negatively influence our results of operation and financial condition.
Furthermore, the market for wireless backhaul equipment is expected to go through significant consolidation; current and potential competitors may make strategic moves such as mergers, acquisitions or establishing cooperative relationships among themselves or with third parties that may allow them to increase their market share and competitive position.
We expect to face increasingcontinuing competitive pressures in the future. If we are unable to compete effectively, our business, financial condition and results of operations would be materially adversely affected. For more information on the best-of-breed“best-of-breed” market, please refer to Item 4:4. INFORMATION ON THE COMPANY; B. Business Overview – “Wireless Backhaul;Transport; Short-haul, Long-haul and Small Cells Backhaul.”Transport”.
Design Wins may not assure or secure the materialization of an actual sale.
As part of the marketing and sales of our products, predominantly such that had been recently released and introduced to the market or to the specific customer, including new 5G technologies, our products and solutions undergo an evaluation stage and design into the customer’s systems or networks. The award of a Design Win does not necessarily mean that such customer shall eventually buy our products or that only our solution has been chosen for the design. Any such design and evaluation phase is subject to the risk of failure to meet the customer’s technological and operational requirements, specifications, delivery date or certain other parameters at any time before the design is frozen. Thus, being awarded a Design Win does not assure nor secure the materialization of actual sale and should not be relied upon by you as such.
Until recently, we sold products and services in one single market domain - the wireless communication market, and were focused on the “best-of-breed” market segment of the wireless transport market, which we believed to have the most profit potential. We are currently expanding our service offering, and until such new service offering will ramp-up, we continue selling mostly in a single market domain, which may result in sensitivity to the changes in demand for this market segment. If this segment should experience a decline in demand which is not replaced by our new offering, we will likely experience a negative effect on our business, financial condition and results ofoperations.
Until recently, we mainly attributed our leadership position in our target market to the focus on the “best-of-breed” market segment of the wireless transport market. Investment cycles in this market depend on technology cycles of mobile networks services (e.g., 4G to 5G technologies) and the network requirements for wireless transport of each technology. Hence, if this segment of the market or the service providers enter into a negative cycle, or our market share in the market shrinks, our sales and revenues may decline, and our results of operations and cash flow may be significantly and adversely affected. In such case, we may need to take cost reduction and other measures, which may adversely impact our research and development, operations, marketing and sales activities and our ability to effectively compete in the market.
Moreover, we used to develop and sell products mainly to one market domain of the wireless communication market, characterized as point-to-point licensed wireless connectivity - often referred to as “backhaul”, “midhaul”, “fronthaul” or simply wireless “transport” - into this “best-of-breed” market segment. As a result, we were, and still are, more likely to be adversely affected by a reduction in demand for point-to-point wireless transport products in comparison to companies that also sell multiple and diversified product lines and solutions in different market domains. If technologies or market conditions change, resulting in a decreased demand for our specific technology, and our new offering will not be mature or material enough to compensate for it, it could have a material adverse effect on our business, financial results and financial condition as we attempt to address these issues.
Although we have revisited and updated our strategy to include, among other things, focus on WISPs (wireless internet service providers), private networks and critical infrastructure market segments, as well as focus on offering of software based solutions, managed services and disaggregated cell-site routing, it will take time for our new offering and our focused market segments to materialize and mature and they may not be accepted by the market and have a significant impact on our results in a way that would mitigate and compensate for the aforementioned risks, and as such activities bear their own inherent risks, we currently might not be able to secure an alternative in order to avoid the implications of the realization of the risks detailed above.
If we fail to attract or retain qualified and skilled “talents” and personnel, our business, operations and product development efforts may be materially adversely affected.
Our products require sophisticated research and development, marketing and sales, and technical customer support. Our success depends on our ability to attract, train and retain qualified personnel in all these professional areas while also taking into consideration varying geographical needs and cultures. We compete with other companies for personnel in all of these areas, both in terms of profession and geography, and we may not be able to hire sufficient personnel to achieve our goals or support the anticipated growth in our business. The market for the highly trained personnel we require globally is competitive, due to the limited number of people available with the necessary technical skills and understanding of our products and technology. We experience immense competition, mostly in Israel, on talent, predominantly among R&D and technological personnel, or employees having experience or expertise in high-tech and traded companies, which was reflected, among other things, in an increase in salaries and retention challenges.
In the last two years, in addition to the shortage in skilled engineers and other computers science and technology professionals versus high market demand and competitive environment predominantly in Israel, where our laboratories are located, we have also experienced fierce competition driven from the effect of major fund raising and initial public offerings activities in the Israeli capital markets that had created sudden and high demand for professional manpower having skills, experience and expertise in the management and performance of professional functions at all levels within publicly traded companies, coupled with the means to place challenging highly competitive offers.
As the demand for qualified and highly skilled personal is on constant demand, our ability to retain existing “talents” and recruit new ones is becoming more challenging. Consequently, we may have to face with increasing employment costs for existing and new personnel in professions characterized with high demand, and might have to increase our equity-based long-term incentive programs, which in turn could result in the dilution of our shareholders due to the exercise of such rights. Loss of senior level “talents” may cause delays in our development efforts and operational challenges as well as shortage in knowhow and capabilities which cannot always immediately mitigated.
Despite recent signs for a slight slowdown in competition for skilled and qualified personnel, if we fail to attract and retain qualified personnel due to compensation or other factors, our business, operations and product development efforts would suffer.
It is difficult to predict our gross margin as it is exposed to significant fluctuations as a result of potential changes in the geographical mix of our revenues.
Our revenues are derived from multiple regions, each of which may consist of a number of countries. Gross margin percentages may vary significantly between different regions and even among different countries within the same region.region and even within different customers in the same country, dependent on the size and characteristic of specific deal terms. A significant change in the actual ratio of our revenues among the different regions/countries, whereby the actual ratio of revenues from a higher gross margin region/country exceeds our expectations, may cause our gross margin to significantly increase, while in case the actual ratio of revenues from a lower gross-margin region/country exceeds our expectations, our gross-margin may significantly decrease.
Our revenue and operating results are hard to predict and may vary significantly from quarter to quarter and from our expectations for any specific period.
Our quarterly results are difficult to predict and may vary significantly from quarter to quarter, or from our expectations and guidance for any specific period. Most importantly, delays in product delivery or completion of related services, delays in performing acceptance tests or delays in projects timetable on part of our customers or their other vendors, can cause our revenues, net income and operating cash flow to deviate significantly from anticipated levels, especially as a large portion of our revenues are traditionally generated towards the end of each quarter. Factors
Additionally, as a significant portion of our business is concentrated with certain customers, who are not obligated to purchase from us a fixed amount of products or services over any period of time and may terminate or reduce their purchases from us at any time without prior notice or penalty, we have difficulty projecting future revenues from these customers, which highly affect our overall revenue, cash-flow and business. In addition to the inherent uncertainty associated with such business pattern, any credit crunch, distressed financial situation or insolvency on the part of such customers, may adversely affect our ability to collect the balance due from them and further expend the variation in our revenues and operating results.
Moreover, factors such as geographical mix, delivery terms and timeline(s), product mix, related services mix and other deal terms may differ significantly from our expectations, and thus impact our revenue recognition timing, gross margins, costs and expenses, as well as cash flow from operations. In addition, the spending decisions of our customers throughout the year may also create unpredictable fluctuations in the timing in which we receive orders and can recognize revenues, which may impact our quarterly results. Such unpredictable fluctuations could be material in cases where these spending decisions are made by our largest customers or regarding significant deals. In addition,Additionally, the quarterly variationaggregation of several revenue recognition requirements for each such transaction, results in difficulty and complexity in establishing a firm prediction as to the end-of-term results, and consequently, our operating resultsactual revenue rates may significantly exceed or be less than our expectations.
We are engaged in turn create volatility in the market priceproviding installation or rollout projects for our shares.
We experience high-volatility in the supply needs of our customers, which from timeare long-term projects that are subject to time lead toinherent risks, including early delivery pressures. If we fail to effectively cope with such volatility and growing supply demands of our customers, we may be unable to timely fulfill our customer commitments, which would adversely affect our business and results of operations.
The delivery requirements of our customers are unevenly spread throughout the year. In addition, we offer our customers a wide variety of products and configurations, and our inability to forecast the quantities or mix of the delivery demands for our products may result in underestimating our material purchasing needs, as well as production capacity requirements. If we fail to effectively manage our deliveries to the customers in a timely manner, or otherwise fulfill our contractual obligations to them - for example if we are unable to synchronize our supply chain and production process in cases of rapidly increasing production needs - the cost of our material purchasing, manufacturing and logistics may increase and we may also be obligated to pay penalties to our customers for delays, all of which would adversely affect our business, financial results and our relationship with our customers.
Relying on third-party manufacturers, suppliers and service providers may disrupt the proper and timely management of deliveries of our products a risk that is intensified in case of a single source supplier.
We outsource our manufacturing and the majority of our logistics operations, and purchase ancillary equipment for our products from contract and other independent manufacturers. Disruption in deliveries or in operations of these and other third-party suppliers or service providers, for example – as a result of capacity constraints, production disruptions, price increases, force majeure events, decreased availability of raw materials or commodities, as well as quality control problems related to components - may all cause such third parties not to comply with their contractual obligations to us. This could have an adverse effect on our ability to meet our commitments to customers and could increase our operating costs.
Although we believe that our contract manufacturers and logistics service providers have sufficient economic incentive to perform our manufacturing and logistics services requirements, the resources devoted to these activities are not within our control. We cannot assure you that manufacturing or logistics problems will not occur in the future due to insufficient resources devoted to our requirements by such manufacturers and logistics service providers.
These delays, disruptions, quality control problems, loss in capacity and problems in logistics processes could result in delays in deliveries of our products to our customers,delayed payment terms, which could subject us to penalties payable to our customers, increased warranty costs as well as shipment expenses in case of expedited deliveries, possible cancellation of orders, as well as damage our reputation. If any of these problems occur, we may be required to seek alternate manufacturers or logistics service providers and we may not be able to secure such alternate manufacturers or logistics service providers that meet our needs and standards in a timely and cost-effective manner. The above-mentioned risks are exacerbated in the case of raw materials or component parts that are purchased from a single-source supplier.
Our contract manufacturers obtain some of the components included in our products from a limited group of suppliers and, in some cases, single or sole source suppliers. The loss of or problems in any of these suppliers could cause us to experience production and shipment delays as well as additional costs, which may result in a substantial cost increase or loss of revenue.
Our contract manufacturers currently obtain key components from a limited number of suppliers. Some of these components are obtained from a single or sole source supplier. Our contract manufacturers’ dependence on a single or sole source supplier, or on a limited number of suppliers, subjects us to the following risks:
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| The component suppliers may experience shortages in components and interrupt or delay their shipments to our contract manufacturers. Consequently, these shortages could delay the manufacture of our products and shipments to our customers, which could result in increased manufacturing and shipment costs, penalties or cancellation of orders for our products. |
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| The component suppliers could discontinue the manufacture or supply of components used in our systems. In such an event, our contract manufacturers or we may be unable to develop alternative sources for the components necessary to manufacture our products, which could force us to redesign our products or buy a large stock of the component into inventory before it is discontinued. Any such redesign of our products would likely interrupt the manufacturing process and could cause delays in our product shipments. Moreover, a significant modification in our product design may increase our manufacturing costs and bring about lower gross margins. In addition, we may be exposed to excess inventory of such component, which we will have to write-down in case the demand is not as high as we have anticipated at the time of buying this stock. |
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| The component suppliers may significantly increase component prices at any time and with immediate effect, particularly if demand for certain components increases dramatically in the global market. These price increases would increase component procurement costs and could significantly reduce our gross margins and profitability. |
Merger and Acquisition activities expose us to risks and liabilities, which could also result in integration problems and adversely affect our business.
We continue to explore potential merger and acquisition opportunities within our wireless backhaul market or as a diversification effort in order to implement a growth strategy. However, we are unable to predict whether or when any prospective acquisitions will be completed. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’s attention.
In addition, we also explore potential merger and acquisition opportunities aimed at obtaining technological improvement of our products or diversifying our business to achieve business growth and adding new technologies to our products. These mergers could prove to be unsuccessful, if the new market we were aiming for does not materialize, if we fail to effectively obtain the technological improvement we have anticipated, or if we are unable to integrate the acquired technology into our products.
As a result, the anticipated benefits and cost savings of such mergers and acquisitionscustomers’ default, insolvency, or other restructuring may not be fully realized, or at all, or may take longer to realize than expected. Acquisitions involve numerous risks, any of which could harm our business, results of operations cash flow and financial condition as well as the price of our ordinary shares.
Our international operations expose us to the risk of fluctuations in currency exchange rates and restrictions related to foreign currency exchange controls.
Although we derive a significant portion of our revenues in U.S. dollars, a portion of our U.S. dollar revenues are derived from customers operating in local currencies other than the U.S. dollar. Therefore, devaluation in the local currencies of our customers relative to the U.S. dollar could cause our customers to cancel or decrease orders or to delay payment, which could have a negative impact on our revenues and results of operations. We are also subject to other foreign currency risks including repatriation restrictions in certain countries, particularly in Latin America and in Africa. See also the risk of “Due to the volume of our sales in emerging markets, we are susceptible to a number of political, economic and regulatory risks that could have a material adverse effect on our business, reputation, financial condition and results of operations.”
A substantial portion of our operating expenses are denominated in New Israeli Shekels (“NIS”), and to a lesser extent, other non-U.S. dollar currencies. Our NIS-denominated expenses consist principally of salaries and related costs as well as other related personnel expenses. In addition, our lease and facility related expenses and certain engagements with other Israeli vendors are denominated in NIS as well. We anticipate that a portion of our expenses will continue to be denominated in NIS. In 2017, the NIS continued to fluctuate in comparison to the U.S. dollar, and appreciated by 6.5% against the U.S. dollar (on an annual average compared to annual average basis). If the U.S. dollar will continue to devaluate against the NIS, there will be a negative impact on our results of operations.
In some cases, we are paid or maintain monetary assets and liabilities, or cash reserves in certain countries, in non-U.S. dollar currencies. Significant fluctuation in these non-U.S. dollar currencies could have a significant adverse effect on our results of operation, and especially in cases where conversion to U.S. dollars and repatriation of such cash reserves is restricted or impossible, our cash balances may be significantly devaluated and have a material adverse effect on our financial condition. During the first quarter of 2018, the Venezuelan Bolivar suffered from a major devaluation of approximately 1,200% relative to the US dollar. As a result, we expect to record approximately $0.6 million of forex expenses in the first quarter of 2018, primarily related to the erosion of our cash balances in Venezuela.
We use derivative financial instruments, such as foreign exchange forward contracts, to mitigate the risk of changes in foreign exchange rates on our balance sheet accounts and forecast cash flows. We do not use derivative financial instruments or other “hedging” techniques to cover all our potential exposure and may not purchase derivative instruments that adequately insulate us from foreign currency exchange risks. In some countries, we are unable to use “hedging” techniques to mitigate our risks because hedging options are not available for certain government restricted currencies. Moreover, derivative instruments are usually limited in time and as a result, cannot mitigate currency risks for the longer term. During 2017, we incurred losses in the amount of $1.2 million as a result of exchange rate fluctuations that have not been fully offset by our hedging policy. The volatility in the foreign currency markets may make it challenging to hedge our foreign currency exposures effectively.
Moreover, some of our competitors can benefit from currency fluctuations as their costs and expenses are primarily denominated in currencies other than the U.S. dollar. In case the U.S. dollar strengthens against these currencies these competitors might offer their products and services for a lower price and capture market share from us, which might adversely affect our business and negatively influence our results of operation and financial condition.
Additional tax liabilities could materially adversely affect our results of operations and financial condition.
As a global corporation, we are subject to income and other taxes both in Israel and in various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Our tax expense includes estimates or additional tax, which may be incurred for tax exposures and reflects various estimates and assumptions, including assessments of our future earnings that could impact the valuation of our deferred tax assets. From time to time, we are subject to income and other tax audits, the timings of which are unpredictable. Our future results of operations could be adversely affected by changes in our effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in our overall profitability, changes in tax legislation and rates, changes in tax treaties, changes in international tax guidelines (such as the OECD Base Erosions and Profit Shifting project – known as BEPS), changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures. While we believe we comply with applicable tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and impose additional taxes. Should we be assessed with additional taxes, there could be a material adverse effect on our results of operations and financial condition.
Our business activities in multiple countries may also expose us to indirect as well as withholding taxes in those countries. Our inability to meet certain tax regulations related to indirect or withholding taxes as well as different interpretations applied by the governing tax authorities to those regulations may expose us to additional tax payments and penalties. These would have a material adverse impact on our results of operations and financial condition.
Due to the volume of our sales in emerging markets, we are susceptible to a number of political, economic and regulatory risks that could have a material adverse effect on our business, reputation, financial condition and results of operations.
A majority of our sales is made in emerging economies in Latin America, India, Asia Pacific and Africa. For each of the years ended December 31, 2017 and 2016, sales in these regions accounted for approximately 74% and 71% of our revenues, respectively. As a result, the occurrence of international, political, regulatory or economic events in these regions could adversely affect our business and result in significant revenue shortfalls and collection risk. Any such revenue shortfalls and/or collection risks could have material adverse effects on our business, financial condition and results of operations. For example, in the past few years, due to a shortage of foreign currency, the Central Bank of Nigeria put in place a number of currency controls aimed at reducing the flow of foreign currency in Nigeria and out of the country. These restrictions make it hard for our customers in Nigeriacustomers’ ability to pay for equipment purchases, in U.S. dollars. In some cases, payment for imported goods is made in Nigerian Naira, which exposes us, to significant currency fluctuations.
