Earnings Call Transcript - CRNT Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ceragon Networks' Third Quarter Earnings Call. Our presentation today will be followed by a question-and-answer session. I'd like to hand the call over to the first speaker today, Maya Lustig, Investor Relations. Please go ahead.

Maya Lustig, Investor Relations

Thank you, operator, and good morning, everyone. I am joined by Doron Arazi, Ceragon's Chief Executive Officer; and Ran Vered, Ceragon's Chief Financial Officer. Before we start, I would like to note that this call includes information that constitutes forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be obtained or that any deviations therefrom will not be material. Such statements involve risks and uncertainties that may cause future results to differ materially from those anticipated. These risks and uncertainties include, but are not limited to, such risks, uncertainties and other factors that could affect our results, as detailed in our press release that was published earlier today, and as further detailed in Ceragon's most recent Annual Report on Form 20-F, and in Ceragon's other filings with the Securities and Exchange Commission. Such forward-looking statements represent our views only as of the day they are made and should not be relied upon as representing our views as of any subsequent date. Such forward-looking statements do not purport to be predictions of future events or results, and there can be no assurance that they will prove to be accurate. Ceragon may elect to update these forward-looking statements at any point in the future, but it specifically disclaims any obligation to do so. Ceragon's public filings are available on the Securities and Exchange Commission's website, and may also be obtained from Ceragon's website. Also, today's call will include certain non-GAAP numbers. For a reconciliation between GAAP and non-GAAP results, please see the table attached to the press release that was issued earlier today. I will now turn the call over to Doron. Please go ahead.

