Well, I think it's time that I wrote up an analysis of CRNT.  I'll take a close look at the conference call from January 08.  I've written about this stock a few times lately, but I've stopped short of giving the "full monty" like I did with TCHC.  So, here goes...

• zero debt.
• Lots of cash on hand (I think, about $90-$120 mill) from the secondary.  That's how they wiped out the debt too.  Of course, secondaries are sometimes annoying because they dilute value, but still, an ok move for a growing company I think.  So long as the company is being managed well, and it is, this is ok with me.
• 49% revenue growth in 2007.  Here's  a quote from the last conference call: "2007 was an excellent year in which our revenues grew 49% and our profits grew even faster."
• Revenues for fourth quarter 2007 were up 40% over the previous year (also from the CC).
• Trading, by my calculations, not too far above book value. 
• The company predicts 25%-30% growth in 2008.  Predicts a similar growth rate through 2010. 
• At current prices ($6ish), the stock is trading at a low earnings multiple.  High growth companies often trade at 30x eps. CRNT is nowhere near that right now.  (still in the 13x range, I think.)
• Income should increase at a higher rate than sales and expenses (Per the last conference call.) 
• They met their earnings expectations in Q4, but got hammered anyway.  Even with that sort of ridiculous growth, Q4 was a "disappoint" to the market.  lunacy, if you ask me.  In fact, that link demonstrates the whole company's earnings history pretty well. 
• increasing profit margins
• Here is the Google balance sheet.  MSN reports on the earnings call.

And, now let's get deeper into the conference call:

CEO: "Thank you. Thank you for joining us today. With me on the call is Tali Idan, our CFO. We are pleased to report record results and another excellent year. For 2007, our revenues grew 49% and non-GAAP net income grew 129%. This was our sixth straight year of strong revenue growth, averaging 55% a year.

We believe the primary growth drivers for high-capacity wireless backhaul remain in place and we continue to expect revenue growth of 25% to 30% in 2008 with additional operating leverage, leading to operating and net income growth at a higher rate."

Ok, all that sounds great.  Let's hear some more:

"Even in a tight capital spending environment, we expect wireless backhaul projects to be funded due to the attractive economics and the operators' need to reduce operating expenses.

Ok, that's good news as well.

"Turning to the revenue breakdown, the service provider category accounted for 79% of total revenues in Q4. Private networks represented the remaining 21%. This category is comprised of enterprise and government customers. The Asia-Pacific region continued to grow, accounting for 49% of total revenues in Q4. North America accounted for 15% of revenues, EMEA accounted for 32% of revenues, and Latin America for the remaining 4%. We had only one 10% customer in the quarter, a direct customer in India. OEMs accounted for 11% of total revenues in Q4."

Ok, international business and expanding markets are the primary places of growth.   We already know that.

"In 2007, our OEM revenue grew 14% to $31 million, but declined as a percentage of revenue because our direct business grew even faster. In Q4, OEM business dipped a little, but we do not see this as a trend. We expect OEM business to continue growing during 2008 and we are currently bidding for new opportunities with all our OEM partners. "

Ok, so your business was growing so quickly that growing markets actually decreased in percentage size because other business lines were doing even better?  It doesn't get much better than that.  The OEM drop is a little worrisome, but not overly so because company management has proven itself over the last few years.  The growth has continued quarter after quarter.  No disappointments yet.  They address the OEM drop later in the CC and say that they don't expect the drop to be permanent.

Ok, more...

"With more churns business, book and bill same quarter in the mix, we are checking frequently and carefully for changes in the market, now even more so due to growing concerns about tight credit and the possibility of a slowing global economy. And up to now, we have not detected any change in market conditions.

So to summarize, the feedback from the field is positive. We have a strong pipeline of business and the outlook for 2008 remains the same."

Ok, so as of late January, we're still looking at the same growth rate (25%-30%) even with the credit situation and a "slowing global economy". 