Below are some of the risks and challenges that we face as a result of doing business internationally, several of which are more likely in the emerging markets than in other countries:
| · | unexpected changes in or enforcement of regulatory requirements, including security regulations relating to international terrorism and hacking concerns and regulations related to licensing and allocation processes; |
| · | unexpected changes in or imposition of tax or customs levies, including as a result of actions threatened or taken by the Trump Administration in the United States; |
| · | fluctuations in foreign currency exchange rates; |
| · | restrictions on currency and cash repatriation; |
| · | imposition of tariffs and other barriers and restrictions; |
| · | burden of complying with a variety of foreign laws, including foreign import restrictions which may be applicable to our products; |
| · | difficulties in protecting intellectual property; |
| · | laws and business practices favoring local competitors; |
| · | demand for high-volume purchases with discounted prices; |
| · | collection delays and uncertainties; |
| · | civil unrest, war and acts of terrorism; |
| · | requirements to do business in local currency; and |
| · | requirements to manufacture or purchase locally. |
Business practices in emerging markets may expose us to legal and business conduct-related regulatory risks.
Local business practices in jurisdictions in which we operate, and particularly in emerging markets, may be inconsistent with international regulatory requirements, such as anti-corruption and anti-bribery laws and regulations, to which we are subject. It is possible that, notwithstanding our policies and in violation of our instructions, some of our employees, subcontractors, agents or partners may violate such legal and regulatory requirements, which may expose us to criminal or civil enforcement actions. If we fail to comply with such legal and regulatory requirements, our business and reputation may be harmed.
A decrease in the industry or reduction in our customers’ revenues from increased regulation or new mobile services may cause operators’ investments in networks to slow, be delayed or stop, which could harm our business.
We are exposed to changing network models that affect operator spending on infrastructure as well as trends in investment cycles of telecom operators and other service providers. The changes include: 1) further expansion of coverage; expansion out of metro, as well as other urban and suburban areas to rural areas; 2) densification and optimization of the 4G network, within the evolution of the LTE standard from relatively low speed single carrier LTE to high speed multiple carrier LTE (LTE-A), to Gigabit 4G LTE (LTE-A-Pro). Network densification and optimization investments that are designed to provide both additional network capacity and higher speeds for a better user experience to the subscriber; 3) early introduction of 5G services; and 4) 2G networks shutdown, which is expected to take place within the next several years and designed to free spectrum for the delivery of additional 4G Gigabit LTE and 5G services.
The proliferation of strategic options for service providers, as outlined above, may cause service providers to prolong evaluations of services and network strategies, resulting in slower and smaller budget spent in the next several years, which may negatively affect our business. In addition, the intensification of use of “over-the-top services” - which make use of the operators’ network to deliver rich content to users but do not generate revenue to operators - is causing operators to lose a substantial portion of their potential revenues. In addition, recent changes to USA policy against net neutrality and the potential adoption of such policy in other countries may negatively affect operators’ revenue streams and result in a decrease in network investments. In addition, changes in regulatory requirements in certain jurisdictions around the world are allowing smaller operators to enter the market, which may also reduce our customers’ pricing to their end-users, further causing them to lose revenues. This has made operators more careful in their spending on infrastructure upgrades and build-outs.
As a result, operators are looking for more cost-efficient solutions and network architectures, which will allow them to break the linearity of cost, coverage, capacity and costs of service delivery through more efficient use of existing infrastructure and assets. If operators fail to monetize new services, fail to introduce new business models or experience a decline in operator revenues or profitability, their willingness to invest further in their network systems may decrease, which will reduce their demand for our products and services and may have an adverse effect on our business, operating results and financial condition.
Global competition and current market conditions, including those specifically impacting the telecommunications industry, have resulted in downward pressure on the prices for our products, which could result in reduced revenues, gross margins, profitability and demand for our products and services.
We and other manufacturers of telecommunications equipment are experiencing, and are likely to continue to experience, increased downward price pressure, particularly as we increase our customer base to include more Tier 1 customers (customers who are telecom operators with national or multinational service coverage that can reach every other network without purchasing network resources from other network communication providers) and continue to meet market demand in certain emerging markets and other less profitable countries. As a result, we may experience declining average sales prices for our products. Our future profitability will depend upon our ability to improve manufacturing efficiencies, to reduce costs of materials used in our products, and to continue to ‘design to cost’, i.e., introduce new lower-cost products and product enhancements. Since customers frequently negotiate supply arrangements far in advance of delivery dates, we may be required to commit to price reductions for our products before we are aware of how, or if, cost reductions can be obtained. Current or future price reduction commitments and any inability on our part to respond to increased price competition, in particular from Tier 1 customers with higher volumes and stronger negotiating power, could harm our profitability, business, financial condition and results of operations. Alternatively, if we decide not to pursue some of the deals, our revenues might significantly decrease and harm our business and financial results.
In recent years, we have increased our sales in India, a region typically characterized as being price-sensitive, resulting in pressure on our prices. In 2017, 39.2% of our revenues were earned in India, while in prior years – 2016, 2015 and 2014 – 27.3%, 30.3% and 24.8%, of our revenues, respectively, were generated from sales in India. We expect that our revenues from sale of products in India will continue to constitute a significant portion of our business in the future. In addition, we anticipate continued demand for our products and/or services in Latin America, a market which is also characterized by strong downward pricing pressures.
Challenging global economic conditions could also have adverse, wide-ranging effects on demand for our products and services, as well as for the products of our customers, which could result in reduced revenues, gross margins and profitability.
The telecommunications industry has experienced downturns in the past, in which operators substantially reduced their capital spending on new equipment. Continued adverse economic conditions, which currently exist in certain jurisdictions, including certain countries in Latin America, Eastern Europe and Africa, could cause network operators to postpone investments or initiate other cost-cutting initiatives to improve their financial position. Over the past several years, network operators have started to share parts of their network infrastructure through cooperation agreements rather than through legal consolidation, which may adversely affect demand for lower cost network equipment. Moreover, the level of demand by operators and other customers who buy our products and services can change quickly and can vary over short periods, including on a monthly basis.
If the current global economic situation deteriorates, or if the uncertainty and variations in the telecommunications industry continues, our business could be negatively impacted. For example, we could experience reduced demand for our products and services, slowed customer buying decisions, pricing pressures, possible withdrawal of global operators from some geographies in which they currently operate and in which we sell and supplier or customer disruptions. Furthermore, insolvency of some of our key distributors, resellers, original equipment manufacturers (OEMs) and systems integrators, could impair our distribution channels. Any of these contingencies could reduce our revenues or our ability to collect our accounts receivable, and have a material adverse effect on our financial condition and results of operations.
If we fail to develop and market new products that keep pace with technological developments, the changing industry standards and our customers’ needs, we may not be able to grow or sustain our business.
The market for our products is characterized by rapid technological advances, changing customer needs and evolving industry standards, as well as increasing pressures to make existing products more cost efficient. Accordingly, our success will depend, among other things, on our ability to develop and market new products or enhance our existing products in a timely manner to keep pace with developments in technology and customer requirements.
In addition, the wireless equipment industry is subject to rapid change in technological and industry standards. This rapid change, through official standards committees or widespread use by operators, could either render our products obsolete or require us to modify our products, necessitating significant investment, both in time and cost, in new technologies, products and solutions. We cannot assure you that we will bring products into full production with acceptable reliability, or that any development or production ramp-up will be completed in a timely or cost-effective manner.
We cannot assure you that we will continue to successfully forecast technology trends nor that we will continue to anticipate innovations made by other companies and respond with innovation in a timely manner, which could affect our competitiveness in the market.
Our market is also characterized by a growing demand for more sophisticated and rich software-based capabilities within the network IP layer, some which may require us to utilize and embed additional components, either in hardware or third-party software, in solutions we provide. We therefore cannot assure you that we will continue to be successful in providing these necessary software based capabilities in a cost-effective manner, which could affect our business performance.
We are continuously seeking to develop new products and enhance our existing products. In late 2013 we announced a significant new line of products (IP-20 Platform), which we have continued to enhance with newer products and capabilities every year since. Developing new products and product enhancements requires research and development resources. We may not be successful in enhancing our existing products or developing new products in response to technological advances or in satisfying increasingly sophisticated customer needs in a timely and cost-effective manner, all of which would have a material adverse effect on our ability to grow or maintain our business. Moreover, we cannot assure that new products being developed based on the IP-20 Platform will be accepted in the market or will result in profitable sales or that such products will not require additional quality assurance and defect-fixing processes.
We may encounter technical difficulties as we introduce new products or new versions of existing products into the market, which could impair our ability to fulfill our commitments to our customers in a timely manner and negatively impact our business and results of operations.
In our competitive market, we launch new versions of existing products and new products from time to time. New products and new versions of existing products are more prone to technical problems which, may, among other things, adversely affect our ramping up ability and our ability to meet delivery commitments to our customers in a timely manner, and may cause us to incur additional manufacturing, development and repair costs. This may have a material adverse effect on our business and results of operation.
Breaches of network or information technology security could have an adverse effect on our business.
Cyber-attacks or other breaches of network or IT security may cause equipment failures or disrupt our systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber-attacks, malware, computer viruses and other means of unauthorized access. While we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain. While we maintain redundancy and disaster recovery practices for our critical services, we cannot assure you that our cyber-security measures and technology will adequately protect us from these and other risks. Furthermore, our inability to operate our facilities as a result of such events, even for a limited period of time, may result in significant expenses or loss of market share to our competitors. In addition, a failure to protect the privacy of customer or employee confidential data against breaches of network or IT security could result in damage to our reputation.
Maintaining the security of our products, computers and networks is a critical issue for us and our customers, therefore each year we invest additional resources and technologies to better protect our assets. We believe that employee awareness is one of the best defensive tools, and thus we continue to implement best practices in this area. In 2018 we will continue to increase the time spent by our Chief Information Security Officer and its teams in preventing cyber security attacks while being focused on cloud-based solutions. However, security researchers, criminal hackers and other third parties regularly develop new techniques to penetrate computer and network security measures. In addition, hackers also develop and deploy viruses, worms and other malicious software programs, some of which may be specifically designed to attack our products, systems, computers or networks. Additionally, external parties may attempt to fraudulently induce our employees or users of our products to disclose sensitive information in order to gain access to our data or our customers’ data. These potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary information or sensitive, personal or confidential data about us, our employees or our customers, including the potential loss or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our employees, our customers or the individuals affected, to a risk of loss or misuse of this information, result in litigation and potential liability or fines for us, damage our brand and reputation or otherwise harm our business.
In 2013 and 2014, we incurred substantial losses and negative cash flows from operations. Although we were profitable and generated cash from our operations during 2015 - 2017, we cannot assure you that we will be able to maintain profitability or continue to have positive operating cash flows.
In 2013 and 2014, we incurred substantial net losses and a negative cash flow from operations. For example, in 2014 we incurred a net loss of $76.5 million, and negative cash flow from operations of $32.3 million. Our losses in prior periods were impacted by decreased gross margins and the significant expenses and charges associated with organizational restructuring activities. In 2015, 2016 and 2017 we recognized net income of $1.0 million, $11.4 million and $15.6 million, respectively, and generated cash flow from operating activities of $16.1 million, $25.8 million and $17.2 million, respectively. However, there is no assurance that we will be able to maintain or improve such results, which may require the implementation of additional cost reduction measures. Our failure to maintain profitability or to continue to have positive operating cash flows may impact our ability to compete in the market for the short and long term and impair our financial condition.
We could be adversely affected by our failure to comply with the covenants in our credit agreement or by the failure of any bank to provide us with credit under committed credit facilities.
We have a committed credit facility available for our use from a syndicate of several banks. Our credit agreement contains financial and other covenants requiring that we maintain, among other things, a certain ratio between our shareholders’ equity and the total value of our assets on our balance sheet, a certain ratio between our net financial debt to each of our working capital and accounts receivable, and a minimum cash covenant. Any failure to comply with the covenants, including due to poor financial performance, may constitute a default under the credit facility and may require us to seek an amendment or waiver from the banks to avoid termination of their commitments and/or an immediate repayment of all outstanding amounts under the credit facilities, which would have a material adverse effect on our financial condition and ability to operate. In addition, the payment may be accelerated and the credit facility may be cancelled upon an event, in which a current or future shareholder acquires control (as defined under the Israeli Securities Law) of us. For more information, please refer to Item 5: “OPERATING AND FINANCIAL REVIEW AND PROSPECTS; Liquidity and Capital Resources.”
In addition, the credit facility is provided by the syndication with each bank agreeing severally (and not jointly) to make its agreed portion of the credit loans to us in accordance with the terms of the credit loan agreement, which includes a framework for joint decision making powers by the banks. If one or more of the banks providing the committed credit facility were to default on its obligation to fund its commitment, the portion of the committed facility provided by such defaulting bank would not be available to us.
Emergence of new 5G radio access technologies, which make use of high frequency microwave and millimeter-wave spectrum in network architectures different than Point-to-Point, could potentially be used by existing and new vendors to provide new and different wireless backhaul solutions and cause our revenues to decrease.
The 5G industry is making significant efforts to provide ultra-high speed multi-Gbps mobile and fixed access between networks and people through smartphones, tablets, CPEs and other devices, as well as machines such as meters, street surveillance and body-worn cameras and more. In order to achieve such high access speeds, microwave and millimeter-wave spectrum, which is currently used primarily for wireless backhaul, may be used more often. Regulators are also making changes to the regulatory status of such additional high frequency spectrum for access use, traditionally used for wireless backhaul. Numerous companies have responded by investing in the development of such access technologies to resolve these challenges in an innovative and cost-effective manner supported by the availability of standards based components and products, which some could potentially be used for wireless backhaul as well. If such products and solutions are made available, those have the potential of taking share from our available backhaul market. If we are unable to respond in time by developing competing and cost effective high-speed wireless backhaul solutions, we could be negatively affected in market share, revenues and profits.
Consolidation of our potential customer base could harm our business.
The increasing trend towards mergers in the telecommunications industry has resulted in the consolidation of our potential customer base. In situations where an existing customer consolidates with another industry participant, which uses a competitor’s products, our sales to that existing customer could be reduced or eliminated completely to the extent that the consolidated entity decides to adopt the competing products. Further, consolidation of our potential customer base could result in purchasing decision delays as consolidating customers integrate their operations and could generally reduce our opportunities to win new customers, to the extent that the number of potential customers decreases. Moreover, some of our potential customers may agree to share networks, resulting in a decreased requirement for network equipment and associated services, and thus a decrease in the overall size of the market. Network operators have started to share parts of their network infrastructure through cooperation agreements rather than legal consolidations, which may adversely affect demand for network equipment and could harm our business and results of operations.
We face intense competition from other communications solutions that compete with our high-capacity point-to-point wireless products, which could reduce demand for our products and have a material adverse effect on ourbusiness and results of operations.
Our products compete with other high-speed communications solutions, including fiber optic lines and other wireless technologies. Some of these technologies utilize existing installed infrastructure and have achieved significantly greater market acceptance and penetration than high-capacity point-to-point wireless technologies. Moreover, as more and more data demands are imposed on existing network frameworks, and due to consolidation of fixed and mobile operators, operators may be more motivated to invest in more expensive high-speed fiber optic networks to meet current needs and remain competitive.
Some of the principal disadvantages of high capacity, point-to-point wireless technologies that may make other technologies more appealing include suboptimal operations in extreme weather conditions and limitations in connection with the need to establish line of sight between antennas and limitations in site acquisition for multiple links, favoring other technologies.
To counter the disadvantages of point to point wireless technologies, license exempt technologies in the V-band spectrum (60Ghz band), which can operate in the wide bandwidth available at this band, may be used to deliver multi-Gbps capacity backhaul for a limited set of scenarios, such as dense urban, serving short range point-to-multipoint communications, thereby reducing site acquisition barriers, enabling flexible deployment models. Though the applicability of such solutions is limited to a small set of use cases, with shared capacity thus limiting the peak capacity available for urban backhaul, those may take share from point to point solutions we provide for these same urban scenarios.
In addition, customers may decide to use transmission frequencies for which we do not offer products.
To the extent that these competing communications solutions reduce demand for our high-capacity point-to-point wireless transmission products, there may be a material adverse effect on our business and results of operations.
We are engaged in supplying installation or rollout projects for our customers. Such long-term projects have inherent additional risks. Problems in executing these rollout projects, including delays or failurefailures in acceptance testing procedures and other items beyond our control, all of which could have a material adverse effect on ourresults of operations.operations or financial condition.
Our offering includes long term projects such as the networks rollout, managed services, and related projects. Some of those projects are characterized by providing customers’ credit and availing long payment terms, which exposes us to the risks of default, insolvency, or other adverse effect on the customer’s ability to pay us. Although we hedge or insure some of those risks, the entire exposure cannot be covered. This may result in significant losses and may adversely affect our financial results.
In a significant number of ourcertain projects, we are engaged in supplying our productsserve as totalan integrator and prime contractor of end-to-end rollout projects, which include installation and other services for our customers. In this context, we may act as the prime contractor and equipment supplier for network build-out projects, providing installation, supervision and commissioning services required for these projects, or we may provide such services and equipment (or part thereof) for projects handled by others, primarily system integrators. As we engage in more
These rollout projects we expect to continue to routinely enter into contracts involving significant amounts to be paid by our customers over time and which often require us to deliver products and services representing an important portion of the contract price before receiving any significant payment from the customer. customer, as significant amounts are to be paid by our customers over time, which expose us to our customers’ default, insolvency, or other adverse effects on our customers’ ability to pay us. In cases where we do not serve as prime contractors as aforesaid, and the full project is handled by others, even if we have delivered to our commitments, there is a risk that we will not be able to receive payments in a timely fashion due to failure or default on part of the prime contractor or other issues which are not related to the performance of our portion of the project, causing payment delays by the end customers. Therefore, rollout projects could cause us to experience significant collection issues and as a result substantial period-to-period fluctuations in our results of operations, cash flow and financial condition.