Doron Arazi, CEO

Thank you, Maya, and good morning everyone. Creating equal digital opportunities for all people around the world by bringing expert communication capabilities everywhere is the foundation of everything we do, and will do moving forward. Today, many operators and network providers are on accelerated schedules to build the networks of tomorrow. We are proud that, in the third quarter of 2021, a high number of them continued to select us. Since the days of 2G, we have worked hard to earn the trust of our customers in more than 140 countries. So far, in 2021, we have added around 10 new material customers, many of whom, as well as existing customers, consume projects designed to bring a better communication infrastructure to rural areas. We are seeing a growing number of governments allocate budgets and initiate incentive plans to improve rural networks. And we are all well-positioned to take part in these vital projects. We have a strong solution mix and reputation, but it is important to note that gaining new customers in our market can be a long process, often lasting more than a year, depending on the type of customer and the positions of other incumbents. Even when we win a new customer, in most cases, the business ramp up is gradual. Our revenues in Q3 were strong. We achieved this despite an external environment marred by unprecedented challenges in the chip and shipping industries. During this challenging time, we've been doing everything in our power to maintain and grow our customer base. These efforts are crucial, but they incur expenses. I will address these issues later in my speech, and so will Ran. In Q3, we have seen a further increase in our backlog, which helps provide more confidence and visibility. The primary driver of this outperformance has been sustained strong bookings in different regions. In Q3, our 5G orders maintained the trend of previous quarters and showed steady performance. Once again, we achieved two new 5G design wins. Let me now provide a snapshot of our performance by region. In North America, our 5G-related bookings accounted for over 50% of all North American bookings year-to-date. We were selected by a leading U.S. service provider for a multiyear managed services agreement. The satisfaction from our level of services and professionalism so far has driven a discussion about potential network modernization. We also just signed a contract with another new strategic operator in North America, and are expecting orders in the coming quarters. Furthermore, we have one new 5G design win. In India, Q3 was a healthy quarter for us, as it was for telecom companies. Industry performance was driven by subscriber additions, increasing data consumption, and tariff hikes, as well as recovery after a severe wave of COVID-19. The quality of the network experience is becoming more important. There is a growing demand for network upgrades and expansions. India is moving towards rolling out 5G by developing 5G corridors. Three telecom operators have recently been approved to start 5G trials. Spectrum auctions are expected to take place in 2022. Commercial launch is expected during the same year, and we will be there to meet the demand. We are planning to participate in RFP processes. Our competitive advantages include our indisputable local market leadership position driven by our technology, brand positioning, and experience in India, as well as in other regions. In Europe, we had a very strong quarter, especially in terms of bookings. We continue to receive orders from leading European operators from different countries, secured new orders, participated in trials, and received great feedback on our POCs. We have multiple RFPs in progress. We're in the POC stage with a Tier 1 global operator in Western Europe. They are interested in our disaggregated wireless transport solutions. With another, we have achieved product validation, and we are in the negotiation phase to secure orders. Our European 5G-related bookings accounted for over 35% of all European bookings year-to-date. We had one new 5G design win. In APAC, in terms of bookings, we had a relatively stronger quarter compared to Q2 2021. Our 5G-related bookings accounted for over 25% of all APAC bookings year-to-date. We are in a POC phase with a global Tier 1 vendor regarding our disaggregated solution. While we're building a solid pipeline and witnessing the emergence of new momentum, it might be too early to yield optimism. The shockwaves of the pandemic continue to radiate throughout the region, affecting people, economies, and business decisions. In Latin America, we experienced some improvements in bookings. Even though the macro environment remains challenging, we received a substantial PO from new customers. We are working on POCs and have multiple RFPs in progress. A majority of LatAm countries have begun preparing for 5G. Several have already started trials including Brazil, Chile, Argentina, Peru, and Colombia, but 5G spectrum allocations have just started, and in most countries are to be assigned in 2022 or beyond. We are taking this time to engage with existing and new players that may take part in the spectrum allocations in order to position ourselves as the lead 5G wireless transport vendor. In Africa, we acquired new material customers, received a new PO for managed services, and are working on a number of new opportunities. When it comes to 5G, only a few countries have started assessing and investing in potential infrastructure. Overall, our global bookings increase our confidence in Q4 and beyond. Among other things, what will take us further is the expected growth in the total addressable market. This is thanks to acceleration in 5G network densification, increased efforts to digitize rural areas, as well as the shift to the OpenRAN architecture. These developments are likely to continue to have positive and profound implications for us, especially in the medium and long-term. They create more opportunities for us to not only sell our product-led solutions, but also expand our offerings and business model to deliver managed services and increased sales of our software solutions. I mentioned earlier the tough external environment we're operating in. While we have maintained good control and are able to increase our revenue compared to Q2, we've also encountered challenges. We believe the component shortages all across the globe will extend into 2022. At the same time, international shipping bottlenecks will continue to prolong supply chain turmoil. It looks like there is no quick fix. It impacts both delivery timelines and costs. Our customer-first culture leads us to take measures to stabilize our lead times and avoid delays as much as possible, even at the expense of current increased costs. Our goal during this turbulent period is to help customers continue with their plans as smoothly as possible. In parallel, we're working to optimize our product costs. We've undertaken an in-depth analysis of our bill of material costs in order to identify all the necessary cost reduction options that are in our control without sacrificing an ounce of quality along the way. We believe our initiatives will start bearing fruit in the next few quarters. While the big picture is complex, and global market dynamics are beyond our control, we remain confident in our mid and long-term prospects. We may experience a shift of revenue between quarters and temporary gross margin pressures on which Ran will elaborate. Before turning over the call to Ran, I would like to refer to the progress of our new 5G SoC. As mentioned in our Q2 call, we expect the tape out towards the end of this year. Immediately, after the tape out, we will start the productization process of the SoC which will be followed by the integration phase into Ceragon's future products. Once launched, our new SoC-based product series will enable our customers to increase wireless transport capacity by 16 times using only a quarter as much of the spectrum, providing a several-year lead over the rest of the market. It is ideal for the bulk of the 5G networks that we will be rolling out in two to three years from now. Moreover, it will be significantly more cost-efficient and less dependent on the component market, reducing our inventory and improving our delivery lead times. With that, let me now turn the call over to Ran to discuss the financial for the quarter. Ran?