"The geographical breakdown of the full year revenues is as follows: EMEA 32%, North America 21%, Asia-Pacific 42% and Latin America, 5%. Revenues from the Asia-Pacific region more than doubled during 2007, growing much faster than the other regions and therefore accounting for a larger proportion of the total."

Ok...Asia is growing like crazy...good...

"On non-GAAP basis, gross margin in 2007 increased to 36.2% from 35.3% in 2006. Operating margin increased to 8.7% from 5% a year ago and net margin increased to 9.5% from 6.2% in 2006, reflecting our success in improving the operating leverage."

Ok, year on year increase in *margin*.  The company is growing, but so are the profit margins. That's important.  This means they're going to have more business AND that business will be even more profitable than it has been in the past.

"Gross margin in Q4 remained around 36%. Operating margin in Q4 was 8.8%. Our objective is to reach 10% operating margin in 2008."

Ok, continuing to grow margins is good.

"I will start with Sprint right now. We are in the lab, okay, like other vendors as well, systems being tested, integrated and have not finished their selection process or awarded things they had on the backhaul. From a working level perspective, it's full steam ahead to complete all the process and do the rollouts, and that's what we hear from all of their team.

Probably you have a better assessment than I do on what's happening at the political management level and how will this have effect. We have been very, very cautious in our outlook for ‘08 in factoring Sprint in, if at all."

Ok, so any concerns about the Sprint rollout deal are largely void because the company either didn't include Sprint in the outlook or barely included them at all. 

" I would say, again, that expenses will continue to grow. I think it is the same trend that you have been saying in this year and the prior years. Expenses do grow in dollar terms, but in percentage of revenue terms, they do slow down. And therefore operating expenses continue to improve as we have been improving them throughout the years, and then our goal is to reach 10% operating margin in 2008." 

"No, I don't believe that we have any substantial increases in expenses."

"I think the general trend is reduction of operating expense as a percentage of revenues. So it could be that one quarter, it will be a little bit higher, but overall the trend is reduction; continuing increase in absolute term, but reduction as percentage. And this is our goal for next year as well, to continue and make operating expenses lower in terms of revenues."

That sums up where they stand on expenses.  Fewer expenses and better profit margin. Good.

"Well, let's hope that the dollar will not stay as weak as it is right now. I mean right now, I do have expenses of course in Israeli shekel and of course they worth more dollars these expenses. It's not a huge amount because a lot of our expenses first of all are the cost of the product and then there are many other expenses. And I am usually hedged for a quarter plus ahead. But if it stays the same rate as it is right now, we may see some impact beyond Q1."

Alright, the weak dollar could be a problem, but the rep says that they will "make efforts" to avoid the effects of a weak dollar.  The exchange rate could hurt the bottom line a little, considering that the last few days the dollar has hit record lows (against the Euro).  The rep goes on to say:

"But if you calculate it correctly, you will see that the foreign exchange effects on our OpEx are not that large because the salary content in shekels is relatively small from our operating expenses. So the overall effect on our budget is low."

Ok. shew.  Later they state that even if the dollar continues to collapse, the effect likely won't be felt until 2^nd quarter, and even then it will only have a $200,000-$300,000 effect on the bottom line. 

Question: "Okay. So you are not building in a very aggressive number in the 25-30% growth for..."

Answer: "No." 

Alright, so the 25%-30% growth does not include the Sprint deal or a very aggresive growth outlook. good.  We might even beat earnings if things go well. 

This is one of the reasons business continues to grow:

"The main trend, if I am looking from the top, is capacity expansion, okay. They need a lot more backhauls to each and every base station and then at the aggregation levels as well, because things like the iPhone or other smart phone devices generate a lot more traffic to the base station. And the operators are looking at differing technologies and ways to do that.