Once a purchase agreementorder has been executed, the timing and amount of revenue if applicable, may remain difficult to predict. The completion of the installation and testing of the customer’s networks and the completion of all other suppliers’ network elements are subject to the customer’s timing and efforts, and other factors outside our control, such as site readiness for installation or availability of power and access to sites, which may prevent us from making predictions of revenue with any certainty. Throughout the COVID-19 pandemic, for example, we have experienced difficulties in completion and testing of sites or in obtaining acceptance certificates due to travel limitations, lockouts restrictions and other disruption of our and our suppliers’ activities or of our customers’ operations, which impair our ability to recognize revenue.
Also, as we usually engage subcontractors, third party service providers and temporary employees to perform a significant part of the work (such as installation, supervision, on-site testing, commissioning, repair and replacement services), we are dependent on such service providers’ and temporary employees’ timely and quality performance, including with respect to the fulfillment of or default under their back-to-back obligations to those we may have undertaken vis-à-vis our customers, as well as pricing that may fluctuate significantly due to various factors. All these factors may affect our ability to accurately project our costs and profits in providing these services and may result in significant deviations from our projections, which may adversely affect our financial results. In addition, we may be subject to other risks that may apply to our subcontractors or associated with their businesses.
In some of these projects, we may need to provide bank guarantees to ensure successful completion of the rollout services, to secure an advance payment we have received, in case we fail to meet our obligations, or to secure our warranty obligations. As a result, in these projects we assume greater financial risk. In addition, these types of projects could cause us to experience substantial period-to-period fluctuations in our results of operations and financial condition.
In addition, typically in rollout projects, we are dependent on the customer to issue acceptance certificates to generate and recognize revenue. In such projects, we bear the risks of loss and damage to our products until the customer has issued an acceptance certificate upon successful completion of acceptance tests. Moreover, we are not always the prime integrator in these projects and in such cases, the acceptance may be delayed even further since it depends on the acceptance of other network elements not in our control. The early deployment of our products during a long-term project reduces our cash flow, as we generally collect a significant portion of the contract price after successful completion of an acceptance test. If our products are damaged or stolen, if the network we install does not pass the acceptance tests or if the customer does not or will not issue an acceptance certificate, the end user or the system integrator could refuse to pay us any balance owed and we would incur substantial costs, including fees owed to our installation subcontractors, increased insurance premiums, transportation costs and expenses related to repairing or manufacturing the products. Moreover, inIn such a case, we may not be able to repossess the equipment, thus suffering additional losses.
Our service offering includes full design and implementation of wireless communication networks, while also using technologies of third-party vendors. The complexity of such projects and the above occurs, wereliance on third parties’ performance is increasing the risk of not meeting our performance obligations. As a result, the completion of such projects may be delayed, or the outcome may not be able to generatethe full satisfaction of the customer, who may in turn, impose penalties or recognize revenueexercise any other remedy available to customers in the service contract. In addition, the cost of such projects may be higher than planned. This may result in significant losses and may adversely affect our financial results.
The duration and the severity of the global outbreak of COVID-19 has impacted the global economy and us. Any future outbreak of additional waves of COVID-19, or another pandemic in similar magnitude, could adversely affect our business, financial condition and results of operations.
In recent years, the COVID-19 pandemic has resulted in authorities imposing, and businesses and individuals implementing, numerous measures to try to contain the virus, including the closure of workplaces, restricting travel, prohibiting assembling, closing international borders and quarantining populated areas. As our global operations require physical presence in many stages of our business activities, we were particularly vulnerable to the consequences of such measures, and we may incurbe vulnerable to any restrictions that may be further imposed, in case of a renewed outbreak of COVID-19, or any other pandemic with similar effects.
The degree to which a renewed outbreak of COVID-19 (or another pandemic with similar effects) will impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and severity of the pandemic, the actions taken to contain the virus or treat its impact, other actions taken by governments, businesses, and individuals in response to the virus and resulting economic disruption, and how quickly and to what extent normal economic and operating conditions can resume. We are unable to predict the extent of the impact of such renewed or new outbreak of pandemic on our customers, suppliers, vendors, and other partners, and their financial conditions, but a material effect on these parties could also materially adversely affect us.
The impact of any renewed outbreak of COVID-19 or similar pandemic can also exacerbate other risks discussed herein, which could in turn have a material adverse effect on us. Developments related to such outbreaks have been unpredictable, and additional impacts and risks may arise that we are not aware of, or unable to respond to appropriately.
Increased breaches of network or information technology security along with changes in privacy and data protection laws could have an adverse effect on our business.
Cyber-attacks or other breaches of network or IT security may cause equipment failures or disrupt our systems and operations, expose us to ransom demands or sensitive data leaks. We might be subject to attempts to breach the security of our networks and IT infrastructure through cyber-attacks, malware, computer viruses and other means of unauthorized access. While we maintain insurance coverage for some of these events, we cannot be certain that our coverage will be adequate for liabilities actually incurred. While we take cybersecurity measures and maintain redundancy and disaster recovery practices for our critical services, we cannot assure you that our cybersecurity measures and technology will adequately protect us from these and other risks. Furthermore, our inability to operate our facilities as a result of such events, even for a limited period of time, may result in significant expenses or loss of market share to our competitors. We may expend significant resources or modify our products to try to protect against security incidents.
Maintaining the security of our products, computers and networks is a critical issue for us and our customers. Therefore, each year we invest additional resources and technologies to better protect our assets. However, security researchers, criminal hackers and other third parties regularly develop new techniques to penetrate computer and network security measures. In addition, hackers also develop and deploy viruses, worms, Trojan horses and other malicious software programs, some of which may be specifically designed to attack our products, systems, computers or networks. Moreover, due to current labor market trends, a significant number of our employees or employees of our vendors, suppliers and service providers, have moved to work from their homes and remotely access our or such vendors’, suppliers’ or service providers’ IT networks. Such remote working mode creates the risk of attacking the end-point user stations, connection channels and gateways. We have seen a significant increase of cyberattacks on enterprises and individuals in recent years and we assume that we shall further be exposed to such threats going forward. In addition, our and our vendors’, suppliers’ and service providers’ IT systems are increasingly being moved to cloud-based platforms such as IaaS (Infrastructure as a Service) and SaaS (Software as a Service) IT solutions. These cloud-based arena poses risks of attack on and from the end-point user stations, connection channels and gateways as well as the IaaS and SaaS infrastructures of our service providers. Additionally, external parties may attempt to fraudulently induce our employees or users of our products to disclose sensitive information in order to gain access to our data or our customers’ data. These potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary information or sensitive, personal or confidential data about us, our employees or our customers, including the potential loss or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our employees, our customers or the individuals affected, to a risk of loss or misuse of this information, result in litigation and potential liability or fines for us, damage to our brand and reputation or otherwise harm our business.
In addition, a failure to protect the privacy of customers’ or employees’ confidential and/or personal data against breaches of network or IT security could result in monetary liabilities and damage to our reputation. The regulatory framework for data and privacy protection issues is evolving worldwide, including the imposition of more comprehensive data protection requirements under the General Data Protection Regulation (GDPR), which imposes stricter obligations and provides for greater penalties for noncompliance. These laws and regulations constantly evolve and remain subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain. New data protection and privacy laws and regulations add additional complexity, requirements, restrictions and potential legal risk, require additional investment in resources to compliance programs, and could result in increased compliance costs and/or changes in business practices and policies.
Unauthorized use or behavior on part of our vendors’, suppliers’ and service providers’ employees or taking insufficient cybersecurity measures by them, could result with data leaks and penetration to our databases that are located or installed in their network. In addition, the shift to software solutions coupled with requirement to move data to cloud-based and open-source environments impose enhanced cybersecurity challenges that can make our vendors, suppliers and service providers more vulnerable to cyber-attacks.
Cyber-attacks on our customers’ networks involving our products could have an adverse effect on our business.
Maintaining the security of our products (including newly introduced software products) which are installed with our customers is a critical issue for us, therefore each year we invest additional resources and technologies to better protect our assets. However, security researchers, criminal hackers and other third parties regularly develop new techniques to penetrate computer and network security measures. Cyber-attacks, or other breaches of security on our customers’ networks, may be initiated at any network location or device including initiation through our products. Although we maintain high levels of cyber-security aware development processes, we cannot assure that such attacks, or other breaches of security through our products, will fail and therefore may negatively affect our customers’ business. Moreover, criminal hackers or hackers associated with national governments, may target a customer of ours or even try to get access to a wider group of the communication network users while devoting immense resourced for long-term access to industry, economy or critical infrastructure users, gather intelligence and develop the means to disable their systems, which attacks are hard to detect, prevent and illuminate. Such attacks could be highly sophisticated, such as slipping malware and Trojan horses and warms into software updates or systematically search for vulnerabilities in our products or in the components we use even before it supplies to us. While we maintain insurance coverage for some of these events, we cannot be certain that our coverage will be adequate for liabilities actually incurred. In addition, these events could also result in damage to our reputation which will further negatively impact our business.
Unauthorized use or behavior on part of our customers’ employees or taking insufficient cybersecurity measures by certain customers, could result with data leaks and penetration to our systems that are located or installed in its network. In addition, the shift to software solutions coupled with requirement to move data to cloud-based and open-source environments impose enhanced cybersecurity challenges that can make our products and services more vulnerable to cyber-attacks.
These potential breaches of our security measures could expose our customers to network failures or other related risks, result in litigation and potential liability or fines for us, damage to our brand and reputation or otherwise harm our business.
We are subject to complex and evolving regulatory requirements that may be difficult and expensive to comply with and that could adversely impact our business, results of operations and financial condition.
Our business and operations are subject to regulatory requirements in Israel and may be subject to additional regulatory requirements in other jurisdictions where we operate or where our subsidiaries’ offices are located, including, among other things, with respect to government contracts, global trade compliance, export controls, trade sanctions, labor, tax, anti-bribery, anti-corruption, and data privacy and protection. Compliance with these regulatory requirements may be onerous, time-consuming, and expensive, especially where these requirements vary from jurisdiction to jurisdiction or where the jurisdictional reach of certain requirements is not clearly defined or seeks to reach across national borders.Regulatory requirements in one jurisdiction may make it difficult or impossible to do business in another jurisdiction. Moreover, the cross-border nature of our business operations may trigger not only a responsibility to comply with Israeli trade compliance and export control legislation but also a responsibility to comply with certain applicable foreign trade and export control regulations. Certain of such requirements may also vary from the jurisdiction in which we operate to jurisdictions in which our suppliers, customers or resellers are operating. If we or our suppliers fail to obtain any required export licenses, or where existing licenses are revoked or become subject to export restrictions, our ability to manufacture, market and sell our products and services could be adversely affected, all of which could materially adversely impacthave a material adverse effect on our results of operationoperations or financial condition.
Additionally, we may be limited in our ability to transfer or outsource certain aspects of our business to certain jurisdictions, and may be limited in our ability to undertake research, development, or sales activities in certain jurisdictions, or we may be unsuccessful in obtaining permits, licenses or other authorizations required to operate our business, such as for the marketing, sale, import or export of products, solutions and services, which may adversely affect our business, operations and results. We rely on a global supply chain and on certain marketing channels that may be similarly affected by these regulatory requirements. We cannot assure you that despite our efforts we will be able to successfully or effectively assure that all of our suppliers, agent and resellers will adhere, or will succeed in making sure that their suppliers or customers adhere, to the regulatory requirements that flow down to them. Further, these regulatory requirements are subject to change and governments around the world are adopting a growing number of compliance and enforcement initiatives. In particular, the pace and scope of changes to global trade control regulations has increased dramatically over the past year, in multiple jurisdictions relevant to our business. These regulations may continue to increase and change at an unusually rapid pace. It has been and may continue to be increasingly difficult to keep up with the pace and scope of these changes. Violations of applicable laws or regulations, including by our officers, employees, contractors or agents, may harm our reputation and deter governments and governmental agencies and other existing or potential customers or partners from purchasing our solutions. Furthermore, non-compliance with applicable laws or regulations could result in fines, damages, civil penalties, or criminal penalties against us, our officers or our employees, restrictions on the conduct of our business, and damage to our reputation. While we make efforts to comply with such regulatory requirements, we cannot assure you that we will be fully successful in our efforts, or that that regulatory changes will not negatively affect our ability to develop, manufacture and sell the products, solutions and services we offer.
Our business is subject to numerous laws and regulations designed to protect the environment, including with respect to discharge management of hazardous substances. Although we believe that we comply with these requirements and that such compliance does not have a material adverse effect on our results of operations, financial condition.condition or cash flows, the failure to comply with current or future environmental requirements could expose the Company to criminal, civil and administrative charges. Due to the nature of our business and environmental risks, we cannot provide assurance that any such material liability will not arise in the future.
In projects in whichOur wireless communications products emit electromagnetic radiation. While we supply installationare currently unaware of any negative effects associated with our products, there has been publicity regarding the potentially negative direct and indirect health and safety effects of electromagnetic emissions from wireless telephones and other wireless equipment sources, including allegations that these emissions may cause cancer. Health and safety issues related to our products may arise that could lead to litigation or rollout services,other actions against us or to additional regulation of our products, and we may be required to ramp up rapidlymodify our technology without the ability to do so. Even if these concerns prove to be baseless, the resulting negative publicity could affect our ability to market these products and, in orderturn, could harm our business and results of operations. Claims against other wireless equipment suppliers or wireless service providers could adversely affect the demand for our transport solutions.
As part of our business is located throughout Europe, we are exposed to meetthe negative impacts of the invasion of Ukraine by Russia on the global economy and specifically the European markets in which we operate and on our customer’s timelines.operations.
In large projectsThe invasion of Ukraine by Russia is likely to have numerous adverse effects on the global and European markets in which we operate. Sanctions and export controls imposed by the U.S. U.K. and E.U. countries significantly limit trade with Russian entities and individuals, requiring us to apply for export licenses and approval for orders placed by Russian customers or that are to be delivered to Russian end-users. We have been recently denied certain license application we submitted to the U.S. Department of Commerce, Bureau of Industry Security, and there is no assurance that such licenses and permissions shall be awarded in the framefuture. Due to the pace of changes, the complexity and the immediate effect of the new sanctions and export controls, they pose a risk of failure to timely respond, adjust, implement or comply therewith. These new regulatory measures may also lead to the cancellation or suspension of orders in the short term as well as a more long-term loss of market share to competitors who are unaffected or do not seek to comply with the new Russia-related trade limitation. Furthermore, as Russia is a global source of raw materials, oil and gas and additional goods and commodities, the ongoing war and hostility also disrupts the supply of these resources (in addition to the imposition of sanctions and embargoes), causes price increases, shortage, disruption to deliveries, shipping and transportation. These disruptions are reflected both in price increases and shortages impacting our contract manufacturers and suppliers, and adversely affect our production and supply chain costs and timelines. Furthermore, there is an increased risk of cyber-attacks and deliberate disruption to the routine activities in general and communication channels in particular. The above-described risks are continuously changing and developing at an unprecedented rate as the war continues. Those and other risks could have an adverse effect on us, our business, suppliers and customers.
Our international operations expose us to the risk of fluctuations in currencyexchange rates and restrictions related to foreign currency exchange controls.
We are a global company that operates in a multi-currency environment. Although we derive a significant portion of our revenues in U.S. dollars, a portion of our revenues are derived from customers operating in local currencies other than the U.S. dollar. Therefore, devaluation in the local currencies of our customers relative to the U.S. dollar could cause our customers to cancel or decrease orders or to delay payment, which could have a negative impact on our revenues and results of operations. We are also subject to other foreign currency risks including repatriation restrictions in certain countries, particularly in Latin America, Asia Pacific and in Africa or significant costs in converting local currencies to U.S. dollars. See also the risk of “Due to the volume of our sales in emerging markets, we supply installationare susceptible to a number of political, economic and regulatory risks that could have a material adverse effect on our business, reputation, financial condition and results of operations”.
A substantial portion of our operating expenses are denominated in NIS, and to a lesser extent, other non-U.S. dollar currencies. Our NIS-denominated expenses consist principally of salaries and related costs as well as other related personnel expenses. In addition, our lease and Israeli facility-related expenses and certain engagements with other Israeli vendors are denominated in NIS as well. We anticipate that a portion of our expenses will continue to be denominated in NIS. Devaluation of the U.S. dollar against the NIS, could have a negative impact on our results of operations.
We used and may use in the future derivative financial instruments, such as foreign exchange forward contracts, to mitigate the risk of changes in foreign exchange rates on our balance sheet accounts in various currencies and also to hedge our forecasted NIS denominated cash flows. Each type of derivative instrument may have different effect on our financial statements as explained in notes 2.o to our Consolidated Financial Statements. We do not use derivative financial instruments or rollout services,other “hedging” techniques to cover all our potential exposure and may not purchase derivative instruments that adequately insulate us from foreign currency exchange risks. In some countries, we are unable to use “hedging” techniques to mitigate our risks because hedging options are not available for certain government restricted currencies. Moreover, derivative instruments are usually limited in time and as a result, cannot mitigate currency risks for the longer term. During 2022, we incurred losses in the amount of $3.5 million as a result of exchange rate fluctuations that have not been fully offset by our hedging policy. The volatility in the foreign currency markets may be requiredmake it challenging to ramp up rapidly in order to meethedge our customer’s requirements. foreign currency exposures effectively.
