Earnings Call Transcript
Ceragon Networks Ltd (CRNT)
Earnings Call Transcript - CRNT Q1 2020
Operator, Operator
Good day, everyone. Welcome to the Ceragon Networks Limited First Quarter 2020 Results Conference Call. Today's call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks. Today's call will include statements concerning Ceragon's future prospects that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on certain beliefs, expectations, and assumptions of Ceragon's management. For examples of these statements, please refer to the relevant section in our press release that was published earlier today. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including risks of disruption to our and our customers’ businesses related to the outbreak of the COVID-19 pandemic, the risk of a macroeconomic downturn and significant decline of business that could harm our and our customers’ ability to operate or develop further, including cancellations, suspensions, or reductions in investment in new equipment purchases, delays in the rollout of wireless networks, postponed transitions to 5G technologies, delivery challenges, and adverse effects on financial performance, cash flow, and revenues. There are also risks linked to the concentration of a significant portion of Ceragon's expected business in certain countries, particularly in India, where a small number of customers may represent a large portion of our revenues, as well as risks of delays in converting design wins into revenue and maintaining our technological advantage. Other risks and uncertainties detailed in Ceragon's Annual Report and filings with the Securities and Exchange Commission represent our views only as of the date they are made and should not be relied upon as current views. These statements do not guarantee predictions of future events or results and we do not assume any obligation to update them. Ceragon’s public filings are available from the SEC’s website or can be obtained from Ceragon’s website. Additionally, today’s call will include certain Non-GAAP numbers. For a reconciliation between GAAP and Non-GAAP results, please refer to the table attached to the press release issued earlier today. I will now turn the call over to Mr. Ira Palti, President and CEO of Ceragon. Please go ahead, sir.
Ira Palti, President and CEO
Thank you. Good morning and good afternoon to everyone joining us on the call today. With me on the call today are Ran Vered, our Chief Financial Officer, and Osi Sessler, Head of Investor Relations. I hope you and your family are staying healthy during these unprecedented times. During this period, our top priority is ensuring the health and safety of all our employees around the globe as we continue to serve our customers. As you are well aware, COVID-19 has turned the world upside down since our last conference call. It has changed the way we work, shop, learn, and stay entertained literally overnight. For telecom, the impact has been dramatic. Operators are experiencing unprecedented demand for bandwidth. According to the New York Times, operators like Comcast, Vodafone, and Telefonica and many ISPs have never seen such a steep and sudden surge in demand. T-Mobile’s US President of Technology, Neville Ray, says its mobile hotspot usage is up 60%, meaning that people frustrated by poor home broadband are moving to the cellphone as a hotspot device. The use of collaboration tools like Zoom, Teams, and Webex is up 87%, and use of online educational tools is up 135%. The change in telecom usage that we expected to see over a period of a few years has accelerated into just weeks. Although no one knows what the long-term outcome will be, one thing is clear: broadband connectivity with high capacity has become widely recognized as an essential utility, like electricity or water. Consumers and businesses both expect a new level of speed to support the connectivity needed for HD-quality streaming, better online gaming, remote office, and virtual meeting experiences. As a result, operators throughout the world now understand the need to ramp up their capabilities and we believe that they will compete to address the demand. This brings urgency to the need to increase the capacity of existing networks and extend coverage into areas where it is unavailable. Wireless hauling is an important enabler of the process since it is the fastest and most flexible way of achieving these goals. In fact, in many places in the world, mobile wireless is the only broadband connectivity that exists. All this urges for the acceleration of 5G, which supports 10x higher connectivity speeds, more reliable services, and greatly increased capacity compared with 4G. We therefore believe that the current situation will serve as a catalyst for long-term 5G investment, resulting in increased demand for expanding and densifying wireless networks as well as for building greenfield networks. These are obviously trends that will work to Ceragon’s advantage in the mid and long term. For the short term, however, the outlook is more complex. In support of the optimistic scenario, some service providers are accelerating their investment in both 4G and 5G. For example, AT&T announced that it has canceled a $4 billion stock buyback to keep cash available for major network investments, including nationwide 5G rollouts. T-Mobile, having completed its merger with Sprint, announced that they are moving quickly to fill their nationwide 5G, and there are many other examples. At the same time, there are significant challenges. All aspects of the supply chain are working slower, and our industry has been affected at the operational level along with the rest of the world economy as it faces the risk of a global recession, and no one knows how to predict the timing of the recovery. While operators want to accelerate their investments, the cash they have available may be less than planned due to two main factors: the fact that they have had to consume a higher portion of their budgets early in the year to cope with capacity shortages in networks in rush mode, reducing the resources available for spending during the rest of the year on 5G network developments, and