What we see is that lease lines in many of the places are maxing out. So they have been built, laid out for a certain capacity around the voice circuit. And when you start adding a lot of data, they max out very easily. "

more growth:

"if you look at our North American operation, we expect to see through ‘08 more carrier business than we saw before."

Ok, so even growth in NA. 

Question: "Okay. The overall revenue guidance for ‘08 of 25-30% is really attractive growth in an economic environment that the investment community anyway assumes is plunging into recession. But what is your overall economic outlook and maybe give us some comments on how that differs geographically?"

Answer: "First of all, I don't have an overall economic outlook because I am not in that business. It's very hard for me to predict. I think I read the papers. Probably most of you have better, more detailed understanding. -- From what we have seen right now in the market and from talks to customers worldwide and to our sales teams and sales people, we have not seen any significant changes or any changes at all in what the customers are telling us from what they said before the financial crisis."

Ok, so no sign of a possible recession stopping growth.  And they explained why they will likely continue to grow during the economic slowdown (did I quote that?) - because their products save companies money. 

Overall, with no bad news, I still feel like this is a buy and hold.  "Buy and hold" is not my normal trading style, but I'm down, so I'll be holding at least until it crosses the $8 mark.  Then, I'll probably sell off a few shares to free up some cash and keep the rest.   Looking at the conference call, the future looks great. 

My small caps, both CRNT and TCHC have been beaten up by the market, but hey, very few stocks, large cap or small, have weathered the recent market well.  I'm sticking to my guns here.  Both companies have good fundamentals and good profit outlooks.  If they break $15, the Investor's Business Daily (or some other source) will likely mention them, and then we'll see a large upswing.  CRNT was mentioned by IBD before, and had an upswing.  AFSI has had the same thing happen a couple of times as well. 

Anyways, I've had a request or two to do a more in depth analyis of CRNT, so there it is.  I'm a big fan of reading conference calls.  I can do the math myself and see the low earnings multiple, book value, etc, but reading a conference call is always wise.   I'll probably free up some cash on the next (profitable) upswing, but I'm going to hold some CRNT at least until the next earnings call. Same with TCHC.  I've said it before, and I'll say it again.  If the money is there (good earnings), they won't be ignored forever. 

I'm still unsure why CRNT is down so much recently, but as there is no bad news, I'm just going to hold my breath and ride it out.  At the time of this writing, both CRNT and TCHC are in the green when the market is down 179 209 points.  If I'm lucky, I'll end the day that way.  It would be a nice change. :)

3/25/08

Looks like the analysts are starting to agree with me.  Link

Danny,  a couple things I noticed when looking at CRNT:

* The stock currently has a Beta of 3,  so it's much more volitile than overall market volitility ( yahoo finance ).

*  According to the cash flow statement on Morningstar,  this company has never had positive cashflow.

 * Their profit margin is 36.1% compared to 41.9% for its industry and 34.8% for the S&P 500 overall ( moneycentral.com ).  It's average 5 year gross margin is also lower compared to its industry.

* There return on equity is 12.6% compared to 27.8 for its industry and 25.7% for the S&P 500 ( moneycentral.com )

* Return on Assets is 8.4% compared to 13.5% for its industry ( moneycentral.com )

* Return on Capital is 11% compared to 23.5% for its industry (moneycentral.com)

* 5 year average Return on Equity, Assets, and Capital are all negagive ( moneycentral.com )

* If you look at a 10 year summary of their key rations ( moneycentral.com),  their numbers are all over the map.  A lot of red ink interspersed with black ink in all sorts of areas. In 2000, their book value per share was almost $5.00 and dropped down to $1.73 in 2006. 

This is what I'm looking at:

Upod,

Per Morningstar's "data interpreter":

"This stock is in the wireless equipment industry, which has proven to be an excellent industry over the past 10 years, but hasn't been so strong the past five. Note, however, that while a 10-year record is unavailable for this stock, it has been one of the strongest performers in its industry over the five-year period."