In some cases, we may face regulatory, tax, accounting or corporate restrictions on money transfer from the country from which consideration should have been paid to us (or to our respective selling subsidiary) or revenues could have accumulated and allocated to us, or could face general restriction on foreign currency transfer outside of such country. Inability to collect and receive orders,amounts that are already due and payable, could have a negative impact on our results of operations.
Additional tax liabilities could materially adversely affect our results of operations and financial condition.
As a global corporation, we are subject to income and other taxes both in Israel and in various foreign jurisdictions including indirect as well as withholding taxes. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and differentiation in the timing of recognizing revenues and expenses. Our tax expense includes estimates or additional tax, which require substantialmay be incurred for tax exposures and rapid acquisitionreflects various estimates and assumptions, including assessments of servicesour future earnings that could impact the valuation or recognition of our deferred tax assets. From time to time, we are subject to income and other tax audits, the timing of which is unpredictable. Our future results of operations could be adversely affected by third party service providerschanges in our effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in our overall profitability, changes in tax legislation and rates, changes in tax treaties, changes in international tax guidelines (such as the OECD Base Erosions and Profit Shifting project – known as BEPS), changes in generally accepted accounting principles, changes in the valuation or fast hiringrecognition of deferred tax assets and liabilities, the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures. While we believe we comply with applicable tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and impose additional employees.taxes. Should we be assessed with additional taxes, there could be a material adverse effect on our results of operations and financial condition.
Due to the volume of our sales in emerging markets, we aresusceptible to a number of political, economic and regulatory risks that could have a material adverse effect on our business, reputation, financial condition and results of operations.
A majority of our sales are made in emerging economies in Latin America, India, Asia Pacific and Africa. For each of the years ended December 31, 2022 and 2021, sales in these regions accounted for approximately 63% and 68% of our revenues, respectively. As a result, the occurrence of international, political, regulatory or economic events in these regions could adversely affect our business and result in significant revenue shortfalls and collection risk. Any such revenue shortfalls and/or collection risks could have material adverse effects on our business, financial condition and results of operations. Furthermore, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries, where our customers are located, could adversely affect our business, financial condition, operating results and cash flows.
Below are the main risks and challenges that we face as a result of operating in emerging markets:
14unexpected or inconsistent changes in regulatory requirements, including security regulations, licensing and allocation processes;
unexpected changes in or imposition of tax, tariffs, customs levies or other barriers and restrictions;
fluctuations in foreign currency exchange rates;
restrictions on currency and cash repatriation;
the burden of complying with a variety of foreign laws, including foreign import restrictions which may be applicable to our products;
difficulties in protecting intellectual property;
laws and business practices favoring local competitors;
collection delays and uncertainties;
business interruptions resulting from geopolitical actions, including war and acts of terrorism, or natural disasters, emergence of a pandemic, or other widespread health emergencies (or concerns over the possibility of such an emergency, including for example, the COVID-19 outbreak);
requirements to do business in local currency;
requirements to manufacture or purchase locally, including the possible transfer of knowhow and intellectual property licenses; and
judicial systems that do not apply the principals of natural justice with regard to disputes with foreign nationals.
All of these risks could result in increased costs or decreased revenues, either of which could have a materially adverse effect on our profitability.
Business practices in emerging markets may expose us to legal and business conduct-related regulatory risks.
Local business practices in jurisdictions in which we operate, and particularly in emerging markets, may be inconsistent with international regulatory requirements, such as anti-corruption and anti-bribery laws and regulations, to which we are subject. It is possible that, notwithstanding our strict policies and in violation of our instructions, employees of ours, subcontractors, agents or business partners may violate such legal and regulatory requirements, which may expose us to criminal or civil enforcement actions. If we fail to comply with or effectively enforce such legal and regulatory requirements, our business and reputation may be harmed, and we might be exposed to civil and criminal penalties or sanctions.
An industry downturn, reduction in our customers’ profitability due to increased regulation or new mobile services requirements, may cause operators’ investments in networks to slow, be delayed or stop, which could harm our business.
We are unsuccessfulexposed to changing network models that affect operator spending on infrastructure as well as trends in obtaining rapidly, high quality large scale third partyinvestment cycles of telecom operators and other service providers. The changes include: (i) further expansion of coverage; expansion out of metro, as well as other urban and suburban areas to rural areas; (ii) densification and optimization of the 4G networks to provide faster speeds; (iii) introduction of 5G services as well as expansion and densification of the 5G networks; and (iv) 2G and/or hire adequate employees, we3G networks shutdown, which is expected to take place within the next several years and designed to free spectrum for the delivery of 5G services.
The proliferation of strategic options for service providers, as outlined above, coupled with uncertain development path and clarity as to the future standards and mass-market use cases, may cause service providers to prolong evaluations of services and network strategies, resulting in slower and smaller budget spent in the next several years, which may negatively affect our business. In addition, the intensification of use of “over-the-top services” - which make use of the operators’ network to deliver rich content to users but do not generate revenue to operators - is causing operators to lose a substantial portion of their potential revenues. In addition, changes in regulatory requirements in certain jurisdictions around the world are allowing smaller operators to enter the market, which may also reduce our customers’ pricing to their end-users, further causing them to lose revenues. This has made operators more careful in their spending on infrastructure upgrades and buildouts.
As a result, operators are looking for more cost-efficient solutions and network architectures, which will allow them to break the linearity of cost, coverage, capacity and costs of service delivery through more efficient use of existing infrastructure and assets. If operators fail to monetize new services, fail to introduce new business models or experience a decline in operator revenues or profitability, their willingness or ability to invest further in their network systems may decrease, which will reduce their demand for our products and services and may have an adverse effect on our business, operating results and financial condition.
Consolidation within our customer base could harm our business.
The increasing trend towards mergers in the telecommunications industry, such as the merger of T-Mobile and Sprint in the United States, has resulted in the consolidation of our current and potential customer base. In situations where an existing customer consolidates with another industry participant, which uses a competitor’s products or which already has an installed base covering the areas which are of interest to our customer, our sales to that existing customer could be reduced or eliminated completely to the extent that the consolidated entity decides to adopt the competing products or use the existing installed base. Furthermore, during the interim period commencing the announcement until the actual closing or failure to close under such transaction, the parties to the merger or any of them might suspend, delay or cancel new engagements with us or procurement of our products, even if the merger shall not be ableconsumed. Further, consolidation of our customer base could result in purchasing decision delays as consolidating customers integrate their operations and could generally reduce our opportunities to meet our obligationswin new customers, to the extent that the number of the existing or potential customers decreases. Moreover, some of our customers may agree to share networks, resulting in a decreased requirement for network equipment and associated services, and thus a decrease in the overall size of the market. Some network operators share parts of their network infrastructure through cooperation agreements rather than legal consolidations, which may be required to pay penalties or even face cancelationadversely affect demand for network equipment and could harm our business and results of orders.operations.
Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements or a failure to meet our reporting obligations. This may expose us to fines and damages and cause investors to lose confidence in our reported financial information, which could result in the trading price of our shares to decline.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”).Act. Under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), we carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017,2022, using the criteria established in “Internal Control - Integrated Framework” set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO).
A material weakness is a deficiency, or a combination of deficiencies, in Based on our assessment under that framework and the criteria established therein, our management concluded that the Company’s internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected in a timely manner.
At the end of 2014, based on the Company’s evaluation, our management, including the CEO and CFO, identified a material weakness related to our legal entity in Brazil, which accounted for approximately 10% of our total revenue for the year ended December 31, 2014, and approximately 9% of our total assets as of the year ended December 31, 2014, finding that we did not maintainwas effective controls over our financial reporting and closing procedures as of December 31, 2014. This material weakness resulted from2022 in providing reasonable assurance regarding the fact that our accounting and supervisory personnel in Brazil did not have adequate accounting experience to enforce compliance with all the procedures that had been defined to ensure appropriate financial reporting. This deficiency could result in a material misstatementreliability of the annual or interim consolidated financial statements that may not be prevented or detected on a timely basis.
With the oversight of CEO and CFO, we took steps to remediate the underlying causes of the material weakness in Brazil and as a result, as of December 31, 2015, 2016, and 2017, we had no material weakness in our internal controls over ourCompany’s financial reporting.
However, if we conclude in the future that our internal controls over financial reporting are not effective, we may fail to meet our future reporting obligations on a timely basis, our financial statements may contain material misstatements, our operating results may be negatively impacted, and we may be subject to litigation and regulatory actions, causing investor perceptions to be adversely affected and potentially resulting in a decline in the market price of our shares. Even if we conclude that our internal controls over financial reporting are adequate, any internal control or procedure, no matter how well designed and operated, can only provide reasonable assurance of achieving desired control objectives and cannot prevent all mistakes or intentional misconduct or fraud.
Due to inaccurate forecasts, we may be exposed to inventory-related losses on inventories purchased by our contract manufacturers and other suppliers, or to increased expenses should unexpected production ramp up be required. In addition, part of our inventory may be written off, which would increase our cost of revenues.
Our contract manufacturers and other suppliers are required to purchase inventory based on manufacturing projections we provide to them. If the actual orders from our customers are lower than projected, or the mix of products ordered changes, or if we decide to change our product line and/or our product support strategy, our contract manufacturers or other suppliers will have excess inventory of raw materials or finished products, which we would typically be required to purchase, thus incurring additional costs and our gross profit and results of operations could be adversely affected. In addition, our inventory levels may be too high, and inventory may become obsolete or over-stated on our balance sheet. This would require us to write off inventory, which could adversely affect our gross profit and results of operations.
We require our contract manufacturers and other suppliers from time to time, to purchase more inventory than is immediately required and with respect to our contract manufacturers, to partially assemble components, in order to shorten our delivery time in case of an increase in demand for our products. In the absence of such increased demand, we may need to make advance payments or compensate our contract manufacturers or other suppliers, as needed. We also may purchase components or raw materials from time to time for use by our contract manufacturers in the manufacturing of our products.
Alternatively, if we underestimate our requirements and our actual orders from customers are significantly larger than our planned forecast, we may be required to accelerate production and purchase of supplies, which may result in additional costs of buying components at less attractive prices, paying expediting fees and excess shipment costs, overtime and other manufacturing expenses. As a result, our gross margins and results of operations could be adversely affected.
Inventory of raw materials, work in-process or finished products located either at our warehouses or our customers’ sites as part of the network build-up may accumulate in the future, and we may encounter losses due to a variety of factors, including:
| · | new generations of products replacing older ones, including changes in products because of technological advances and cost reduction measures; and |
| · | the need of our contract manufacturers to order raw materials that have long lead times and our inability to estimate exact amounts and types of items thus needed, especially with regard to the frequencies in which the final products ordered will operate. |
Further, our inventory of finished products located either at our warehouse or our customers’ sites as part of a network build-up may accumulate if a customer were to cancel an order or refuse to physically accept delivery of our products, or in rollout projects, which include acceptance tests, refuse to accept the network. The rate of accumulation may increase in a period of economic downturn.
Our sales cycles in connection with competitive bids or to prospectivecustomers are lengthy.
It typically takes from three to twelve months after we first begin discussions with a prospective customer, before we receive an order from that customer, if an order is received at all. In some instances, we participate in competitive bids, in tenders issued by our customers or prospective customers, and these tender processes can continue for many months before a decision is made by the customer. In addition, even after the initial decision is made, there may be a lengthy testing and integration phase or contract negotiation phase before a final decision to purchase is made. In some cases, even if we have signed a contract and our products were tested and approved for usage, it could take a significant amount of time until the customer places purchase orders, if at all. As a result, we are required to devote a substantial amount of time and resources to secure sales. In addition, the lengthy sales cycle results in greater uncertainty with respect to any particular sale, as events that impact customers’ decisions occur during such cycle and in turn, increase the difficulty of forecasting our results of operations.operations and may cause an increase in inventory levels and our liability to our suppliers, and a risk for inventory write downs and write-offs.
If we fail to obtain regulatory approval for our products, or if sufficientradio frequency spectrum is not allocated for use by our products, our ability to market our products may be restricted.
Generally, our products must conform to a variety of regulatory requirements and international treaties established to avoid interference among users of transmission frequencies and to permit interconnection of telecommunications equipment. Any delays in compliance with respect to our future products could delay the introduction of those products. Also, these regulatory requirements may change from time to time, which could affect the design and marketing of our products as well as the competition we face from other suppliers’ products, which may not be affected as much from such changes. Delays in allocation of new spectrum for use with wireless backhaultransport communications, such as the E, V, D and VW bands in various countries, at prices which are competitive for our customers, may also adversely affect the marketing and sales of our products.
In addition, in most jurisdictions in which we operate, users of our products are generally required to either have a license to operate and provide communications services in the applicable radio frequency or must acquire the right to do so from another license holder. Consequently, our ability to market our products is affected by the allocation of the radio frequency spectrum by governmental authorities, which may be by auction or other regulatory selection. These governmental authorities may not allocate sufficient radio frequency spectrum for use by our products. We may not be successful in obtaining regulatory approval for our products from these authorities and as we develop new products either our products or some of the regulations will need to change to take full advantage of the new product capabilities in some geographies. Historically, in many developed countries, the lack of available radio frequency spectrum has inhibited the growth of wireless telecommunications networks. If sufficient radio spectrum is not allocated for use by our products, our ability to market our products may be restricted, which would have a materially adverse effect on our business, financial condition and results of operations. Additionally, regulatory decisions allocating spectrum for use in wireless backhaultransport at frequencies used by our competitors’ products, could increase the competition we face. In addition, the 5G rollout could be contingent upon the allocation of the radio frequency spectrum by governmental authorities which could cause a delay in the ramp up of those activities.
Other areas of regulation and governmental restrictions, including tariffs on imports and technology controls on exports or regulations related to licensing and allocation processes, could adversely affect our operations and financial results.
Our products are used in critical communications networks, which may subject us to significant liability claims.
Since our products are used in critical communications networks, we may be subject to significant liability claims if our products do not work properly. The terms of agreements with our customers do not always provide sufficient protection from liability claims. In addition, any insurance policies we have may not adequately cover our exposure with respect to such claims. We warrant to our current customers that our products will operate in accordance with our product specifications, but if our products fail to conform to these specifications, our customers could require us to remedy the failure or could assert claims for damages. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Any such claims, successful or not, would be costly and time-consuming to defend, and could divert management’s attention and seriously damage our reputation and our business.
Our international wireless backhaul operations subject us to various regulations. Liabilities forWe could be adversely affected by our failure to comply with these regulationsthe covenants in our credit agreement or by the failure of any bank to provide us with credit under committed credit facilities.
We have a committed credit facility available for our use from a syndicate of several banks. Our credit agreement contains financial and other covenants. Any failure to comply with the covenants, including due to poor financial performance, may constitute a default under the credit facility, which may have a material adverse effect on our financial condition. In addition, the payment may be accelerated, and the credit facility may be cancelled upon an event, in which a current or future shareholder acquires control (as defined under the Israeli Securities Law) of us. For more information, please refer to Item 5: “OPERATING AND FINANCIAL REVIEW AND PROSPECTS; B. Liquidity and Capital Resources.”
In addition, the credit facility is provided by the syndication with each bank agreeing severally (and not jointly) to make its agreed portion of the credit loans to us. If one or more of the banks providing the committed credit facility were to default on its obligation to fund its commitment, the portion of the committed facility provided by such defaulting bank would not be available to us.
In the event that the credit facility is terminated in accordance with its terms, including due to breach of covenants by us, or if it is not renewed and we are not be able to secure alternative financing, we could materially impactexperience a distressed cash flow challenges that could harm our business operations and prospects, results of operations, cash flow and financial condition.position.
Due to the nature of our global operations, we must comply with certain international and domestic laws, regulations and restrictions, which may expose our business to risks including the following:
| o | Our business is subject to numerous laws and regulations designed to protect the environment, including with respect to discharges management of hazardous substances. Although we believe that we comply with these requirements and that such compliance does not have a material adverse effect on our results of operations, financial condition or cash flows, the failure to comply with current or future environmental requirements could expose the Company to criminal, civil and administrative charges. Due to the nature of our business and environmental risks, we cannot provide assurance that any such material liability will not arise in the future. |
| o | Our wireless communications products emit electromagnetic radiation. While we are currently unaware of any negative effects associated with our products, there has been publicity regarding the potentially negative direct and indirect health and safety effects of electromagnetic emissions from wireless telephones and other wireless equipment sources, including allegations that these emissions may cause cancer. Health and safety issues related to our products may arise that could lead to litigation or other actions against us or to additional regulation of our products, and we may be required to modify our technology without the ability to do so. Even if these concerns prove to be baseless, the resulting negative publicity could affect our ability to market these products and, in turn, could harm our business and results of operations. Claims against other wireless equipment suppliers or wireless service providers could adversely affect the demand for our backhaul solutions. |
We sell other manufacturers’ products as an original equipment manufacturer, or OEM, which subjects us to various risks that may cause our revenues to decline.
We sell a limited number of products on an OEM basis through relationships with a number of equipment vendors and software vendors. Our sale of OEM products exposes us to the risk that these equipment vendors and software vendors might terminate their relationships with us, experience technical and financial problems, decide to promote their products through other channels, fail to deliver their products or discontinue production of their products. If we cannot develop alternative sources for OEM products, we could lose certain customers and our revenues could decline.