Ran Vered, CFO

Thank you, Doron and good morning everyone. To help you understand the results, I'll be referring mainly to non-GAAP numbers. Like Doron mentioned, during Q3 2021, we saw very strong bookings coming from North America, India, and Europe, as well as some recovery in APAC. In fact, Q3 is the fourth consecutive quarter with a book-to-bill above one. Our revenues for the quarter were at the high end of our projections. Let me now review the actual numbers with you. Revenues from the third quarter were $76.1 million, up by 8% compared with $70.6 million in Q3 last year. This was achieved despite the challenging environment regarding component shortages. We are proud of this achievement and the fact that most of our customers' demand was fulfilled. Our strongest region in terms of revenues for the quarter was India, reflecting ongoing deliveries for our main customers and in line with the growing demand we are seeing in this region. Our second strongest region in terms of revenues for the quarter was Latin America, reflecting the deliveries and installations from the major win we had in the beginning of the year with a Tier 1 carrier in Colombia. Europe also had a strong quarter, continuing its positive momentum and reflecting initial revenues from 5G projects. In North America, we continue to see strong momentum with our Tier 1 customer, other related ISPs, and smaller carriers. However, even though the demand continues to be very strong, we will not be able to deliver at the same pace as previous quarters due to component shortages. Revenues in Africa and APAC were slightly lower than in the previous quarter, reflecting the still challenging situations in both regions. We have above 10% customer growth in the third quarter. Gross profit for the third quarter on a non-GAAP basis was $23.6 million, giving us a non-GAAP gross margin of 31%, compared with 33.5% for the third quarter of 2020. This gross margin is supported by a favorable mix of products and solutions served to specific customers this quarter. That said, there are growing challenges associated with component shortages and high supply chain costs that can impact our gross margin. Our effort to satisfy our customer needs, as mentioned by Doron, is taking a toll on us as we pay significantly higher prices to resolve component scarcity. We believe the situation will be temporary. Operating expenses on a non-GAAP basis for the third quarter were $19.6 million, slightly better than our expectations. Research and development expenses for the third quarter on a non-GAAP basis were $6.6 million, a decrease from $7.3 million in Q3 2020, mainly as a result of a decrease in vacation utilization in August. We expect these expenses to be higher in the next quarter until we reach tape out towards the end of this year. Sales and marketing expenses for the third quarter on a non-GAAP basis were $8.3 million, an increase from $7.8 million in Q3 2020, but still reflecting the reduced travel due to COVID-19. We expect to gradually increase our sales and marketing expenses as markets open post-pandemic. General and administrative expenses for the third quarter on a non-GAAP basis were $4.6 million, a slight decrease from $4.8 million in Q3 2020. Financial and other expenses for the third quarter on a non-GAAP basis were $2.3 million, an increase from $1.2 million in Q3 2020. Our tax expenses for the third quarter on a non-GAAP basis were $0.3 million, in line with our expectations. Net profit on a non-GAAP basis for the third quarter was $1.4 million, representing $0.02 earnings per diluted share on a non-GAAP basis. Our inventory for the third quarter was $53.2 million, higher than the $51.9 million in Q3 2020, representing the activities we are undertaking while facing the global component shortages crisis. We have been taking measures to optimize our inventory model to ensure we meet our commitments to our customers. Our trade receivables are now at $109.9 million, up from $108.4 million in Q3 2020. Our DSO now stands at 140 days. Net cash used in operating activities for the third quarter was $0.7 million. Net cash used in investing activities for the third quarter was $2.3 million. Looking ahead, our strong bookings in Q3 along with a very healthy backlog reflect increasing business activity mainly in North America, India, and Europe. I'm happy to report today that we continue to be confident about our revenue growth in 2021, and still expect it to be on the higher end of our annual revenue guidance, which is between $275 million to $295 million. That said, the global component and shipping challenges still create fluctuations in our quarterly revenues, and influence our gross margin. Despite these challenges, we expect our net income for the second half of 2021, on a non-GAAP basis, to be around breakeven. With that, I now open the call for your questions.