"Most stocks in the wireless equipment industry have seen steadily growing revenue and earnings over the past three years. This stock has done even better than most of its peers as far as top-line growth is concerned--its revenues have grown very rapidly over the past three years." 

"This stock's forward earnings yield of 11.76% is the annual return it would generate if its profits remained fixed and it paid out all of its earnings as dividends. Not only is this much higher than the earnings yields of other stocks in its industry, it is extremely healthy in absolute terms. For this company to generate decent returns for investors, it will probably only have to realize moderate growth in earnings or a higher valuation by the market. "

Marketwatch does point out that the return on investments has been too low.

In regards to a few of your concerns:

* The stock currently has a Beta of 3,  so it's much more volitile than overall market volitility ( yahoo finance ).

Agreed.  Such is the way with most small caps.  Usually, either that float along a straight line and never move, or they are very volitile.

*  According to the cash flow statement on Morningstar,  this company has never had positive cashflow.

But now they are out of debt, having growing margins, and a growing business.  They are more fundamentally sound than they've ever been.

 * Their profit margin is 36.1% compared to 41.9% for its industry and 34.8% for the S&P 500 overall ( moneycentral.com ).  It's average 5 year gross margin is also lower compared to its industry.

This doesn't worry me.  They are working to increase margins.  Also, I imagine the low margins may have something to do with keeping bids low in order to continue marketshare growth. (?).  Whatever the case, this doesn't worry me.   As pointed out above, the industry has only had 11% revenue growth over the last three years while CRNT has had 46% revenue growth.  If the company is growing revenues at 4x the industry average, I don't think slightly lower margins are going to hurt much.

* There return on equity is 12.6% compared to 27.8 for its industry and 25.7% for the S&P 500 ( moneycentral.com )

Indeed, this could be improved. 

* Return on Assets is 8.4% compared to 13.5% for its industry ( moneycentral.com )

* Return on Capital is 11% compared to 23.5% for its industry (moneycentral.com)

* 5 year average Return on Equity, Assets, and Capital are all negative ( moneycentral.com )

This is a growing small cap company.  To me, industry averages are not necessarily reflective of the company's strengths/weaknesses.  If I compared crnt's growth rate (46%) with the industry average (11%), then industry would seem stagnant.  Also, comparing five year averages is something that I especially try to avoid with small caps.  The first few years of operation, especially a high growth company, large amounts of capital are used to build the business.  As such, the first few years are sometimes rocky.  I think that CRNT are just now at the point that they can really start profiting from there exceptional growth.  Their margins are getting better, and their growth is continuing.  Take a look at the five year chart and look at 2007.  The stock went from $5 to $19 in less than 6 months.  Why? Because if you look at the one year chart, on April 30, 2007, they raised their one year revenue outlook.  From there, the stock went straight up (until late December, when everything started going down.)  They beat earnings expectations in July, which only added more fuel to the fire.  When it comes to young growth stocks, comparison to the industry (which likely includes huge large caps stocks) isn't always the best guide.  A lot of the time, the small cap growth stocks will trade at ridiculous multiples based on their future potential earnings (which, you know doubt already know) regardless of their actual results.  Many times with young growth stocks, so long as the results are "good" relative to the company's future and current standing, the past can be overlooked (so long as historical management and earnings have been relatively "good" with some consistency).  As the company is in better shape now than it's ever been, is improving margins, and still growing rapidly, I only expect better results in the future.  Many small companies use debt and income to finance their growth.  Some do so to the extent that they almost bankrupt the company trying to finance new growth.  CRNT have not done that. 

But with all that said, you concerns are valid.  I would like to see more cash on hand and return on equity. 

Keep in mind that I'm not alone in my pick here.  Investor's Business Daily had no problem putting them at the #1 and #2 spots on the top 100 list at various times in 2007, despite any problems.