If we are unable to protect our intellectual property rights, our competitive position may be harmed.
Our ability to compete will depend, in part, on our ability to obtain and enforce intellectual property protection for our technology internationally. We currently rely upon a combination of trade secret, patents,patent, trademark and copyright laws, as well as contractual rights, to protect our intellectual property. However, as our patent portfolio may not be as extensive as those of our competitors, we may have limited ability to assert any patent rights in negotiations with, or in counterclaims against, competitors who assert intellectual property rights against us.
We also enter into confidentiality, non-competition and invention assignment agreements with our employees and contractors engaged in our research and development activities, as well as non-disclosure agreements with our suppliers and certain customers so as to limit access to and disclosure of our proprietary information. We cannot assure you that any steps taken by us will be adequate to deter misappropriation or impede independent third-party development of similar technologies. Moreover, under current law, we may not be able to enforce the non-competition agreements with our employees to their fullest extent.
We cannot assure you that the protection provided tofor our intellectual property by the laws and courts of foreign nations will be substantially similar to the remedies available under U.S. law. Furthermore, we cannot assure you that third parties will not assert infringement claims against us based on foreign intellectual property rights and laws that are different from those established in the United States. Any such failure or inability to obtain or maintain adequate protection of our intellectual property rights, for any reason, could have a material adverse effect on our business, results of operations and financial condition.
Moreover, in an effort to further grow our business, we may also sell our innovative Systems-on-Chip (SoC), which we use within our products, to some of our larger competitors, with full or limited access to our technology capabilities, over which they may design products that more effectively compete with our own.
Defending against intellectual property infringement claims could be expensive and could disrupt our business.
The wireless equipment industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in often protracted and expensive litigation. We have been exposed to infringement allegations in the past, and we may in the future be notified that we or our vendors, allegedly infringeinfringed certain patent or other intellectual property rights of others. Any such litigation or claim could result in substantial costs and diversion of resources. In the event of an adverse result of any such litigation, we could be required to pay substantial damages (including potentially treblepunitive damages and attorney’s fees should a court find such infringement willful), or to cease the use and licensing of allegedly infringing technology and the sale of allegedly infringing products (including those we purchase from third parties). We may be forced to expend significant resources to develop non-infringing technology, obtain licenses for the infringing technology or replace infringing third party equipment. We cannot assure you that we would be successful in developing such non-infringing technology, that any license for the infringing technology would be available to us on commercially reasonable terms, if at all, or that we willwould be able to find a suitable substitute for infringing third party equipment.
IfWe occasionally use Open Source codes during our development process and in our software products. An unintentional breach of Open Source licenses might compel us to publish certain confidential and proprietary codes, incur damages, and result with intellectual property infringement claims that could be expensive and could disrupt our business.
We occasionally use open source software component under open source licenses. As certain open source copyright licenses may be categorized as “copyleft licenses” that place certain requirements and restrictions on users, we maintain a process to assure the use of permissive licenses that guarantee the freedom to use, modify and redistribute, and creating proprietary derivative works, in order to avoid any limitations on our IPs and exposure of confidential proprietary software. Nonetheless, if we shall not correctly monitor and manage those licenses, fail to attractmaintain their terms (for example, to provide adequate copyright notices, or avoid modifications) or otherwise fail in identifying limited open source codes, we might be subject to third party copyright and retain qualified personnel,to reciprocity obligation requiring us to make our business, operations and productcode open for use by others as well. Such claims may harm our development efforts mayand competitive advantage and expose us to copyright infringement claims that could be materiallyexpensive and could disrupt our business.
Merger and acquisition activities expose us to risks and liabilities, which could also result in integration problems and adversely affected.affect our business.
OurWe continue to explore potential merger and acquisition opportunities within our wireless transport market or as a diversification effort in order to create a growth engine and implement a growth strategy. In addition, we also explore merger and acquisition opportunities aimed at obtaining technological improvement of our products, require sophisticated researchadding new technologies to our products and development, marketing and sales, and technical customer support. Our success depends onto diversify our abilitybusiness. However, we are unable to attract, train and retain qualified personnelpredict whether or when any prospective deals will be completed.
In addition, these strategic transactions involve numerous risks, which can jeopardize or even eliminate the benefits entailed in all these professional areas while also taking into consideration varying geographical needs and cultures. We compete with other companies for personnel in all of these areas, both in terms of profession and geography, and such transactions, such as:
we may not be able to hire sufficient personneldiscover, or the target company may fail to provide us with, all relevant information and documents in relation to the transaction, which could lead to a failure to achieve the objectives of acquisition and to a substantial loss;
we may fail to reveal that the due diligence materials and documents provided contain untrue statements of material facts or omit to state a material fact necessary to make the statements therein not misleading, hence fail to achieve the objectives of acquisition and suffer a substantial loss;
we may fail to correctly assess the due diligence investigation findings, establish a correct investment thesis or establish a correct post-merger integration plan;
the process of integrating an acquired business including, for example, the operations, systems, technologies, products, and personnel of the combined companies, particularly companies with large and widespread operations and/or complex products, may be prolonged due to unforeseen difficulties;
the implementation of the transaction may distract and divert management’s attention from the normal daily operations of our goalsbusiness;
we may sustain and record significant expenditure and costs associated with outstanding transactions that either did not or supportwill not materialize or would fail to achieve its objectives;
there will be increased expenses associated with the transaction, and we may need to use a substantial portion of our cash resources or incur debt in order to cover such expenses; expenses which the combined merged companies may not be sufficient to offset;
we may generate negative cash flow as a result of such transaction, which may require fund raising that may not be available for us;
we may incur unexpected accounting and other expenses associated with the transaction, such as tax expenses, write offs, amortization expenses related to intangible assets, restructuring costs, litigation costs or such other costs derived from the acquisition;
the transaction may harm our business as currently conducted (for example, there may be a temporary loss of revenues, we may experience loss of current key employees, customers, resellers, vendors and other business partners or companies with whom we engage today or which relate to any acquired company);
we may be required to issue ordinary shares as part of the transaction, which would dilute our current shareholders;
we may need to assume material liabilities of the merged entity;
the failure to successfully complete the integration associated with the transaction (including integrating any acquired technology into our products), which may cause new markets we were aiming for not to materialize or in which competitors may have a stronger market position; or
we may fail to effectively obtain the technological improvement.
Failure to manage and successfully complete a strategic transaction could materially harm our business operating results and cash flow. As a result, the anticipated growth inbenefits or cost savings of such mergers and acquisitions or other restructuring activities may not be fully realized, or at all, or may take longer to realize than expected. Acquisitions involve numerous risks, any of which could harm our business. The market forbusiness, results of operations cash flow and financial condition as well as the highly-trained personnel we require globally is competitive, due to the limited number of people available with the necessary technical skills and understandingprice of our products and technology. If we fail to attract and retain qualified personnel due to compensation or other factors, our business, operations and product development efforts would suffer.
ordinary shares.
Risks RelatedRelating to Our Ordinary Shares
Holders of our ordinary shares who are U.S. residents may be required to pay additional U.S. income taxes if we are classified as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes.
There is a risk that we may be classified as a PFIC. Our treatment as a PFIC could result in a reduction in the after-tax return for U.S. holders of our ordinary shares and may cause a reduction in the value of our shares. For U.S. federal income tax purposes, we will generally be classified as a PFIC for any taxable year in which either: (1) 75% or more of our gross income is passive income, or (2) at least 50% of the average value (determined on a quarterly basis) of our total assets for the taxable year produce, or are held for the production of, passive income. Based on our analysis of our income, assets, activities and market capitalization, we do not believe that we were a PFIC for the taxable year ended December 31, 2017.2022. However, there can be no assurance that the United States Internal Revenue Service ("IRS"(“IRS”) will not challenge our analysis or our conclusion regarding our PFIC status. There is also a risk that we were a PFIC for one or more prior taxable years or that we will be a PFIC in future years, including 2018.2023. If we were a PFIC during any prior years, U.S. shareholders who acquired or held our ordinary shares during such years will generally be subject to the PFIC rules. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of our future income, assets, activities and market capitalization, which are relevant to this determination. If we were determined to be a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. holders owning our ordinary shares and such U.S. holders could suffer adverse U.S. tax consequences.
For more information, please see Item 10. ADDITIONAL INFORMATION – E. Taxation - “U.S. Federal Income Tax Considerations” – “Tax Consequences if We Are a Passive Foreign Investment Company.”
Changes to the U.S. federal tax laws, including the recent enactment of certain tax reform measures, could have an impact on a shareholder’s investment in the Company.
U.S. federal income tax laws and the administrative interpretations of those laws may be amended at any time, potentially with retroactive effect. On December 22, 2017, P.L. 115-97 was signed into law making significant changes to U.S. federal tax laws. The impact of these provisions on the Company’s operations and on its investors is uncertain, and may not become evident for some period of time. Prospective investors are urged to consult their tax advisors regarding the effect of these changes to the U.S. federal tax laws on an investment in our shares.
The price and trading volume of our ordinary shares isare subject to volatility. Such volatility could limit investors'investors’ ability to sell our shares at a profit, could limit our ability to successfully raise funds and may expose us to class actions against the Company and its senior executives.
The stock market in general, and the market price of our ordinary shares in particular, are subject to fluctuation. As a result, changes in our share price and trading volumes may be unrelated to our operating performance. The price of our ordinary shares hasand the trading volumes in our ordinary shares have experienced volatility in the past and may continue to do so in the future, which may make it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. In the two-year period ended December 31, 2017,2022, the price of our ordinary shares has ranged from a high of $4.23$6.90 per share to a low of $0.89$1.53 per share.On December 31, 20172022 and 2016,2021, the closing prices of our ordinary shares were $1.98$1.91 per share and $2.62$2.58 per share, respectively. A variety of factors may affect the market price and trading volume of our ordinary shares, including:
| · | announcements of technological innovations by us or by others; |
announcements of technological innovations or new commercial products by us or by our competitors;
| · | competitors’ positions and other events related to this market; |
| · | changes in the Company’s estimations regarding forward looking statements and/or announcement of actual results that vary significantly from such estimations; |
19competitors’ positions and other events related to our market;
changes in the Company’s estimations regarding forward looking statements and/or announcement of actual results that vary significantly from such estimations;
the announcement of corporate transactions, merger and acquisition activities or other similar events by companies in our field or industry;
changes and developments effecting our field or industry;
period to period fluctuations in our results of operations;
changes in financial estimates by securities analysts;
our earnings releases and the earnings releases of our competitors;
our ability to show and accurately predict revenues;
our need to raise additional funds and the success or failure thereof;
other announcements, whether by the Company or others, referring to the Company’s financial condition, results of operations and changes in strategy;
changes in senior management or the board of directors;
the general state of the securities markets (with a particular emphasis on the technology and Israeli sectors thereof);
| · | announcement of corporate transactions or other events impacting our revenues; |
the general state of the credit markets, the volatility of which could have an adverse effect on our investments;
developments concerning material proprietary rights, including material patents;
| ·• | changes in financial estimates by securities analysts;whether we or our competitors receive or are denied regulatory approvals; and |
global and local macroeconomic developments, components shortage, effects of the Russia-Ukraine war and other global occurrences, such as a renewed outbreak of COVID-19 or another pandemic with similar effect.
| · | our earnings releases and the earnings releases of our competitors; |
| · | other announcements, whether by the Company or others, referring to the Company’s financial condition, results of operations and changes in strategy; |
| · | the general state of the securities markets (with a particular emphasis on the technology and Israeli sectors thereof); |
| · | the general state of the credit markets, the volatility of which could have an adverse effect on our investments; and |
| · | global macroeconomic developments. |
Many of these factors are beyond our control, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance.
All these factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares and may result in substantial losses to our investors.
In addition to the volatility of the market price of our shares, the stock market in general and the market for technology companies in particular, has been highly volatile and at times thinly traded. These broad market and industry factors may seriously harm the market price of our ordinary shares, regardless of our operating performance. Investors may not be able to resell their shares following periods of volatility.
In addition, the volatility of the market price of our share, especially when market price is perceived to be very low, may stimulate hostile activities against us such as capital markets’ “activists” trying to influence our operations and hostile takeover attempts by competitors (or other potential stakeholders), as we have recently experienced (see below under “Attempts for a Hostile Takeover, or Shareholder Activism, may negatively affect our business”). This may cause a significant distraction of management attention in executing against our plans and adversely impact our business and financial results.
Moreover, the market prices of equity securities of companies that have a significant presence in Israel may also be affected by changes in the Middle East, including political and economic changes, and particularly in Israel. As a result, these companies may experience volatility in their share prices and/or difficulties in raising additional funds required to effectively operate and grow their businesses. Thus, market and industry-wide fluctuations and political, economic and military conditions in the Middle East and Israel, may adversely affect the trading price of our ordinary shares, regardless of our actual operating performance. For further details see below under “Conditions in the Middle East and in Israel may adversely affect our operations”.
Further, as a result of the volatility of our stock price, we could be subject, and are currently subject, to securities litigation, which could result in substantial costs and divert management'smanagement’s attention and Company resources from our business. On January 6, 2015, the Company was served with a motion to approve a purported class action, naming the Company, its CEO and its directors as defendants. The motiondefendants, which was filed with the District Court of Tel-Aviv. The purported class action isTel-Aviv, was based on Israeli law and alleges breaches of duties by making false and misleading statements in the Company’s SEC filings and public statements during the period between July and October 2014. The plaintiff seeks specified compensatory damages in a sum of up to $75,000,000, as well as attorneys’ fees and costs (seecosts. Interim proceedings were held with respect to the application of the US Securities Act of 1933 and the Securities Exchange Act of 1934, as amended, and the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995, following a judgment issued by the Israeli Supreme Court stating that Israeli companies whose shares are dually traded in Israel and in certain foreign stock exchange, will be subject to the listing rules in the foreign jurisdiction. To date, after a rehearing proceedings it was ruled that U.S. law will apply also in our case, which was returned to the first judicial instance and will be adjudicated as a class claim under U.S. law. The Court further held that the Company’s claims based upon the statute of limitations should also be adjudicated under U.S. law. On March 20, 2022, following the court’s decision, the Plaintiff filed to the first judicial instance, an amended class action claim, based on provisions of US law, estimated at $52,099,000. For more information see below in Item 8. “FINANCIAL INFORMATION”)INFORMATION – Legal Proceedings”. Although the Company believes it has
If we sell ordinary shares in future financings, shareholders may experience immediate dilution and, as a strong defense against these allegations and that the District Court should deny the motionresult, our share price may decline.
In order to approve the class action, there is no assurance that the Company’s position will be accepted by the District Court. Furthermore, there is a risk that this litigation will divert theraise additional capital, we may at any time and energy of the Company’s executives and lead to damages and expendituresoffer additional ordinary shares or other securities convertible into or exchangeable for our ordinary shares at prices that may not be coveredthe same as the price paid for our ordinary shares by insurance. This may adversely affect the Company’s financial condition and results of operations.
our shareholders. We may need to raise additional funds in the future; to the extent any such funding will be based on sales under shelf registration statements, our existing shareholders will experience dilution of their shareholdings.
On April 7, 2017, we filedhave a shelf registration statement on Form F-3 on file with the SEC under which we are ableallows us to offer and sell, from time to time, in one or more offerings, our ordinary shares, rights, warrants, debt securities and units comprising any combination of these securities (the “Securities”), which haswith an aggregate offering price of up to $150U.S.$150 million (the "2017 Shelf”“Shelf Registration Statement”). As to date, we did not offer any Securities under the 2017 Shelf. While there is no assurance thatThe price per share at which we will sell any Securities,additional ordinary shares, or securities convertible or exchangeable into ordinary shares, in future transactions, including under the Shelf Registration Statement, may be higher or lower than the price per share paid by our existing shareholders. If we issue ordinary shares underlyingor securities convertible into exchangeable for,ordinary shares, our shareholders would experience additional dilution and, as a result, our share price may decline.
In addition, as opportunities present themselves, we may enter into financing or exercisable for shares, under the 2017 Shelf, any such salesimilar arrangements in the future, including the issuance of debt or equity securities with or without additional securities convertible or exchangeable into ordinary shares. Whether or not we issue additional shares at a discount, any issuance of ordinary shares will, and any issuance of other equity securities may, result in additional dilution to existing shareholders.
Due to the size of their shareholdings, Yehuda and Zohar Zisapel have influence over matters requiring shareholder approval.
As of March 27, 2018, Zohar Zisapel, our Chairman of the Boardpercentage ownership of Directors, beneficially owned, directlyour shareholders and could cause our share price to decline. New investors could also gain rights, preference and privileges senior to those of our shareholders, which could cause the price of our ordinary shares to decline. Debt securities may also contain covenants that restrict our operational flexibility or indirectly, 13.94%impose liens or other restrictions on our assets, which could also cause the price of our ordinary shares to decline.
Attempts for a hostile takeover, or shareholder activism, may negatively affect our business.
In recent years, shareholder activists have become involved in numerous public companies. Shareholder activists could propose to involve themselves in the governance, strategic direction and operations of a company. While shareholders’ activism might be, in certain cases, an efficient course of action taken by financial investors in order to enhance market efficiency and financial performance, other shareholders might have hostile intentions towards the company and may provoke actions which are intended to damage its business and reputation.