the reduction of revenues from enterprise accounts whose employees are on leave or are closed, and the change in local currency versus U.S. dollars, which makes investments more expensive in some regions. This could clearly have a negative impact on Ceragon in the short to mid-term. For the long term, however, we believe the market is headed for accelerated 5G development, and we expect to emerge as leaders in the growing market. For now, I would like to make the following points: we are currently experiencing high demand for our products from certain operators, including both existing customers and new customers. Demand was especially strong toward the end of the first quarter. This demand has so far translated into very strong bookings. During the first quarter, our book-to-bill ratio was well above 1, reflecting significant new orders from Tier-1 operators in India, Asia-Pacific, the US, and Latin America. Just last week, we announced a new order from Airtel, one of our large customers in India, indicating the end of last year’s slowdown in this important region. We are seeing an acceleration of projects within our customer base, including North America, Europe, and India. And we are reaching out to existing customers, offering to help them increase capacity to resolve capacity bottlenecks. This is giving them an increased appreciation for the flexibility that our technology provides. Nonetheless, the situation has brought us up against significant challenges in the short term. The pandemic may delay the placing of orders by our customers, in addition to impacting our ability to translate bookings into revenues. Many of our suppliers are working at reduced capacity and sourcing substitutions is often slow and expensive. Shipments are taking longer to complete, and installations are taking longer to perform. We have been working around the clock to resolve the challenges, to ensure that our employees and customers are safe, and to keep the company resilient and agile. We have remained fully operational, transitioning into a new mode of operation, and supporting our customers with our Business Continuity Program. Even though most of our employees have been working partially or fully from home, it has been 'business as usual.' We recently completed on time a significant R&D release remotely, and we’ve maintained a continuous PR and market presence, and we are proud to have been able to have achieved such a strong quarter from a bookings perspective despite having no face-to-face meetings. But revenues can’t be recognized until the equipment is delivered, and when we sell with installation services, we can’t bill and recognize until the equipment is installed and operational. This was the main reason for our low revenues and gross margin for the first quarter, as Ran will explain in more detail. As it looks now, we expect the impact to continue in Q2, but to a lesser extent. For the longer term, however, while still early to make detailed projections, we currently believe that markets will return to a new normal in the third and fourth quarters. We expect to take our fair share and hopefully more of accelerated long-term network investments. Turning to our recent business and financial performance, I’ll just note that our first quarter results were in line with the update we provided on April 6. We are pleased with our progress in almost all regions, demonstrating our continued progress in winning new 5G design wins and substantial projects for expanding and densifying 4G networks. This is another demonstration of our technology leadership and our global capabilities. In India, India has returned to activity after last year’s slowdown. We just announced a major new contract with Airtel India, a customer for more than a decade and India’s largest telecommunications company, for a project to increase its 4G network capacity in urban areas, expand its coverage in rural regions, and prepare for its future evolution to 5G. As the country’s telecom market wakes up, we are taking market share, a testament to our strong network rollout capabilities, which allow us to deploy hundreds of sites every month. In North America, in the U.S., we have begun benefiting from the merger of T-Mobile and Sprint, both long-term customers, which was completed on April 1. As you recall, last year they both cut back on their orders during the merger process. But right before the close of the merger, they expedited an order with us, and we expect to continue supplying them with 4G and 5G wireless backhaul equipment for their network rollout. In addition, following a new 5G design win, we have been working intensively with the lab of another Tier-1 U.S service provider to integrate our products into their network blueprint. Once completed, we expect this step to lead to IP-20 and IP-50 orders during the second half of the year. In Europe, while we had weak revenues, we had our highest Q1 booking in 6 years. This reflects the fact that service providers, operators and ISPs in a number of countries, including Italy and Spain, are turning to us to help provide bandwidth to their locked-down populations and to enable emergency projects. Africa was very weak both from a revenue and booking perspective. In Latin America, we continued executing on 4G expansion projects for a Tier 1 pan-Latin American operator across several countries, including Argentina, Brazil, Colombia, and more. Unfortunately, we’ve experienced delays with a large project in Peru and Colombia due to the region’s very strict lockdown measures. In Asia Pacific, in Australia, we received follow-on orders from a Tier-1 service provider against a 5G design win that we secured last year. Other 4G-related projects with operators in the region have progressed during the quarter, and we expect Asia to continue to expand its 4G during 2020. And in Japan, we are working with a 5G mobile operator with the goal of securing their future business. So, as you can see, despite the uncertainty, the crisis has brought us many new opportunities while supporting our long-term strategy. This gives us room for optimism. I’d like to end with a discussion of our readiness as a company