* If you look at a 10 year summary of their key rations ( moneycentral.com),  their numbers are all over the map.  A lot of red ink interspersed with black ink in all sorts of areas. In 2000, their book value per share was almost $5.00 and dropped down to $1.73 in 2006. 

However, the same chart shows the book value increasing from $1.73 in 2006 to $4.50 the next year.  How many companies can double their book value in a 12 month span?  Like I said, with these small caps, there comes a point when they begin to turn the corner and require less investment and start profiting/growing without the baggage of debt and startup costs.  I think CRNT is finally getting around that corner. 

You pointed out that the lifetime trendline is down and the four year trendline is flat.  --If you look at the last 5 years, 2007 was hardly flat.  A quadruple in one year is not flat.  Over the last few years (other than 2007) the stock traded in the $4 range. It would jump from $3.95-$5.20, but usually hovered in the $3's.  Now, at $6.50 per share, down from it's near $20 highs of a few months ago, you've got to consider a few things.  1) even in the horrible market, the "old" lows in the mid $4's were avoided.  In fact, price resistance never fell beneath the mid $6's. 2) Their was a secondary (in November, I think), which added more shares than there were in 2006 and 2007.  Even after the share dillution, the stock is holding a higher price than it did two years ago.  Again,  this is a sign of progress and strengthening of the company.

Simply put, since 2006, we've seen the following positive developements:

1. elimation of debt
2. improving margins
3. very high revenue growth
4. drastically improved book value (more than a double)
5. the stock is holding a higher bottom ($6.15) than it did in early 2007 ($5.00), even after the secondary, the credit crisis, and generally bad market.

Right now, I think there are a few things keeping this stock down:

1. The overall market in the U.S. is affecting the Israeli exchange as well.  Their tech sector has been especially hard hit.
2. People are bailing on small caps because they are less safe.  In the bad market, security is a big deal.
3. The Israeli exchange has been closing three hours early the last week or two do to labor problems.  I'm not sure if this is affecting the stock or not, but it's an abnormal trading condition in the CRNT's home country.  It could be affecting the stock price. (??)
4. They had a secondary last year.  The stock started going down soon after and hasn't recovered.  Of course, even with the secondary, it's oversold in my opinion.
5. At the last conference call, they beat their original expectations for the year, but only "met" expectations for the quarter.  Apparently, that wasn't good enough for the analysts.  Perhaps they were worried over the slight downturn in OEM profits, but that still didn't warrant the sell-off that started.  Any sign of weakness from these small cap growth companies, especially in the tough market.... they get spooked easily.  The demands to beat earnings expectations every single quarter are very high, and the market always overreacts.  Simply "meeting" expectations for the quarter, beating expectations for the year, and giving strong guidance wasn't enough.  The drop in price is either a result of some unknown bad news, or the market letting the stock suffer because of the dillution and only "meeting" Q4 expectations.  They want blow-me-away results quarter after quarter.  I think it's ridiculous that the stock actually met such high growth standards, and still got hammered. 
   

Anyways, as always, thanks for the comments Upod.  Your analysis is appreciated, and you did bring up some good points.  But overall, unless there is some problem that I don't know about, I'm gonna try to ride out the storm (just like you're doing with SBUX).  Anyways, I hope I didn't make any mistakes in all of that...sometimes on these huge blog posts you can't see what all you're typing, and it becomes easy to make an error.  I hope the ability to edit our blog post comments is eventually implemented. 

Just correcting this sentence:

After I made those posts, I realized that CRNT is an entirely different beast than what I normally work with and most of my observations probably don't apply given their characteristics. 

Hey man, your posts are always good.  At the very least, you got me to address a few concerns that my original post didn't mention.  In fact, your post brought up a place or two in which I would like to see some improvement from CRNT.  I've been meaning to post on your SBUX thread again.  I've had some thoughts about them lately..

http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/03-20-2008/0004777614&EDATE=

Looks like they just won another $1 million contract.  This time in Arizona.