Operator, Operator

Thank you. Our first call today will be from the line of George Iwanyc from Oppenheimer. George, please go ahead and unmute yourself to speak.

George Iwanyc, Analyst

So, Doron and Ran, can you hear me?

Doron Arazi, CEO

Yes, hi, George.

Ran Vered, CFO

Yes, hi, George.

George Iwanyc, Analyst

Great, thank you for taking my questions. So, congrats on the solid execution and the ability to grow in a tough environment. The outlook from a design win opportunity sounds very strong, but when you map that with your visibility into the supply chain, especially as you look into 2022, how confident are you at being able to maintain a $75 million to $80 million revenue run rate? And are you able to start projecting even a higher revenue level on top of that next year?

Doron Arazi, CEO

So, George, first of all, thanks for this question. I think that in terms of the supply chain, primarily focusing on the chip industry, there's a lot of turbulence. Based on our new strategy regarding procuring components, we believe that we will see some relaxation during 2022, probably towards the second half of it because we changed our strategy regarding the procurement of the critical items. That said, even this strategy is still dependent on the reliability of the projections of the vendors in terms of timelines and lead times. All in all, it is our belief that the situation will start getting better gradually during 2022, primarily in the second half. But what we have seen in the last two or three months is showing that things could change dramatically for the good side and for the bad side. In terms of the top line, obviously, when we look into the beginning of 2022, we will probably come with a nice backlog, depending on the booking that we'll be able to generate in Q4, and that gives us some level of confidence to start having our revenue in the range that you are suggesting.

George Iwanyc, Analyst

All right. You mentioned the favorable mix from the gross margin standpoint, so I have a couple of questions related to that. One, how much is the regional strength contributing to that? Are you starting to see much of a lift from the managed services standpoint? And then when you think about supply chain costs, if your mix normalizes, would you expect it to tick down in the next couple of quarters given the high cost of managing the current environment?

Doron Arazi, CEO

So, I will start by answering regarding the managed services, and then will give it to Ran to provide you the trends in terms of the impact of the supply chain costs. In terms of managed services, this is a relatively new initiative that we have embarked on. It takes time to get to a significant business volume that can really impact our margins and recurring revenue piece. So, it's just a start, but looking at the deal, I'm definitely very optimistic about our ability to generate higher gross margin than the current ones if this becomes a substantial part of our business.

Ran Vered, CFO

So, just to complement, George, on what Doron said, let me try to be a little bit more specific. We have sometimes, even within specific regions, specific deals that have come with a more favorable mix, whether it's due to software or specific products. We benefited from that, both in the second quarter and the third quarter. As for the supply chain component impact on our gross margin, I think the impact comes from two vectors. The first vector is our ability to better predict our revenue because in both component and shipping issues it's hard for us to predict, given that some of the components that are missing leave us uncertain as to when we will receive them. The second piece of this challenge involves the costs associated with both aspects. If I had to quantify this, I would say the accumulation of the challenges from expediting some of the components and securing them, as well as shipping, is creating an approximate 3% to 4% impact on our gross margins. We are doing a lot to mitigate this. We improved our sea freight versus air freight and are taking other initiatives, but if I had to summarize the overall impact, it's roughly around 3% to 4% on our gross margins.

George Iwanyc, Analyst

Right. And just one more question from me. From an overall OpEx standpoint, very good control in the third quarter, but would you expect it to trend more towards the second quarter levels in the fourth quarter and then tick back up and stabilize at that level next year?