to take advantage of these opportunities. From a product and technology point of view, we are ideally positioned to address the 5G opportunity. Our existing platforms continue to stand out in the market for their technology leadership, flexibility, and speed. In parallel, we are on track with our development of our next generation wireless hauling chipset for the more advanced stages of the 5G network transformation. It will allow us to provide even higher 5G network capacity, driving to 100 gigabits speeds with a focus on smart, efficient spectrum asset management, with far more flexibility for the deployment of 5G networks. From a financial point of view, as Ran will explain, we believe we are in excellent shape to ride out the current crisis and to take advantage of the opportunities that come with the recovery. Even though this was an extremely challenging quarter, we remain strong and cash positive. Our customers are primarily large top-tier operators, whose broadband services are increasingly recognized as essential utilities, or large companies like utilities and public service organizations. With significant bases of customers and subscribers, all are likely to continue investing in their infrastructure. So although no one knows what the next few months will look like, we believe that momentum will continue to build for Ceragon. Now I’d like to turn the call over to Ran to discuss our finances in more detail. Ran?
Ran Vered, CFO
Thank you, Ira. Since you have all seen the press release, I’ll focus on the highlights. As we indicated in the update we provided on April 6, our revenues for the quarter were lower than originally expected, approximately $56 million in line with what we shared. This reflects the normal seasonality of the first quarter, compounded by delays in the pace of network rollouts and shipments, as lockdowns and other COVID-19-related measures caused a slowdown in the ability of our customers to execute on their network expansion plans. Regionally, India was our strongest market, accounting for about 25% of our revenues. This, together with strong bookings, demonstrates that India has returned as an important focus market, despite the fact that hundreds of installations became impossible to carry out due to the lockdown. India was followed by APAC, which continued with a normal level of revenues despite COVID-19. The U.S., Europe, Latin America, and Africa all had weak revenues compared with previous quarters due to delays in our ongoing projects compounded by normal Q1 seasonality. We had three above 10% customers in the first quarter. Our bookings for the quarter were very strong, with a book-to-bill ratio well above 1. This demonstrates the strong positive momentum that has been developing since the beginning of the year, including the return of India as a major source of business; continued strong activities in Latin America, Europe, and Asia Pacific; and the steady quarter that we had in the U.S., countered somewhat by a weak quarter in Africa. In general, many of our customers have accelerated the pace of existing projects to address the sudden increase in demand for capacity. Our non-GAAP gross profit for the quarter was $14 million, giving us a gross margin of 25.1%. This is the lowest it has been in many years, reflecting the low revenues as compared to our fixed costs, compounded by a less favorable geographical and customer mix and increased sourcing and supply chain costs. Our expectation is that once the volume of our revenues picks up, our gross margin will return to a normal range. Our non-GAAP operating expenses for the first quarter were $19.6 million, which is below our plan. R&D continued at its normal level, as we continue to move forward with the development of our new chipset and IP-50 platform. Sales and marketing were lower than their normal run rate, reflecting lower variable compensation and lower travel expenses due to the travel limitations of the COVID environment. G&A expenses remained at their normal level. Financial expenses and other expenses were lower than their normal expected level. We do expect them to return to their regular levels in Q2. Given the current environment, we expect OpEx to continue around this level for the second quarter, and then probably to rise gradually back to the normal rate of $21 million to $22 million per quarter. Tax expenses for the quarter were low at a bit less than $400k. On a non-GAAP basis, net loss was $6.7 million, or $0.08 per diluted share. Our GAAP net loss was $6.9 million, or $0.09 per diluted share. Turning to the balance sheet, we were pleased to remain cash flow positive despite the low revenues. Our cash balance is up by $20 million, reflecting the combination of $1.9 million of free cash generated from our operating and investing activities, together with the $18 million draw from our revolving credit facility that we carried out as a precautionary measure. We aim to reduce our short-term loans in Q2. Our receivables decreased to $104.2 million, giving us DSO of 140 days. This reflects our successful ongoing collection effort, and we will continue to put a major focus on it. Similarly, our inventories decreased by another $2.5 million, reflecting our continuous efforts to reduce them to the levels we had in 2018. We are continuing with this effort to optimize our inventories in this challenging period. Turning to the near-term outlook, our current view is that our expected Q2 revenues will be lower than the $70 million to $75 million average quarterly run rate that we previously projected, due to ongoing COVID-19-related difficulties in supply chain, installations, etc. With the situation far from resolved, it is too early to make predictions about the rest of the year. As Ira said, while we believe that long-term trends are working in our favor, there is a lot of uncertainty in the short to mid-term. We continue to invest in our major development programs to assure that our future roadmap supports our design wins efforts, sustaining our positioning as the strongest company in wireless hauling and key to generating future revenues. Now, I would like to open the call for questions, operator?