In the summer of 2022, our competitor Aviat launched a hostile takeover attempt against us, after purchasing more than 5% of our outstanding ordinary shares,shares. In June 2022, immediately after becoming a 5% shareholder, Aviat sent us a letter (the “Letter”), demanding that we convene an extraordinary general meeting of shareholders for the purpose of presenting and Yehuda and Nava Zisapel beneficially owned, directly or indirectly, 4.57%voting on the following proposals made by Aviat: (i) to remove from office three of our outstanding ordinary shares. Such percentages include optionsdirectors at the time: Ms. Yael Langer, Mr. Ira Palti and Mr. David Ripstein, and to also remove from office any and all new directors appointed to the Board following the conclusion of our 2021 Annual General Meeting of Shareholders; and (ii) to appoint five of Aviat’s director nominees to our Board (the “Proposals”). The purpose of the Proposals was for Aviat to gain control of our Board, and to be able to execute a business combination between the two companies, under terms which we considered as undervaluing the Company and to the detriment of our shareholders. As in accordance with the Companies Law, a 5% shareholder is entitled to demand the convening of such meeting, on August 23, 2022, we held an extraordinary general meeting of shareholders (the “Extraordinary Meeting”), in which the Proposals were rejected by our shareholders. Shareholder activism in general, and hostile takeover attempts in particular, including proxy contests, divert our management’s and Board’s attention and resources from our business, could give rise to perceived uncertainties as to our future direction, could result in the loss of potential business opportunities, limit our ability to raise funds and make it more difficult for us to attract and retain qualified personnel for positions in both management and Board levels. In addition, if nominees advanced by activist shareholders are exercisable within 60 days as of March 27, 2018. Yehudaelected or appointed to our Board with a specific agenda, it may adversely affect our ability to effectively and Zohar Zisapel, who are brothers, do not have a voting agreement. Regardless, these shareholderstimely implement our strategic plans or to realize long-term value from our assets. Also, we may influencebe required to incur significant expenses, including legal fees, related to hostile takeover, or shareholder activism matters. For example, total expenses associated with the outcome of various actions that requireAviat hostile takeover attempt amounted to $4.2 million for the year ended December 31, 2022. Further, our share price could be subject to significant fluctuations or otherwise be adversely affected by the events, risks and uncertainties associated with any shareholder approval. Yehudaactivism in general, and Nava Zisapel have an agreement which provides for certain coordinationhostile takeover attempts in respect of sales of shares of Ceragon as well as for tag along rights with respect to off-market sales of Ceragon’s shares.particular.
Being a foreign private issuer exempts us from certain SEC and Nasdaq requirements, which may result in less protection than is afforded to investors under rules applicable to domestic issuers.
We are a "foreign private issuer" within the meaning of rules promulgated by the SEC. As such, we are exempt from certain provisions applicable to U.S. public companies, including:
| · | The rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q and immediate reports on Form 8-K; |
| · | The sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of securities registered under the Exchange Act; |
| · | The provisions of regulation FD aimed at preventing issuers from making selective disclosures of material information; and |
| · | The sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profit realized from any "short-swing" trading transaction (a purchase and sale, or sale and purchase, of the issuer's equity securities within less than six months). |
In addition, we are permitted to follow certain home country corporate governance practices and laws in lieu of certain Nasdaq listing requirements with regard to, among other things, shareholder approval of equity-based incentive plans for our employees and the requirement to have a formal charter for our Compensation Committee. Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the Nasdaq, may provide less protection to investors than is accorded under the Nasdaq Listing Rules applicable to domestic issuers. For more information regarding specific exemptions we chose to adopt, please see “Item 16G. CORPORATE GOVERNANCE.”
We are subject to regulations related to “conflict minerals,” which could adversely impact our business.
Pursuant to Section 1502 of the Dodd-Frank Act, as a United States publicly-traded company we are required to disclose use or potential use of certain minerals and their derivatives, including tantalum, tin, gold and tungsten, that are mined from the Democratic Republic of Congo and adjoining countries and deemed conflict minerals. These requirements necessitate due diligence efforts to assess whether such minerals are used in our products in order to make the relevant required annual disclosures. We timely file our conflict minerals reports. While there are, and will be, ongoing costs associated with complying with these disclosure requirements, we may face reputational challenges that could impact future sales if we determine that certain products of ours contain minerals not determined to be conflict free, or if we are unable to verify with sufficient accuracy the origins of all conflict minerals potentially used in our products.
Risks RelatedRelating to Operations in Israel
Conditions in the Middle East and in Israel may adversely affect our operations.
Our headquarters, a substantial part of our research and development facilities and some of our contract manufacturers’ facilities are located in Israel. Accordingly, we are directly influenced by the political, economic and military conditions affecting Israel. Specifically, we could be adversely affected by:
| · | hostilities involving Israel; |
| · | the interruption or curtailment of trade between Israel and its present trading partners; |
| · | a downturn in the economic or financial condition of Israel; and |
| · | a full or partial mobilization of the reserve forces of the Israeli army. |
21
the interruption or curtailment of trade between Israel and its present trading partners;a downturn in the economic or financial condition of Israel; and
a full or partial mobilization of the reserve forces of the Israeli army.
Since its establishment in 1948, Israel has been subject to a number of armed conflicts that have taken place between it and its ArabMiddle Eastern neighbors. While Israel has entered into peace agreements with both Egypt, Jordan, UAE, Bahrain, Morocco and Jordan,Sudan, it has no peace arrangements with any other neighboring or other Arab countries.
Further, all efforts to improve Israel'sIsrael’s relationship with the Palestinian AuthorityPalestinians have failed to result in a permanentpeaceful solution, and there have been numerous periods of hostility, acts of terror against Israeli civilians, as experienced recently once again in recent years. ThisIsrael, as well as civil insurrection of Palestinians in the West Bank and the Gaza Strip.
Israel is engaged, from time to time, in armed conflicts with Hamas (a militia group and political party controlling the Gaza Strip). These conflicts have involved missile strikes against civilian targets in the south and center parts of Israel, most recently in August 2022.
Over the years, this state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel.
The high level of uncertainty in the region continued to intensify in 2017 with the continuation of the civil war and state of chaos experienced in Syria, adjacent to Israel's northern border, the continued involvement of regional extremist Islamic groups, based in Syria, in hostile activities against Israel, and the continued hostile activities of ISIS, the Islamic State, in Syria, and in the Sinai Peninsula - which all contribute to the tension in the region. Also,In addition, relations between Israel and Iran continue to be seriously strained, especiallyhostile, due to the fact that Iran is perceived by Israel as sponsor of these regional extremist Islamic groups,Hamas and also with regardHezbollah (a Shia Islamist political party and militant group based in Lebanon), maintains a military presence in Syria, and is viewed as a strategic threat to Iran'sIsrael in light of its nuclear program. Air bombing attacks on what is perceived to be Iranian facilities, assets and weapons supplies in Syria and the assassinations of certain Iran’s senior generals which to Iran belief is associated to Israel, has contributed to the tension in the region and further intensified the hostility between Iran and Israel and between Israel and Hezbollah, which is positioned alongside Israel’s northern border.
All of the above raise a concern as to the stability in the region, which may affect the political and security situation in Israel and therefore could adversely affect our business, financial condition and results of operations.
Furthermore, the continued conflict with the Palestinians is already disrupting some of Israel'sIsrael’s trading activities. Certain Muslim countries, primarily in the Middle East, but also in Malaysia and Indonesia, as well as certain companies and organizations around the world, continue to participate in a boycott of Israeli firmsbrands and others doing business with Israel and Israeli companies. The boycott, restrictive laws, policies or practices directed towards Israel or Israeli businesses could, individually or in the aggregate, have a material adverse effect on our business in the future, for example by way of sales opportunities that we could not pursue or from which we will be precluded. In addition, should the BDS Movement, the movement for boycotting, divesting and sanctioning Israel and Israeli institutions (including universities) and products become increasingly influential in the United States and Europe, this may also adversely affect our business and financial condition. Further deterioration of ourIsrael’s relations with the Palestinians or countries in the Middle East could expand the disruption of international trading activities in Israel, may materially and negatively affect our business conditions, and could harm our results of operations.operations and adversely affect the Company’s share price.
Our business may also be disturbedaffected by the obligation of personnel to perform military service. Our employees who are Israeli citizens are generally subject to a periodical obligation to perform reserve military service, until they reach the age of 4540 (or older, for reservists with certain occupations). During times of a military conflict, these employees may be called to active duty for longer periods of time. In response to the increase in violence and terrorist activity in the past years, there have been periods of significant call-ups for military reservists and it is possible that there will be further military reserve duty call-ups in the future. In case of further regional instability such employees, who may include one or more of our key employees, may be absent for extended periods of time which may materially adversely affect our business.
Furthermore, our Company’s insurance does not cover loss arising out of events related to the security situation in the Middle East. While the Israeli government generally covers the reinstatement value of direct damages caused by acts of war or terror attacks, we cannot be certain that such coverage will be maintained.
Another risk for political, social and economic instability in Israel is associated with the extensive changes pursued in early 2023 by the current Israeli government with respect to Israel’s judicial system. In response to such developments, individuals, organizations and financial institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment in Israel including due to reluctance of foreign investors to invest or conduct business in Israel, as well as to increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in securities markets, and other changes in macroeconomic conditions. Such proposed changes may also adversely affect the labor market in Israel or lead to political instability or civil unrest. To the extent that any of these negative developments do occur, they may have an adverse effect on our business, our results of operations and our ability to raise additional funds, if deemed necessary by our management and board of directors, and to attract or retain qualified and skilled “talents” and personnel.
We can give no assurance that the political, economic and security situation in Israel as well as the economic situation, will not have a material impactadverse effect on our business in the future.
We have received Israeli government grants for researchfrom the IIA that may require us to pay royalties and development expenditures, which restrict our ability to manufacture products and transfer technologies or know-how outside of Israel.
WeIn prior years we have received government grants from the Israel Innovation Authority (formerly known as the Office of Chief Scientist – "OCS") ("Israel Innovation Authority" or "IIA"(the “IIA”) for the financing of a significant portion of our research and development expenditures in Israel. Even following full repayment of any IIA grants, and unlessUnless otherwise agreed by the applicable authority of the IIA, we must nevertheless continue to comply with the requirements of the Israeli Law for the Encouragement of Industrial Research and Development, Law, 1984 and regulations promulgated therethereunder (the “R&D Law”) with respect to technologies that were developed using such grants (the “Financed Know-How”), including an obligation to repay such grants from consideration received from sales of products which are based on the Financed Know-How, if and when such sales occur and if applicable in accordance with the grant plan or under (the "Rthe agreements entered into between the Company and IIA.
In accordance with certain grant plans, in addition to the obligation to pay royalties to the IIA, the R&D Law").Law requires that products which incorporate Financed Know-How be manufactured in Israel, and prohibits the transfer of Financed Know-How and any right derived therefrom to third parties, unless otherwise approved in advance by the IIA. Such prior approval may be subject to payment of increased royalties. Although such restrictions do not apply to the export from Israel of the Company’s products developed with such Financed Know-How, they may prevent us from engaging in transactions involving the sale, outsource or transfer of such Financed Know-How or of manufacturing activities with respect to any product or technology based on Financed Know-How, outside of Israel, which might otherwise be beneficial to us. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of Financed Know-How (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the IIA.
For more information regarding the above-mentioned and other restrictions imposed by the R&D Law and regarding grants received by us from the IIA, please see Item 4. “INFORMATION ON THE COMPANY- B. Business Overview - The Israel Innovation Authority, formerly – the Israeli Office of Chief Scientist.Authority.”
The tax benefits to which we are currently entitled from our approved enterprise program and our beneficiary enterprise program, require us to satisfy specified conditions, which, if we fail to meet, would deny us from these benefits in the future. Further, if such tax benefits are reduced or eliminated in the future, we may be required to pay increased taxes.
The Company has certain capital investment programs that have been granted approved enterprise status by the Israeli government (the “Approved Programs”), and a program under beneficiary enterprise status pursuant to Israel’s Law for the Encouragement of Capital Investments, 1959 (the “Beneficiary Program”“Encouragement Law”). When we begin to generate taxable income from these approved or beneficiary enterprise programs, the portion of our income derived from these programs will be tax exempt for a period of two years, and will be subject to a reduced tax for an additional eight years thereafter, depending on the percentage of our share capital held by non-Israelis.years. The benefits available to an approved or beneficiary enterprise program are dependent upon the fulfillment of conditions stipulated under applicable lawthe Encouragement Law and in the certificates of approval or in rulings obtained from the Israeli Tax Authorities with respect to beneficiary enterprise programs.Authorities. If we fail to comply with these conditions, in whole or in part, we may be required to pay additional taxes for the period(s) in which we benefited from the tax exemption or reduced tax rates and would likely be denied these benefits in the future. The amount by which our taxes would increase will depend on the difference between the then-applicable corporate tax rate and the rate of tax, if any, that we would otherwise pay as an approved enterprise, or beneficiary enterprise, and on the amount of any taxable income that we may earn in the future.
In addition, the Israeli government may reduce, or eliminate in the future, tax benefits available to approved or beneficiary enterprise programs. Our Approved and Beneficiary ProgramPrograms and the resulting tax benefits may not continue in the future at their current levels or at any level, and the legislation regarding Preferred Enterprise may not be applicable to us or may not fully compensate us for such change.level. The termination or reduction of these tax benefits would likely increase our tax liability. The amount, if any, by which our tax liability would increase will depend upon the rate of any tax increase, the amount of any tax rate benefit reduction, and the amount of any taxable income that we may earn in the future. For a description of legislation regarding “Preferred Enterprise"Enterprise” see Item 10. “ADDITIONAL INFORMATION; Taxation; Tax BenefitsINFORMATION”.
Being a foreign private issuer exempts us from certain SEC requirements and Nasdaq Rules, which may result in less protection than is afforded to investors under rules applicable to domestic issuers.
We are a “foreign private issuer” within the meaning of rules promulgated by the SEC. As such, we are exempt from certain provisions under the 2011 Amendment”Exchange Act applicable to U.S. public companies, including:
the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q and current reports on Form 8-K;
the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of securities registered under the Exchange Act, including extensive disclosure of compensation paid or payable to certain of our highly compensated executives as well as disclosure of the compensation determination process;
the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; and
the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profit realized from any “short-swing” trading transaction (a purchase and sale, or sale and purchase, of the issuer’s equity securities within less than six months).
In addition, we are permitted to follow certain home country corporate governance practices and laws in lieu of certain Nasdaq Rules applicable to U.S. domestic issuers. For instance, we have relied on the foreign private issuer exemption with respect to shareholder approval requirements for equity-based incentive plans for our employees and the requirement to have a formal charter for our Compensation Committee. Following our home country governance practices rather than the Nasdaq Rules that would otherwise apply to a U.S. domestic issuer, may provide less protection to investors. For the list of the specific exemptions that we have chosen to adopt, please see Item 16G. “CORPORATE GOVERNANCE”.
We may lose our status as a foreign private issuer, which would increase our compliance costs and could negatively impact our operations results.
We may lose our foreign private issuer status if (a) a majority of our outstanding voting securities are either directly or indirectly owned of record by residents of the United States and (b) one or more of (i) a majority of our executive officers or directors are United States citizens or residents, (ii) more than 50% of our assets are located in the United States or (iii) our business is administered principally in the United States. In such case, we would be required to, among other things, file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more extensive than the forms available to a foreign private issuer, follow U.S. proxy disclosure requirements, including the requirement to disclose, under U.S. law, more detailed information about the compensation of our senior executive officers on an individual basis, modify certain of our policies to comply with accepted governance practices associated with U.S. domestic issuers and we would lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers, as described in the previous risk factor above. All of the above would cause us to incur substantial additional internal and external costs, including for outside legal and accounting support.
It may be difficult to enforce a U.S. judgment against us or our officers and directors, or to assert U.S. securities laws claims in Israel.
We are incorporated under the laws of the State of Israel. Service of process upon our directors and officers, almost all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and investments, and almost all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of them may not be collectible within the United States.
Additionally, it may be difficult for an investor, to enforce civil liabilities underassert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear such a claim, it is not certain if Israeli law or U.S. law will be applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact by an expert witness, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above.
Your rights and responsibilities as a shareholder will be governed by Israeli law which differs in some respects from the rights and responsibilities of shareholders of U.S. companies.
Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our Articles of Association as in effect from time to time (the “Articles of Association”), and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in United States-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to a company’s articles of association, an increase of a company’s authorized share capital, a merger of a company and approval of relatedinterested party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of an office holder in a company, or has another power with respect to a company, has a duty to act in fairness towards such company. Israeli law does not define the substance of this duty of fairness and there is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of U.S. corporations.
Provisions of Israeli law may delay, prevent, or make undesirable an acquisition of all or significant portion of our shares or assets.
Israeli corporate law regulates mergers and acquisitions and requires that a tender offer be effected when certain thresholds of percentage ownership of voting power in a company are exceeded (subject to certain conditions), which may have the effect of delaying, preventing or making more difficult a merger with, or acquisition of, us. Further, Israeli tax considerations may make potential transactions undesirable to us, or to some of our shareholders, if the country of residence of such shareholder does not have a tax treaty with Israel (thus not granting relief from payment of Israeli taxes). With respect to mergers, Israeli tax law provides tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction, during which certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred. See “ItemExhibit 2.1 Item 10.B. - – “Mergers and Acquisitions under Israeli LawLaw”.”
In addition, in accordance with the Restrictive Trade PracticesIsraeli Economic Competition Law, 1988 (the “Economic Competition Law”), and the R&D Law, to which we are subject due to our receipt of grants from the IIA, approvals regarding a change in control in the Company (such as a merger or similar transaction) may be requiredsubject to certain regulatory approvals in certain circumstances. For more information regarding such required approvals please see Item 4. “INFORMATION ON THE COMPANY - B. Business Overview - The Israel Innovation Authority”.