Doron Arazi, CEO

So, the short answer is yes. I would say that both on R&D and sales and marketing, which are the heavier components in our OpEx, Q3 was a unique phenomenon because many people took vacations in August, which impacted our costs. I do expect next quarter to come closer to our usual run rate of around $21 million. When we look at 2022, this will probably be the trend we’re observing. Just one caveat on that, the shekel has been very strong, and we do have a policy to hedge on the shekel. These levels will probably impact our projections for next year, by an estimated $2 million to $3 million.

Ran Vered, CFO

I will just add to this point about operating expenses. The current assumption is based on the fact that we have not finalized our AOP, our annual operational plan. We are diligently working to decide the priorities for us for next year, whether it's in R&D, new business, or new products, and so forth. So, the jury is still out there, but we have a history of many years of keeping our OpEx in control, and from that angle, you can rest assured that this trend will continue.

George Iwanyc, Analyst

Thank you very much.

Ran Vered, CFO

Thank you, George.

Operator, Operator

Thank you. Our next question comes from the line of Matt Rizort. Matt, please go ahead and unmute yourself.

Alex Henderson, Analyst

Yes, this is actually Alex Henderson. Can you hear me?

Ran Vered, CFO

Hey, Alex. How are you?

Alex Henderson, Analyst

I'm very well, thanks.

Ran Vered, CFO

I was surprised when Matt's name was announced…

Alex Henderson, Analyst

Well, he did the registration for me.

Ran Vered, CFO

Okay.

Alex Henderson, Analyst

I have a couple of questions for you. Could you provide some details on how your book-to-bill has performed above the revenue line throughout this year? I believe you mentioned it was the fourth quarter, indicating it was not seven consecutive quarters with a book-to-bill ratio above one. How much have you increased that backlog, and can you explain how much visibility that gives you regarding achieving the same level of revenues this year in the fourth year, assuming there are no supply constraints?

Ran Vered, CFO

So, first of all, let's start by saying we said that it is the fourth quarter in a row in which our book-to-bill was above one. Generally speaking, I don't want to start giving exact percentages, but the accumulation of the numbers over the last three or four consecutive quarters has been very significant. As I answered George's question from a different angle, usually, the big challenge for us is the start of the year, which is the first quarter. I believe that subject to no big surprises in booking of Q4, Q1 would probably be able to maintain the same level of revenue, more or less, that we are seeing in Q3. The visibility is good. But it's not that our business model has changed so suddenly that we have three quarters of visibility. I would just say that our backlog is, in order of magnitude, two quarters ahead, maybe slightly even more. In previous years, it was probably between one to one and a half quarters. So that's the difference.

Alex Henderson, Analyst

And then you made a comment about the tape out in R&D for the fourth quarter. Can you quantify how large that is? I assume it's a one quarter cost hit, and then it falls back out in the first quarter once the tape out is completed. Could you give us some sizing on it?

Ran Vered, CFO

So first of all, I like to think that the tape out was delayed more than a quarter if I go back the overall delay that has come with it. It is probably closer to a year. Even when they were going to do the tape out, I think Doron commented this in the prepared remarks; we still need to productize the chipset and then integrate it into our new products. This will also take time. So, all in all, the delay was around I would say one year, and the impact on the costs is just maintaining a relatively high level of R&D, which reflects what you see on the higher OpEx. The impact of it for the next year, when the tape out is going to be finalized at the end of this year, is yet to be determined, as Doron already commented on that, because we still need to invest in new product developments that are worthwhile. So, at this point, it's a little hard for me to comment on how it will impact our overall R&D spending for the next year.

Doron Arazi, CEO

Just Alex to add to Ran's answer. In terms of cost, obviously, developing a chip is very costly, but this cost is spread over a couple of years and would not substantially alter our financial outlook. The tape out phase by itself is not generating additional significant costs for us. The process following it, which is the productization in which we work hand in hand with different chip vendors doing the packaging, conducting evaluations and all this stuff is costly. But again, it's not a one-time hit that we'll face in this quarter or that quarter; it will either be part of our regular R&D expenditure, or if the accounting insists, a part of R&D capitalization.