Operator, Operator
Thank you. Our first question comes from Alex Henderson from Needham. Please go ahead.
Alex Henderson, Analyst
Hi, everyone. I have a lot of questions to cover. The first one is regarding the revenues for the second quarter. Clearly, no one is expecting you to reach the $70 million to $75 million target. Do you anticipate a moderate recovery from the $56 million you achieved in the first quarter, or should we be considering a range of $60 million to $65 million? Can you provide more details on that? Additionally, how do you foresee your book-to-bill ratio performing in relation to being above 1? Are ongoing supply constraints leading to these lower figures, or do you expect demand to stabilize somewhat?
Ira Palti, President and CEO
I will address the demand side, and then I’ll let Ran discuss the numbers. The main concern at this moment is that it’s challenging to predict Q2 accurately, even as we are currently assessing the situation. Internally, I've observed a wide range of potential scenarios, much broader than usual due to various constraints. From a demand perspective, our current outlook is caught between high demand and emerging constraints from uncertainties, such as early investments and tighter budgets, as well as currency fluctuations. This may lead us to a typical quarter. Ran, do you want to share some insights on the revenue forecast?
Alex Henderson, Analyst
So, what do you mean by normal quarter? I'm not sure I understand the term.
Ira Palti, President and CEO
More in the range of probably book-to-bill around 1.
Alex Henderson, Analyst
I see. Thanks.
Ran Vered, CFO
Just to add to that, Alex, when we analyze the scenarios, we have a very strong backlog, as Ira mentioned. This is one factor that is very clear. The challenge with the scenarios mainly pertains to supply chain deliveries and installations, which can change rapidly. Therefore, it's quite difficult to make predictions. On the positive side, due to this healthy backlog, if we are unable to convert some of it in Q2, we can expect an upside in Q3. However, at this time, the revenue ranges are very wide, making it challenging for us to predict accurately.
Alex Henderson, Analyst
Is it reasonable to think that it could be at least up sequentially?
Ira Palti, President and CEO
Yes, we hope that it will be higher compared to the first quarter.
Alex Henderson, Analyst
I see. If I could, the gross margins were probably the most surprising piece of the puzzle in the quarter. We haven’t seen a 25% gross margin in a long time. Obviously, that reflects the strength in India as well as all the other issues that you outlined. To the extent that we're looking forward into the second quarter, can you talk a little bit about whether you think that mix will stay that way, whether you'll start to see some improvements in that, can we get back some of that gross margin, or should we still be thinking something in that vicinity?
Ran Vered, CFO
Hi, Alex. It's Ran. The primary reason for the low gross margin is the reduced revenue in relation to our fixed cost components. We have fixed costs associated with our production lines and the personnel needed to operate them. When revenue is low, these fixed costs lead to a lower gross margin than usual. However, as we return to our average quarterly run rate of $70 million to $75 million, we expect to get back to our typical gross margin. This is our expectation.