In addition, as a corporation incorporated under the laws of the State of Israel, we are subject to the Economic Competition Law and the regulations promulgated thereunder, under which we may be required in certain circumstances to obtain the approval of the Israel Competition Authority formerly – the Israeli Officein order to consummate a merger or a sale of Chief Scientist.”all or substantially all of our assets.
These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us,or for our shareholders to elect different individuals to our Board of Directors, even if doing so would be beneficial to our shareholders, and may also limitadversely affect the price that investors may be willing to pay in the future for our ordinary shares.
ITEM 4.INFORMATION ON THE COMPANY
A. History and Development of the Company
We were incorporated under the laws of the State of Israel on July 23, 1996 as Giganet Ltd. We changed our name to Ceragon Networks Ltd. on September 6, 2000. We operate under the Israeli Companies Law, and our registered office is located at 24 Raoul Wallenberg Street, Tel Aviv,3 Uri Ariav St., Bldg. A (7th Floor) PO Box 112, Rosh Ha’Ayin, Israel, 69719,4810002, and theour telephone number is +972-3-543-1000. The U.S. Securities and Exchange Commission (SEC) maintains a public internet site that contains Ceragon’s filings with the SEC and reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov). Our web address is www.ceragon.com. Information contained on our website does not constitute a part of this annual report.
Our agent for service of process in the United States is Ceragon Networks, Inc., our wholly owned U.S. subsidiary and North American headquarters, located at Overlook at Great Notch, 150 Clove Road, 9th Floor, Little Falls, NJ 07424.851 International Parkway, Suite 1340, Richardson, Tx 75081.
For information concerning the Company’s principal capital expenditures currently in progress, refer to Item 5.B. “Liquidity and Capital Resources”.
For information concerning the Aviat’s hostile takeover attempt refer to Item 3.C. “KEY INFORMATION Risk factors - Risks Relating to Our Ordinary Shares - attempts for a hostile takeover, or shareholder activism, may negatively affect our business”.
B. Business Overview
We are the leading wireless backhaultransport specialist company in terms of unit shipments and global distribution of our business, providing innovative high-capacity wireless connectivity solutions to global markets across various industries, mainly wireless (mobile) networks service providers.
Wireless transport is a means for connecting mobile network sites (e.g. cellular base stations in various architectures) to the rest of the network. It carries information to and from the cellular base stations. It is used as high-speed connectivity to telecom sites, typically when fiber optics wireline connectivity is not available and for its backup, or where and when rapid deployment is required. According to recent market research, about 45% of global telecom sites are connected to the rest of the network via wireless transport.
Ceragon’s innovative technology related to the transition from Wireless SDH to Wireless IP, and the further transition to compact multi-core all-outdoor wireless backhaul solutions, toassisted in positioning Ceragon as a leader in the global wireless transport market, and we expect that it would have potentially positioned us to benefit from new wireless generation transitions such as the current 5G evolution.
In preparation for the transition from 4G to 5G technologies, we have begun planning the roll-out of new 5G-supporting products. In 2019, we introduced the market-first “disaggregated wireless transport” architecture, which allows operators to significantly simplify 5G network deployment and maintenance, as well as reduce of capital and operating expenses. Currently, we are investing in a new chipset which incorporates multi-cores in a chipset to be incorporated in products expected to be introduced in 2024.
The term ‘wireless transport’ refers to various types of network connectivity signaling and network protocols which vary in speeds and include (i) backhaul markets.- used in 4G, 5G and earlier generations of mobile networks to send data packets between the network and the base-stations and between the base-stations to other network elements, and (ii) fronthaul - used in 4G and 5G networks to send radio signal values between building blocks of the base station, which can be separated from another across geographic site locations to achieve network efficiencies in some network scenarios.
Wireless transport offers network operators a cost-efficient alternative to wire-line connectivity between network nodes at different sites, mainly fiber optics. Support for high broadband speeds and very large numbers of devices, means that all value-added services can be supported, while the high reliability of wireless systems provide for lower maintenance costs. Because they require no trenching, wireless transport links can also be set up much faster and at a fraction of the cost of fiber solutions. On the customer’s side, this translates into an increase in operational efficiency and faster time-to-market, as well as a shorter timetable to achieving new revenue streams.
We provide wireless backhaultransport solutions and services that enable cellular operators, and other wireless service providers and private networks to deliver a diverse service portfolio over a 5G,build new networks and evolve networks towards 4G and 3G network infrastructure, including:5G services. The services provided over these networks are: voice, mobile and fixed broadband, multimedia, Industrial/Machine-to-Machine (M2M) and, Internet of Things (IoT) devices, as well asconnectivity, public safety and other mission critical services. We also provide our solutions for wireless backhaultransport to other vertical markets such as Internet service providers, public safety, utilities, and oil and gas offshore drilling platforms.platforms, as well as maritime communications. Our wireless backhaultransport solutions use microwave and millimeter-wave radio technologies to transfer large amounts of telecommunication traffic between wireless 5G, 4G, 3G and other cellular base station technologies (distributed, or centralized with dispersed remote radio heads) and the core of the service provider’s network. We are also a member of industry consortiums of companies, which attempt to better define future technologies in ICT (Information and Communication Technologies) markets, such as Open Networking Foundation (ONF), Metro Ethernet Forum (MEF), European Telecommunications Standards Institute (ETSI), Telecom Infra Project (TIP) and others.
In addition to providing our solutions, we also offer our customers a comprehensive set of turn-key services, including advanced network and radio planning, site survey, solutions development, network rollout, maintenance, wireless backhaultransport network audit and optimization, and training. To enable delivery of turn-key solutions to our customers, in addition to providing roll-out services, we have partnered with other third-party providers of technologies complementary to our own. Our offering includes technologies such as: Unlicensed Point-to-Point, Private Long-Term Evolution (LTE), Licensed/unlicensed Point-to-Multipoint, Internet Protocol/Multi-Protocol label Switching (IP/MPLS) SW and/or white boxes and others. This allows us to better cover our customers’ end-to-end needs and increases the level of stickiness with these customers. Our services include powerful project management tools such as our “InSide Software” tool that streamline deployments of complex wireless networks, thereby reducing time and costs associated with network set-up and allowing a fasterfast time-to-revenue. Our experienced teams can deploy hundreds of wireless backhaultransport links every week, and our rollout project track record includes hundreds of thousands of links already installed and operational with a variety of industry-leading operators.
Designed for Internet Protocol (IP)any network configurations,scenario, including risk-free flexible migration from current and legacy network technologies and architectures to next-generation backhaul networks,evolving standards and network transport scenarios, our solutions provide fiber-likeultra-high-speed connectivity at any distance, be it a few kilometers or 10stens of kilometers, and even longer, for next generation IP-based networks, for legacy circuit-switched, or SONET/SDH, networksover any available spectrum (or combinations of available spectrum bands) and for hybrid networks that combine IPin any site and circuit-switching technologies.network architecture. Our solutions support all wireless access technologies, including 5G-NR NSA, LTE-Advanced-Pro, LTE-Advanced, LTE,5G-NR SALTE, HSPA, EV-DO, CDMA, W-CDMA, WiFiWIFI and GSM.GSM as well as Tetra, P.25 and LMR for critical communications. These solutions allow wireless service providers to cost-effectively and seamlessly evolve their networks from circuit-switcheda monolithic base-station architecture to an open radio access network (RAN) architecture, utilizing vertical and hybrid concepts to all-IP packet-based concepts,horizontal disaggregation, allowing them extra flexibility, scalability and efficiency, thereby meeting the increasing demand of a growing number of subscribersconnections of any type be thosefor consumers and enterprises with growing needs for mobile and other multimedia services, and a growing number of machines or IoT devices such as street surveillance devices or meters.
We also provide our solutions to other non-carrier vertical markets (private networks) such as oil and gas companies, public safety organizations, businesses and public institutions, broadcasters, energy utilities and others that operate their own private communications networks. Our solutions are deployed by more than 460600 service providers of all sizes, as well as in hundreds ofmore than 1,600 private networks, in more than approximately 130 countries.
As of December 31, 2017, we have $100.2 million of credit with three financial institutions, which was last extended until March 31, 2018. The credit facility provides for a credit line of short term loans of up to $50 million and bank guarantees in the sum of up to $50.2 million. In March 2018, we signed a further amendment to the credit facility agreement that changed certain terms of the Credit Facility. See Item 5. “OPERATING AND FINANCIAL REVIEW AND PROSPECTS; B. Liquidity and Capital Resources,” for a more detailed discussion.
Wireless Backhaul;Transport; Short-haul, Long-haul and Small Cells BackhaulTransport
Deployed byToday’s cellular networks are predominantly based on 4G technologies. These networks constantly undergo expansion of coverage, densification with additional sites to cater to higher demands for speeds and to make more services available per given area. However, more than 200 service providers in all 5 continents have now launched 5G services. These investments in 5G radio network infrastructure, and consequently, associated wireless transport, are expected to gradually increase during the next several years. In order to allocate spectrum resources for 4G and 5G, some operators worldwide, today’sare shutting down their 2G and/or 3G network (a “network sunset”) in order to re-allocate radio access network frequency bands to 4.5 and 5G services. These market dynamics of network expansion and densification have resulted in higher demand for wireless base stations handletransport capacity, at increased density, accommodating sophisticated services over the network at far higher volume than available up to recent years. Such services include the many different technologies such as smart phones, tablets, PCs, CPEs,5G use cases, which among others include enhanced mobile broadband, mission critical services, IoT & Industrial IoT (Industry 4.0, or “IIoT”), Gigabit broadband to homes, multi Gigabits services to enterprises and IoT devices such as meters and wearables. Voice and data traffic generated by these high-end devices are then gathered and transmitted via the backhaul transport network to the radio frequency (RF), or wireless network. Wireless backhaul offers network operators a cost-efficient alternative to wire-line (copper/fiber) connectivity. Support for high capacities and very large numbers of devices, means that all value-added services can be supported, while the high reliability of wireless systems provide for lower maintenance costs. Because they require no trenching, wireless links can also be set up much faster and at a fraction of the cost of wire-line solutions. On the operator’s side, this translates into an increase in operational efficiency and faster time-to-market, as well as a shorter timetable to achieving new revenue streams.more.
The wireless backhaultransport market of service providers is divided into two main market segments. The first is a market segment in which operators invest resources and efforts to select the best wireless backhaultransport solution that will meet their wireless backhaultransport needs, in terms of the ability to improve their business operational efficiency, services reliability and their customers’ (subscribers’) quality of experience. This market segment is referred to as best-of-breed.“best-of-breed”. The other market segment is characterized by operators that do not select the wireless backhaultransport solution, since this decision is made by a network’s solution provider retained by the operator. This network solution provider delivers ana full end-to-end solution and the equipment required to operate the entire network, including the wireless backhaultransport equipment. Operators in this segment of the market rely on the network solution providers to choose wireless transport as part of the full end-to-end solution while often view the wireless backhaul solution as a “commodity,” which should deliver network connectivity, withoutcompromising on performance and optimization of the network and other resources, andas see it as a solution which does not play a primary role within the end-to-end network rollout considerations. This segment of the market is referred to as bundled-deals.
“bundled-deals”. Ceragon will also sometimes offer end-to-end solutions to private Networks, where usually there is no mobile network, utilizing its ecosystem of 3rd party vendors.
Ceragon serves the best-of-breed“best-of-breed” segment of the market and specializes in a range of solutions, which we believeto the Company’s belief, provide high value for our customers:customers including:
| · | Shorthaul solutions, which typically provide a wireless link capacity of up to 2 Gbps per link and are used to carry voice and data services over distances of between several hundred feet to 10 miles. Short-haul links are deployed in access applications (macro cells and small cells) wirelessly connecting the individual base-stations and cellular towers to the core network. Short-haul solutions are also used in a range of non-carrier “vertical” applications such as state and local government, public safety, education and off-shore communication for oil and gas platforms. |
Short-haul solutions, which typically provide a wireless link capacity of up to 2 Gbps per link for backhaul, and/or a link capacity of up to 20Gbps for fronthaul. These solutions are available for distances of several hundred feet to 10 miles. Short-haul links are deployed in access applications (macro cells and small cells and distributed cells) wirelessly connecting the individual base-stations or base-station element (i.e. a “central unit”, a “distributed unit” or a “radio unit”) towers to the core network. Short-haul solutions are also used in a range of non-carrier “vertical” applications such as state and local government, public safety, education and off-shore communication for oil and gas platforms.
| · | Long-haul solutions, which typically provide a capacity of up to 10 Gbps, are used in the “highways” of the telecommunication backbone network. These links are used to carry services at distances of 10 to 50 miles, and, using the right planning, configuration and equipment, can also bridge distances of 100 miles. Long-haul solutions are also used in a range of non-carrier “vertical” applications such as broadcast, state and local government, public safety, utilities and off-shore communication for oil and gas platforms. |
Long-haul solutions, which typically provide a capacity of up to 20 Gbps, are used in the “highways” of the telecommunication backbone network. These links are typically used to carry services at distances of 10 to 50 miles, and, using the right planning, configuration and equipment, can also bridge distances of 100 miles and more. Long-haul solutions are also used in a range of non-carrier “vertical” applications such as broadcast, state and local government, public safety, utilities and offshore communication for oil and gas platforms.
Ceragon has, on more than one occasion, been the first to introduce new products and features to the market, including the first solution for wireless transmission offor evolving cellular networks, providing 155 Mbps at 38 GHz in 1996 and numerous microwave and millimeter-wave technology innovations thereafter. Since 2008, Ceragon has invested in pioneering the multicore™ technology focusing on addressing the multiple wireless transport challenges of 4G and 5G services. This technology is at the core of Ceragon’s in-house developed chipsets for wireless transport, now in their Fourth generation, which enable Ceragon to design and offer vertically integrated solutions. This vertical integration enables Ceragon to provide higher flexibility, better performance, and improved time-to-market. With the first native IPproducts based on multicore™ technology introduced to the market in 2013, Ceragon has enabled dual-core radios and far advanced capabilities, such as Line-of-Sight Multiple Input Multiple Output (LoS MIMO), which allows efficient use of spectrum where congestion of frequencies exist, Advanced Frequency Reuse (AFR), which allows massive network densification and Advanced Space Diversity, which eliminates the use of multiple antennas in various network scenarios, thereby accelerating network deployment and reducing total cost of ownership.
In 2019, Ceragon introduced the market-first “disaggregated wireless transmission offering. More recently, we introduced a variety of technological enhancements including the first hitless/errorless 8-step Adaptive Codingtransport” architecture, which allows operators to significantly simplify 5G network deployment and Modulation (ACM) technology (2007); first native Ethernet multi-channel long-haul radio with ACM (2010); unique asymmetric transfer mode and multi-layer compression (2011); and 1024QAM Long-Haul IP radio with 9 step ACM (2012); the industry’s first multicore radio solution supporting 2048 QAM, 4x4 LoS MIMO (2012), the industry’s first and only “Advanced Frequency Reuse” technology (2015),maintenance, as well as firstreduce capital and only Advanced Space Diversity technology (2017). These last three technologies mentioned, are based on the Company’s multicore technology and allow operators to flexibly deploy the wireless base stations and other sites exactly where those are needed and at lower site acquisition costs, without being bound to wireless backhaul deployment limitations as a result of interferences from various other links, which are often deployedoperating expenses.
Ceragon is currently investing in a dense carrier’s network.new chipset which incorporates multi-cores in a chipset, expected to be available at the beginning of 2024, offering industry-leading performance and capacity.
Industry Background
The market demand for wireless backhaultransport is being generated primarily by cellular operators, wireless broadband service providers, businesses and public institutions that operate private networks. This market is fueled by the continuous customer growth in developing countries, and the explosion in mobile data usage in developing and developed countries. Traditionally based on circuit-switched solutions such as T1/E1 or SONET/SDH,
The main catalyst for the market for wireless backhaultransport evolution has shifted overbeen the past decades, mostly to more flexiblehuge increase in data and video consumption across the globe. This evolution generates higher capacity and cost-efficient architectures, based on IP/Ethernet technologies.technologies in a developing set of network scenarios and architectures.
In 4G, the fronthaul transport network connects Remote Radio Heads (RRHs) to distant centralized/cloud Baseband Units (BBUs), while backhaul connects BBUs back to 4G Evolved Packet Core (EPC). In 5G, the New Radios (NR) are connected to the BBU, which can be disaggregated into a Central Unit (CU) and a Distributed Unit (DU). The main catalyst ofnew midhaul interconnects the shift towards IP/Ethernet-based networksCU to the DU via a new, standardized 3GPP interface.
With help from organizations such as the operator-led O-RAN Alliance, 5G fronthaul and midhaul network interface specifications are open and defined in a whole,structured format. This allows MNOs to purchase RUs, DUs, CUs, and the associated transport networks between them, from anyone. We believe that this presents new market opportunities for Ceragon’s leading wireless backhaul in particular, has been the vast adoption of 4G/LTE wireless service technology and its derivatives over the past several years (e.g. LTE-A, LTE-A-Pro).transport solutions with our open network architecture.
Rapid subscriber and connections growth and the proliferation of advanced smartphones, tablets and other high data consumingend devices, driven mainly by video content, have significantly increased the amount of traffic that must be carried over a cellular operator’s backhaultransport infrastructure. As a result, existing transport capacity is heavily strained, creating a bottleneck that hinders service delivery and quality. The proliferation of industrial, security and metering devices through IoT technologies, and implementation of new 5G network architectures is also expected to increaseincreasing the total capacity and coverage that is needed to be transported throughout networks and put additional strain on network capacity, requiring even higher capacity wireless backhaul and fronthaul connectivity.