Alex Henderson, Analyst

So just to be clear, you're saying that the fourth quarter of 2022 is when you're going to do the tape out as opposed to the fourth quarter of 2021?

Doron Arazi, CEO

No, no. What we are saying is as follows. The tape out is a milestone where we basically finished all the tests, including the tests that are done by our chip vendor, so that we can move to the next phase and productize the chip. This was delayed, and now we are in the process of productizing our chip, which is done by our chip vendor together with some subcontractors of theirs. This starts at the beginning of 2022.

Alex Henderson, Analyst

So to clarify, the year delay that you're citing was in the rearview mirror; that happened a year ago.

Doron Arazi, CEO

Yes.

Ran Vered, CFO

Yes.

Alex Henderson, Analyst

You're suggesting that there has been a delay, but this isn't a new delay; it occurred over a year ago.

Doron Arazi, CEO

Correct.

Ran Vered, CFO

Yes.

Alex Henderson, Analyst

So, to be clear, the year delay that you're citing was not a new delay, but happened a year ago.

Doron Arazi, CEO

Yes.

Ran Vered, CFO

Yes.

Alex Henderson, Analyst

All right, thank you very much for that clarification. Now, I thought you were saying you had an additional delay. Can you talk through why you're unable to pass through the higher cost associated with your supply chain, given most customers that we've heard from other companies have been willing to absorb that? Because it's obviously not within the control of the individual companies, and it's a broad industry-wide problem?

Doron Arazi, CEO

Let's start by saying that I did not say explicitly that we cannot pass these costs. In fact, we are having discussions on ways to work with our customers so that they participate in this time of pain. The approach, which I'm leading in this company, is to first serve the customer, ensuring that you don't jeopardize his rollout attempts as much as possible. When the customer feels comfortable and happy with your performance, then you can more easily come and have this discussion. We are going to try that. There are a lot of differences between industries, and it is a matter of culture, company policies, and what the other competitors in our industry are doing. The bottom line is that we do have discussions with our customers about sharing the pain with us. I cannot give anything beyond that, because at this point, there is no reliable projection I can give you based on the discussions we're having.

Alex Henderson, Analyst

So, just the last question on the same line, so the gross margins have been bumping around 31%. You've had a mix shift to India in the current quarter; we've had very strong wins in EMEA and the U.S. Those tend to be much higher margin, more fully featured. So should we anticipate the mix shift will actually shine through the margins? Or should we anticipate that the cost problems and the ability to pass it through are the more dominant factors as we go out over the next two or three quarters?

Doron Arazi, CEO

At this point, I would assume that the costs we are incurring to deliver on time will be more dominant. This is why when looking at the second half of the year, we toned down our expectations slightly. Yet, I think, it's a temporary situation. I believe that within a couple of quarters, and I actually mentioned that to George, if the lead times that are promised by our vendors are indeed reliable and they deliver to those lead times, I think that our costs to manage this temporary situation will begin to decrease, and accordingly, we will start seeing better gross margins, but this will likely happen during 2022.

Alex Henderson, Analyst

All right, I'll see it before. Thanks.

Doron Arazi, CEO

Sure, thank you.

Ran Vered, CFO

Thanks, Alex.

Operator, Operator

Our next question comes from the line of Rommel Dionisio from Aegis Capital. Please go ahead.

Doron Arazi, CEO

Hi, Rommel. How are you?

Ran Vered, CFO

Hi, Rommel.

Rommel Dionisio, Analyst

Good morning. Can you hear me?

Doron Arazi, CEO

Yes.

Ran Vered, CFO

Yes, good morning.

Rommel Dionisio, Analyst

Great, thanks. Thanks for taking my question. Good morning. So just over the long term, as you look at dovetailing Alex's question on the pricing, are there other things you can do just over the long-term from a supply chain standpoint, whether sourcing from different partners or just to maybe diversify the risks that you're seeing today? Obviously, this might take some time and you're doing all the things you can to address the problems today, but just over the long term maybe some comments on how you think about that.