Alex Henderson, Analyst
All right. So, if it's consistent revenue with the same amount of revenue in the March quarter, then we should think the gross margins are going to have that same level of pressure. If it rebounds modestly, a little less pressure, if it rebounds fully, obviously it goes back to normal. That's basically the slant then.
Ira Palti, President and CEO
That’s basically it, yes.
Alex Henderson, Analyst
No change in the mix? I mean, wouldn't you be slanting towards higher margin product if you're constrained?
Ira Palti, President and CEO
The change of the mix depends on the customers and the geographies where we serve the customers. To be totally fair to the game, almost on a first-come, first-served basis under constrained type of locations, we do not see a significant, or any change in pricing pressures within the market except the normal ones. On every bit of the year, there's pressure, but it's not something which is not normal. And we try for business as usual to serve best all our customers worldwide with varying needs.
Alex Henderson, Analyst
Certainly, India has shut down more aggressively than it was in the first quarter. In other countries, particularly in APAC, have seen improvements. My sense is that North America and Europe are more normalized in 2Q. Wouldn't that suggest a shift away from India to other geographies, hence even at the similar level of revenue, some improvement?
Ira Palti, President and CEO
Lockdown regulations are quite complex and vary by region. In India, for instance, we can still deliver equipment, but it first goes to the warehouse. We anticipate being able to resume installation services at some point during the quarter, although this depends on the specific locations. Sometimes, the issue is supply, while other times it relates to the capacity for local installations. For example, in one quarter, we provided antennas from various locations globally due to the heavy shipping involved. Depending on whether antenna manufacturers are open or closed, moving equipment around the world can be impractical, especially considering that shipping costs have risen and can exceed the cost of the antennas themselves. These factors are currently influencing our operations.
Alex Henderson, Analyst
All right. I understand there are multiple speakers.
Ira Palti, President and CEO
But in general, going back to your overall assumptions, as the revenue starts to climb back into the normal range, gross margins will climb together with it.
Alex Henderson, Analyst
Okay. I will cede the floor. Thanks.
Ira Palti, President and CEO
Thank you, Alex.
Operator, Operator
Our next question comes from George Iwanyc from Oppenheimer. Please go ahead.
George Iwanyc, Analyst
Thank you for taking my question. Ran, can you give us a sense of how much flexibility you have from an OpEx level? When you look at the June quarter and then adjusting in the second half of the year?
Ran Vered, CFO
Hi, George. When we examine our operating expenses, I mentioned in my earlier comments that we expect to maintain the same range as in the first quarter, which is approximately $20 million, for Q2. Looking ahead to Q3 and Q4, we anticipate normalizing to a range of $20 million to $22 million for several reasons. Primarily, we are continuing to invest in our R&D, a crucial element for our success, and we don't plan to reduce that investment. However, we expect our sales and marketing expenses to increase, as there were significant reductions due to travel restrictions. We believe this will rise again in Q3 and Q4. It is important to note that on the operating expense side, we are experiencing some slowdowns in hiring and investments in capital expenditures, IT, and travel. Nevertheless, our operations are running smoothly, and the company is fully functional. Therefore, we believe our operating expenses will return to normal levels in Q3 and Q4.
George Iwanyc, Analyst
Okay. And without the travel that you're seeing and the type of sales engagement you have right now, are decisions that the carriers taking longer, even though there is an increased need for demand or bandwidth?
Ira Palti, President and CEO
We are fully operational. One of the challenges we face is the shift to working from home, which has reduced travel and increased reliance on videoconferencing. We have worked extensively with our sales teams to train them in this approach and to develop effective methodologies for engaging with customers. I've noticed a slowdown in some areas, but in others, we've seen acceleration because ongoing projects still need attention. In some cases, the processes have actually become shorter. For instance, scheduling a meeting with an operator can take time since we may need to coordinate four people from different locations. This can delay meetings, whereas videoconferencing allows for quicker scheduling and more efficient meetings. I'm observing both advantages and disadvantages. The changes brought on by COVID have led to new habits where both salespeople and some customers may prefer non-face-to-face meetings going forward. So, while there may be less interaction and internal decision-making from some customers, we are adapting to these changes.
George Iwanyc, Analyst
Okay. And Ira, when you talk about …
Ira Palti, President and CEO
And at least up to this point this has been, in the first quarter, has been on the positive side. I think in the second quarter will return to a normal level from that perspective.