With the growth in adoption of 4G/LTE4G and LTE-Advanced/Pro,the accelerated pace of adoption of 5G, which providesrequire even higher network speeds and wireless transport capacity, in particular, cellular operators are seeking strategies, using new technologies, which will allow further business growth, to facilitate quick and cost-efficient enablement of new services for more connected subscribers (either human or machine). Among those are next generation cellular 5G technologies, as well as Software Defined Networks (SDN) and Network Function Virtualization (NFV) technologies, the latter twowhich are key for network slicing:slicing.
| · | Next generation cellular 5G services technologies,Network slicing is a network engineering model in which the physical network is providing resources to numerous virtual networks on top, whereas each virtual network delivers a specific set of performance characteristics for a specific service, or set of services, sharing common requirements. For example, a network slice that is tasked with delivering ultra-high bandwidth for mission critical multimedia services (voice and video) to law enforcement agencies, requires a different amount of network resources ensuring prioritized capacity and minimal delay variation, whereas a different network slice support video streaming service for mobile entertainment. SDN and NFV technologies are designed to support network slicing models and its implementation, for high quality subscriber experience, by simplifying service creation and orchestration through simple network traffic engineering rules and tools, as well as enable end-to-end network resources optimization across all network domains, including the wireless transport domain, for increased operational efficiency. Network resources optimization is expected to be achieved, in part, by the use of SDN technologies with wireless transport optimization applications, which the first phase of the standard has been ratified in late 2017 and further standardization efforts are ongoing will be phased in over several years. When fully deployed, 5G networks are expected to serve a 1,000-fold larger number of subscribers than served over 4G networks, with 1Gbps, or more, service capacity for many. The need for supporting 5G service capacities, along with the support of large scale deployment of IoT devices in networks, will require wireless backhaul with higher capacity and scalability to support 5G services. |
| · | Software Defined Networks (SDN) and Network Functions Virtualization (NFV) technologies are key to the network slicing approach which was introduced in recent years to 4G networks and is expected to grow in complexity and in adoption over 5G networks which are expected to support a much larger set of services. Network slicing is a network engineering model in which the physical network is providing resources to numerous virtual networks on top, whereas each virtual network delivers a specific set of performance characteristics for a specific service, or set of services, sharing common requirements. For example, a network slice that is tasked with delivering ultra-high bandwidth for mission critical multimedia services (voice and video) to law enforcement agencies, requires different amount of network resources ensuring prioritized capacity and minimal delay variation, whereas a different network slide support video streaming services for mobile entertainment. SDN and NFV technologies are designed to support network slicing models and its implementation, for high quality subscriber experience, by simplifying service creation and orchestration through simple network traffic engineering rules and tools, as well as enable end-to-end network resources optimization across all network domains, including the wireless backhaul domain, for increased operational efficiency. Network resources optimization is expected to be achieved, in part, by the use of SDN technologies with wireless backhaul optimization applications, which shall exploit network intelligence gathered by SDN controllers within the network. |
The wireless backhaultransport domain of the network will require adaptation to these industry trends by enabling far higher capacities, with ultra-low latency for high service quality, simple service creation and optimization to cope with the influx of a thousand-fold increase in the number of services compared withto 4G networks, and a high degree of wireless backhaul resourceresources optimization (spectrum and other) that will be incorporated within the wireless backhaultransport network infrastructure.
Cellular Operators
In order to address the strain on backhaulbackhaul and fronthaul capacity, cellular operators have a number of alternatives, including leasing existing fiber lines, laying new fiber optic networks or deploying wireless solutions. Leasing existing lines requires a significant increase in operating expenses and, in some cases, requires the wireless service provider to depend on a direct competitor. Laying new fiber-optic lines is capital-intensivecapital and labor-intensive and these lines cannot be rapidly deployed. The deployment of high capacity and ultra-high capacity point-to-point wireless links represents a scalable, flexible and cost-effective alternative for expanding backhaul and fronthaul capacity. Supporting typical data rates of 12 Gbps (backhaul) and above,20Gbps (fronthaul) over a single radio unit, wireless backhaultransport solutions enable cellular operators to add capacity only as required while significantly reducing upfront and ongoing backhaul and fronthaul costs.
Some of today’s backhaul networks, primarily in emerging markets, still employ a large number of circuit switched (or TDM) solutions - whether T1/E1 or high-capacity SDH/SONET. These networks, originally designed to carry voice-only services, have a limited bandwidth capacity and offer no cost-efficient scalability model. The surge in mobile data usage, fueled by anticipation and adoption of 4G/LTE,advanced releases of 4G and 5G services, drives operators to accelerate and finalize the migration of their networks to a more flexible, feature-rich and cost optimized IP network architecture. Additionally, the surge in data usage in densely populated areas drives operators to explore new network architectures that utilize a variety of small-cell technologies requiring the deployment of dense wireless backhaultransport network in various microwave and millimeter-wave spectral bands. As operators intensify 4G services availability and transition to 4G/LTE and LTE-Advanced/Pro,5G services, all of which are IP-based wireless access technologies, they look for ways to benefit from IP technology in the backhaultheir transport network while maintaining support for their primary legacy services. The progression that is expected in 4G gigabit LTE (most advanced 4G standard using LTE-A-Pro technology) and 5G networks rollout over the next several years, will broaden cellular operators’ assessment of the growing role the wireless backhaul and fronthaul may take in their network, in 2-3 years’ time, as reaching the small cells with more fiber is expected to become a significant challenge.
challenge, both physically and economically.
In order to ensure the success of these backhaul network strategies, as well as preparedness to broaden 4G gigabit LTE and 5G technologies adoption, operators require solutions that can support their legacy transport technology (TDM) while providing all the advanced IP capabilities and functionalities. These solutions should also support a scalable high capacity and flexible full IP network architecture once the transition phase from TDM is completed. Our solutions, which support any network architecture and include both all-IP as well as hybrid products, offer operators a simple and quick network modernization plan capable of evolving with the transition to 5G.
Wireless Broadband Service Providers
For wireless broadband service providers, which offer alternate high data access, high-capacity backhaultransport is essential for ensuring continuous delivery of rich media service across their high-speed data networks. If the backhaultransport network and its components do not satisfy the wireless broadband service providers’ need for cost-effectiveness, resilience, scalability or ability to supply sufficientenough capacity, then the efficiency and productivity of the network may be seriously compromised. While both wireless and wire-line technologies can be used to build these backhaultransport systems, many wirelessbroadband service providers opt for wireless point-to-point microwave solutions. This is due to a number of advantages of the technology including: rapid installation, support for high-capacity data traffic, scalability and lower cost-per-bit compared to wire-line alternatives.
Private Networks and Other Vertical MarketsService Providers
Many large businesses and public institutions require private high bandwidth communication networks to connect multiple locations. These private networks are typically built using IP-based communications infrastructure. This market includes educational institutions, utility companies, oil and gas industry, broadcasters, state and local governments, public safety agencies, maritime customers, defense contractors and defense contractors.more. These customers continue to invest in their private communications networks for numerous reasons, including security concerns, the need to exercise control over network service quality and redundant network access requirements. As data traffic on these networks rises, we expect that businesses and public institutions will continue to invest in their communications infrastructure, including backhaulwireless transport equipment. Like wireless service providers, customers in this market demand a highly reliable, cost-effective backhaultransport solution that can be easily installed and scaled to their bandwidth requirements. Approximately 20% of our business is associated with private network operators.network.
Wireless vs. Fiber BackhaulTransport
Though fiber-based networks can easily support the rapid growth in bandwidth demands, they carry high initial deployment costs and take longer to deploy than wireless. Certainly, where fiber is available within several hundred feet of the operator’s point of presence, with ducts already in place, and when there are no regulatory issues that prohibit the connection – fiber can become the operator’s preferred route. In almost all other scenarios, high-capacity wireless backhaulconnectivity using microwave and millimeter-wave technologies (wireless transport), is significantly more cost efficient. Wireless backhaultransport is expected to taketaking a significant role in 4G network densification and is expected to take an even more significant role in the transition to 5G rollout as a result of ease, cost and the speed of deployment. In fact, in most cases the return-on-investment from fiber installations can only be expected in the long term, making it hard for operators to achieve lower costs per bit and earn profits in a foreseeable future.
Wireless microwave and millimeter-wave backhaultransport solutions on the other hand are capable of delivering high bandwidth, carrier-grade Ethernet and TDMnetwork services. Our wireless backhaultransport solutions are suitable for all capacities, carrying multi Gbps of the operators’ traffic over a single radio connection (or “link”). Unlike fiber, wireless solutions can be set up quickly and are more cost efficient on a per-bit basis from the outset. In many countries, microwave backhauland millimeter-wave links are deployed as alternative routes to fiber, ensuring on-going communication in case of fiber-cuts and network failures. Millimeter-wave backhaul links over short distances, including small cells, are expected to be used for this purpose as well, as millimeter-wave spectrum becomes readily available in various countries, at acceptable costs.
Licensed vs. License-exempt Wireless BackhaulTransport
Licensed wireless backhaul:transport: Service providers select the optimal available transmission frequency based on the rainfall intensity in the transmission area and the desired transmission range. The regulated, or licensed, microwave bands (4 - 42GHz)(4-42GHz) and millimeter-wave bands (71-86GHz) are allocated by government licensing authorities for high-capacity wireless transmissions. The license grants the licensee the exclusive use of that spectrum for a specific use thereby eliminating any interference issues. A licensed microwave or millimeter-wave spectrum is typically the choice of leading operators around the world because it matches the bandwidth and interference protection they require. Our licensed spectrum products operate across the entire span of the licensed microwave and millimeter-wave spectrum described herein, from 4GHz microwave to 86GHz, delivering multi Gbps per link and are scalable and versatile to meet all radio access networks, small cells, private networks and long-haul radio transmission paths requirements.
License-exempt wireless backhaul:transport: Service providers also select license-exempt spectrum in order to provide high speed connectivity to businesses, campuses (often regarded as a wireless backhaul) and serve cellular small cells with wireless backhaul connectivity, without regulatory approval for spectrum.
License exempt spectrum can be categorized into two main categories: 1) 57 – 66GHz millimeter-wave band, known as the v-band spectrum and operating at very wide channel bandwidths, up to 2,000MHz and capable of delivering 10Gbps bi-directional capacity (FDD), though expected channel bandwidth operations is of 250MHz/500MHz channels which can deliver 1 – 2.5Gbps bi-directional capacity.. The use of v-band spectrum requires the existence of a line of sight between the sites, allows to achievethe achievement of high availability connectivity because of the narrow beam characteristics of the radio signal and provides the highest capacity when operating in a point-to-point communication mode. Additional V-band solutions include point-to-multipoint and mesh networks architectures which provide up to 4Gbps aggregate capacity and their primary use is for access services to end-users with limited capacity of backhaul operating within the access service spectrum (in-band backhaul); and 2) sub 6GHz license-exempt spectrum, operating at narrow channel bandwidths of up to 80MHz and delivering up to 500Mbps bi-directional capacity (FDD), typically in point-to-multipoint communication mode.network architecture. The use of sub 6GHz spectrum allows for non, or near, line of sight connectivity between the sites and facilitates an economic and flexible rollout model, at the expense of achieving modest capacity, as specified above. License exempt V-band and sub 6GHz bands are more vulnerable to interference as a result of the uncoordinated use and wide beam coverage, as well as the air interface implementation that are prevailing in the market. Examples of such spectrum are the 2.4GHz band and the 5.0 – 5.8GHz bands.
We provide a range of license-exempt solutions to provide service providers and private network owners with the solutions that best fit their service and connectivity needs; we provide high availability point-to-point multi Gbps solutions with very low latency for enterprises, campuses and small cells, operating in the license-exempt millimeter-wave v-band spectrum. For those who require modest capacity connectivity of very few hundreds of Mbps per site, we offer third-party equipment vendor solutions operating at license exempt sub 6GHz point-to-multipoint and point-to-point near/non line of sight wireless connectivity that allow them to make reasonable concessions between capacity and latency, service availability and total cost of ownership of the rollout.spectrum.
Industry Trends and Developments
The widespread surge in network traffic in 2020 to 2022 emerging from the COVID-19 pandemic has significantly affected the way business and individuals access information for work and leisure. National lock-ins for large parts of the population and labor market trends brought many businesses to exercise company-wide work-from-home activities with massive use of video conferencing and cloud network communication. Entire families stay longer at home and extensively consume video streaming and online gaming, along with video chats with friends and relatives. The result is an increase in home broadband demand, while today’s home broadband networks are not designed for such usage patterns. Some countries, even developed ones, lack broadband communication networks in rural areas. As a result, service providers are required to increase network investment to match the network capabilities to the surge in broadband demand. We anticipate that the increase in network traffic which service providers experienced amidst the pandemic will remain and may even increase, as companies and employees adapt to broader use of telecommuting, and families adopt higher use of video calls/chats as larger portions of the world population, young and elderly alike, use highly visual remote communication tools and high volume communication transactions.
5G enables operators to enhance their services portfolio with more use cases such as enhanced mobile broadband (eMBB) delivering gigabit broadband, as well as address new market segments such as IoT & IIoTand mission critical applications with URLLC (Ultra Reliable Low Latency Communications) and mMTC (Massive Machine Type Communications) services. Those services, combined with new network architectures require higher capacity, lower latency networks and in particular higher transport capacity, far denser macro cells and small/distributed cells grids and the implementation of network virtualization technologies and architectures, namely network slicing using SDN. Our wireless transport solutions resolve both higher capacity, lower latency and network densification requirements with advanced capabilities, based on our multicore™ technology for microwave narrowband spectrum (up to 224Mhz) and the use of wider bands in millimeter-wave spectrum, up to 2,000MHz. Network virtualization requirements are addressed with layer 3 capabilities and SDN support.
| ·• | LTE-A-Pro, or commonly named Gigabit LTE, and 5G technologies will enable operators to enhance their mobile broadband offering (to eMBB – Enhanced Mobile Broadband) as well as address new market segments such as IoT and mission critical applications with URLLC (Ultra Reliable Low Latency Communications) and mMTC (Massive Machine Type Communications) services. Those services will require higher capacity networks and in particular higher backhaul capacity, far denser macro cells and small cells grids and the implementation of network virtualization technologies and architectures, namely network slicing using Software Defined Networking. Our IP-20 Platform resolves both higher capacity and network densification requirements with advanced capabilities, based on its multicore technology for microwave narrowband spectrum (up to 112Mhz) and the use of wider bands in millimeter-wave spectrum. Network virtualization requirements are addressed with layer 3 capabilities and SDN support.
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To safeguard our proprietary technology, we rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality agreements and other contractual arrangements with our customers, third-party distributors, consultants and employees, each of which affords only limited protection. We have a policy which requires all of our employees to execute employment agreements which contain confidentiality provisions.
The market for wireless equipment is rapidly evolving, fragmented, highly competitive and subject to rapid technological change. We expect competition, which may differ from region to region, to persist intensify and increase in the future - especially if rapid technological developments occur in the broadband wireless equipment industry or in other competing high-speed access technologies.
We compete with a number of wireless equipment providers worldwide that vary in size and in the types of products and solutions they offer. Our primary competitors include large wireless equipment manufacturers referred to as generalists, such as Huawei Technologies Co., Ltd., L.M. Ericsson Telephone Company, NEC Corporation, Nokia Corporation and ZTE Corporation. In addition to these primary competitors, a number of other smaller wireless backhaultransport equipment suppliers, including Aviat Networks andInc., SIAE Microelectronica S.p.A, and Intracom telecom, offer orand develop products that compete with our products.
The Israel Innovation Authority.
The government of Israel encourages research and development projects in Israel through the IIA, - Israel Innovation Authority, formerly known as the Israeli Office of Chief Scientist, pursuant to and subject to the provisions of the R&D Law.Law and subject thereto. We received grants from the IIA for several projects and may receive additional grants in the future.
Further, the R&D Law imposes reporting requirements on certain companies with respect to changes in the ownership of a grant recipient. The grant recipient, its controlling shareholders, and foreign interested parties of such companies must notify the IIA of any change in control of the grant’s recipient or the holdings of the “means of control” of the recipient that result in an Israeli or a non-Israeli becoming an interested party directly in the recipient. The R&D Law also requires the new interested party to undertake to comply with the R&D Law. For this purpose, “control” means the ability to direct the activities of a company (other than any ability arising solely from serving as an officer or director of the company), including the holding of 25% or more of the “means of control”, if no other shareholder holds 50% or more of such “means of control.” “Means of control” referrefers to voting rights or the right to appoint directors or the chief executive officer. An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, in certain cases, any non-Israeli who acquires 5% or more of our ordinary shares may be required to notify the IIA that it has become an interested party and to sign an undertaking to comply with the R&D Law. In addition, the rules of the IIA may require additional information or representations with respect to such events.
We are an Israeli company that commenced operations in 1996. The following is a list of our significant subsidiaries:
We also lease space for other local subsidiaries to conduct pre-sales and marketing activities in their respective regions.
Not applicable.
The following discussion and analysis should be read in conjunction with our consolidated financial statements, the notes to those financial statements, and other financial data that appear elsewhere in this annual report. In addition to historical information, the following discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth in “Risk Factors” and elsewhere in this annual report. Our consolidated financial statements are prepared in conformity with U.S. GAAP.