Doron Arazi, CEO

Yes, basically, there are a lot of new initiatives for generally speaking, cost reduction in our products, because we understand that this industry demands the best for the least amount. While I know that there are some conflicting elements in those two aspirations, I think that Ceragon is known for achieving great efficiencies, and this is what we are doing. First of all, we are considering different manufacturers that will significantly reduce our manufacturing costs. Additionally, we are looking at some of our products that we believe will be the high runners for the years to come. We are also going to the extent of reviewing the design of the product to reduce our costs significantly. This obviously takes time because it's more of a developmental effort before being able to productize, but we are taking significant steps to adjust the cost structure of our high runner products. This will gradually be reflected during 2022, possibly becoming more noticeable in the second half.

Rommel Dionisio, Analyst

And just one follow-up if I could. You touched on India and its potential for that market to eventually transition to 5G. Typically, that market has been lower margin than the U.S. and Europe for you? Is that a key margin driver potentially as the market transitions, or are there other factors?

Doron Arazi, CEO

India is a major market for us, and it will continue to be so. Our advantage is that we know the Indian market very well, and we can usually anticipate the price points. One of the things we are trying to do is look at what we believe will be the high runners for India once 5G is rolled out, and ensure that we do our best to adjust our cost structure to fit the Indian market. I know for a fact, because I have been talking to these customers, that they like our products and technology very much, which has been crucial to our business in previous years. When we started the significant journey back in 2013 and 2014, our margins were very low. However, over the years, we were able to reduce our costs significantly and are committed to doing the same. We are going to compete vigorously for our market share in the 5G era, and I believe we are well positioned; even if we start with relatively lower margins in the beginning, experience shows that we can significantly improve our margins quickly as we scale up.

Rommel Dionisio, Analyst

Great, thank you very much.

Doron Arazi, CEO

Thank you.

Operator, Operator

Our next call is from the line of Brian Kinstlinger from Alliance Global Partners. Please go ahead.

Brian Kinstlinger, Analyst

Hi, guys, thanks for taking my questions.

Doron Arazi, CEO

Hi, Brian.

Brian Kinstlinger, Analyst

Just one. You talked about just now your lower opportunities to lower your costs. But you also mentioned earlier changing your procurement strategy. So can you identify some of the key changes to help you work through the supply chain challenges as part of the strategy, and how long before you expect it to impact your ability to procure components?

Doron Arazi, CEO

So, on our procurement strategy, the main change is basically the projection period based on which we approach procurement. If in the past, our projection period was nine months or six months, we have now extended it to eight to 15 months, or even 18 months. Obviously, we're doing this very carefully because we don’t want to get stuck with inventory that will become obsolete eventually. This is why we pick and choose our main components that are on one hand critical and very difficult to obtain in this turbulent period. At the same time, we ensure that these components are for our high-runners, minimizing the chances of being stuck with obsolete inventory. Another major change is developing relationships with second sources for components that we currently source from single suppliers. Sometimes it requires little changes that are not critical; other times it doesn’t require any changes at all. We are also ensuring that our new product series will have more common components, creating higher flexibility in delivery timelines. Additionally, our new chip will reduce the number of components we need to buy by integrating more system elements into that chip. It’s a strategic move with multiple ingredients; some will pay off faster, and others will take longer.

Brian Kinstlinger, Analyst

Great, thank you.

Operator, Operator

We have no further questions, please proceed.

Doron Arazi, CEO

Thank you all. In the third quarter of 2021, we not only enjoyed strong bookings and a healthy backlog, we also achieved considerable success in containing the impact of the unfolding challenges around us in different industries. Looking beyond the operational challenges, this turbulent period creates for us, we see very high market traction that we expect to convert into growth and margin expansion in the mid and long-term. I look forward to updating you further on our next call. Thank you everyone. And have a good day.