George Iwanyc, Analyst
So, Ira, when you mentioned the new normal for the second half of the year, is that mainly related to your manufacturing capability in the supply chain? Or do you think that it also reflects changes in the spending environment?
Ira Palti, President and CEO
Both the supply chain activities and the demand environment will need adjustments. Additionally, we should consider the demand side of revenue, particularly as we manage a significant backlog. If supply chain constraints begin to ease, we will need to deliver that backlog as quickly as possible.
George Iwanyc, Analyst
And just from a kind of technology perspective are you seeing a lift in market share currently because of the IP-50 and the ability to kind of be prepared for 5G? And how do you feel from a competitive basis as we get to that new normal?
Ira Palti, President and CEO
The performance has been impressive. I've noticed a significant increase in interest regarding the IP-20. The ability to implement straightforward solutions that are quick and easy to deploy, particularly with high capacity in some situations, provides us with a substantial edge. If the system isn't utilized on the first day, we can nearly double the capacity by activating the second carrier. There’s a growing demand for these solutions, especially in the labs related to the IP-50. We're also engaging in interesting discussions with operators about earlier IP-50 products. Several operators that we haven’t collaborated with in the past are now open to conversations. We have showcased capabilities like conducting remote demos by setting up a comprehensive camera system in the lab. This allows us to perform demos and testing with clients remotely, which is opening new opportunities for us, especially in areas we haven’t previously explored.
George Iwanyc, Analyst
Thank you.
Ira Palti, President and CEO
Thank you, George.
Operator, Operator
We have a follow-up question from Alex Henderson from Needham. Please go ahead.
Alex Henderson, Analyst
Going on …
Ira Palti, President and CEO
Alex?
Alex Henderson, Analyst
Yes, can you hear me?
Ira Palti, President and CEO
Yes.
Alex Henderson, Analyst
Yes, I have a couple of questions. Can you provide an update on the situation with NEC? I have received mixed signals regarding their commitment to your chipset and whether they are still collaborating with MaxLinear on a next generation product. What are your thoughts on this?
Ira Palti, President and CEO
There is a daily video call between the technical teams working on the details of the joint development, but that does not provide a clear answer.
Alex Henderson, Analyst
So any sense of whether they are still working in tandem with MaxLinear, or whether they have down …
Ira Palti, President and CEO
I don't know. I don't know. At least from what we hear in the market. I don't think MaxLinear is on the verge of developing anything which is close to the next level chipset. And let's remember, we're doing something which is wider with NEC, which is a joint development activity.
Alex Henderson, Analyst
Any other OEM relationships brewing in the background that we should be anticipating benefit from?
Ira Palti, President and CEO
There's things brewing in the background, I'm not sure anticipating at this point, because those are one-off deals, and I feel they happen, they don't happen. So at this point, there's a lot of hard work. If we'll be getting close to something. I'll probably give a heads up. At this point, it's not closed.
Alex Henderson, Analyst
I see. Okay. Going back to the exchange rate, the shekel has been all over the map over the last couple of months. It plummeted to surprisingly low levels, but then not surprisingly, it rebounded quite sharply. Can you talk a little bit about whether you were able to take advantage of that, particularly low level when it got down to it, or whether it just happened too fast to benefit from it? And to what extent you were expecting some benefit from the current level?
Ran Vered, CFO
Hi, Alex. It's Ran. So just to remind you that we are hedged on the shekel on an annual basis. So actually, when we set up the budget at December 2019, the shekel is fixed. This year that's fixed at a rate of 3.45. So actually, we're not benefiting or we're not moving on the devaluation. One thing, I would like to mention is that we did utilize the benefit of the low shekel to pay some of our vendors here locally. So we benefited part of it on the cash flow. But from a P&L perspective, we are almost 100% hedged on the shekel.
Alex Henderson, Analyst
If I can return to your comment regarding interest income and expense, it was 758 in the quarter, averaging a little over $2 million, specifically $1.5 million per quarter. When you mentioned it would return to normal, did you refer to the $1.5 million range or what are your thoughts on this?
Ran Vered, CFO
Yes. $1.5 million, yes. So we should think about $1.5 million, $1.6 million, $1.7 million. It's going to rebound in second quarter.
Alex Henderson, Analyst
Okay. That's helpful. Thanks. And then, just talking through the geographic stuff for a second, I mean, it really sounds like your higher-end countries are really seeing strength. Your U.S. commentary, I think, is the most robust I've heard in as long as I can remember, EMEA being extremely strong and APAC, being strong. So, it sounds like you're seeing a pretty good mix shift to some higher area products, and particularly given the turn up of the soft capacity. That also sounds like it's a positive for margins as we go back. If we in fact get back to more normalized revenue levels in the back half of the year or for that matter '21, given those dynamics, should we be expecting some positive trajectory to margins, even with India being a little stronger? or is India the bigger factor here?
Ira Palti, President and CEO
I don't believe India is the main factor. I agree with the trends you've mentioned. However, there are some shifts in the mix and changes in the supply chain, which are resulting in slightly higher costs and increased shipment expenses. It’s still too soon for me to make predictions on that. We may see an improvement in the numbers, but it will likely be within what we define as the normal range, similar to last year's averages.
Alex Henderson, Analyst
I see. Okay.
Ira Palti, President and CEO
I believe the trends you mentioned are accurate, but there are additional factors that may influence the situation. For instance, shipment costs in the air have increased by 150%. We have passed some of these costs onto customers, while others we have to absorb ourselves. This is creating challenges for us.
Alex Henderson, Analyst
Ran, I don't mean to put you on the spot, but what's the fully diluted share count if you're profitable for valuation purposes.
Ran Vered, CFO
Good question. Yes, it's a good question. Probably I will say roughly $1.5 million to $2 million more shares than we have right now.
Alex Henderson, Analyst
So you were at 82 to 50 in the June quarter, …
Ran Vered, CFO
Yes.
Alex Henderson, Analyst
… which was the last kind of meaningful promise.
Ran Vered, CFO
Yes, something like that. We will return to discussing the share count.
Alex Henderson, Analyst
I see. Okay. Got going back to your comment on Japan for a second, if I could. Rakuten, I believe is your primary customer there at this point and obviously they've launched now. What kind of experience are you seeing at that particular customer? It's a rather unique situation relative to your customer base. Can you give us any insight into what we should be thinking there?
Ira Palti, President and CEO
In point to Rakuten, we are working with a customer in Japan on 5G, which might be, I didn’t put on purpose a name next to it. Remember that Japan in general is a very intensive fiber country. And wireless holding is a second step on top of the networks, both, by the way, for classical architectures and for open one architectures like Rakuten is using.
Alex Henderson, Analyst
Okay, I got it. And one last question on the 5G. Should we be thinking of you as not just a backhaul company, but also a front haul company, and to what extent do you think front haul starts to become a meaningful contribution to …?
Ira Palti, President and CEO
Holding, you should be thinking of us as a holding company. Front haul, mid haul, back haul, and we have all those solutions. My expectation is that front hauling will take a larger and larger place as open one 5G types of architecture and remote radio heads take place. We do assume that sometime it will become a significant part of the business.
Alex Henderson, Analyst
Right.
Ira Palti, President and CEO
And that's part, by the way, of the new chip design and some of the things that we do. Because if you look at, for example, 40 and 100 gig in there are more targeted to front hauling versus back hauling applications.
Alex Henderson, Analyst
All right, I understand. Great. Thank you very much.
Ira Palti, President and CEO
Thank you very much, Alex.
Operator, Operator
Our next question comes from Gunther Karger from Discovery Group. Please go ahead.
Gunther Karger, Analyst
On the virus problem, has there been any increase in interest or possibilities in the M&A area?
Ira Palti, President and CEO
As we said in the past, we keep on looking all the time, but usually in situations of this kind most companies hunker down for one to give out where they are. Probably when things emerge, the pandemic will probably see increased interest out there.
Gunther Karger, Analyst
Thank you and good luck going forward.
Ira Palti, President and CEO
Thank you very much, Gunther. So as a closing remark, as we don't have additional questions. So we believe that we are well-positioned to weather this challenging period, and that industry trends will support long-term growth for our company. One final note. I'd like to draw your attention to our newly designed website, Blog and LinkedIn page. We have tried to make them as informative as possible, relevant to the trends we mentioned. So I encourage all of you and invite you to have a look at them and to check back in frequently. Thank you and have a good day.
Operator, Operator
That does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.