Ira Palti - President and CEO Aviram Steinhart - CFO and EVP.

Alex Henderson - Needham & Company George Iwanyc - Oppenheimer & Company Sid Sinha - Canaccord Genuity.

Good day, everyone. Welcome to the Ceragon Networks Limited First Quarter 2014 Results Conference Call. Today's call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks; and Mr. Aviram Steinhart, CFO of Ceragon.

Today's call will include statements concerning Ceragon's future prospects that are forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including risks associated with increased working capital needs, the risks that sales of Ceragon’s new IP-20 products will not meet expectations, risks associated with doing business in Latin America, including currency export controls and recent economic concerns, the risks relating to the concentration of our business in developing nations, the risk of significant expenses in connection with potential contingent tax liability associated with Nera's prior operations or facilities, and other risks and uncertainties detailed from time-to-time in Ceragon's Annual Report on Form 20-F and Ceragon's other filings with the Securities and Exchange Commission, and represent our views only as the date they are made, and should not be relied upon as representing our views as of any subsequent date.

We do not assume any obligation to update any forward-looking statements. Ceragon's public filings are available from the Securities and Exchange Commission’s Web site at www.sec.gov or may be obtained on Ceragon's Web site at www.ceragon.com. I will now turn the call over to Mr. Ira Palti, President and CEO of Ceragon. Please go ahead, sir. .

Thank you for joining us today. With me on the call is Aviram Steinhart our CFO. The major highlights over the first quarter was clearly the improvement in bookings, which were up more than 25% sequentially and represented book-to-bill well above the one based on our original expectations of 83 million to 93 million for Q1.

This is particularly significant since Q1 is usually relatively weak quarter for bookings. In addition, we saw strong initial demand for our new IP-20 products with much higher proportion in Q1 orders than we anticipated. New products accounted for over 40% of our Q1 bookings compared with only 15% in Q4.

This helped support our expectation that we’ll see a pickup in revenues during the second half of the year. As you’ll recall we were expecting revenues to remain generally stable around 90 million per quarter for the first half of this year.

The decline in Q1 revenues do not suggest an overall trend in demand since booking picked up and we think we’ll be back on-track in Q2 and beyond. Now I’ll update you on the development that affected revenues in Q1. Final revenues were within the range of our updated guidance.

As we indicated on the call a few weeks ago, there were two main issues; first, we decided not to ship and install an order we received in Q4 from a longstanding customer in Africa and to renegotiate payment terms.

We’ve reached an understanding with this customer with respect to payment terms for new orders and the schedule of payments on existing balances that will significantly lower our exposure. The relationship is strong and we are confident that they will continue to order from us.

But the new arrangement will cause orders to be spread over a longer period and we will probably only ship small quantities during the balance of the year to this customer.

The second factor affecting Q1 related to the fact that we’ve been in the initial ramp-up of manufacturing for our new product, and we’re not expecting such strong demand for the IP-20 products this quickly. This was combined with the fact the large part of the orders came late in the quarter.

We’ve been working through the normal issues and efficiency holdbacks to the process of ramping up the production line and working with a relevant supply chain. And we are seeing an improvement in efficiency and rates in Q2. We will continue to ramp-up as quickly as possible to accommodate the expected demand for IP-20 products.

Geographically, revenues from Latin America were sequentially lower after a very strong Q4 as expected. We’ve already discussed part of the reason for the weakness in Africa and this is the region that tends to be lumpy.

On the positive side, we saw a major pickup from India, and also improvement in North America consistent with the major deals we announced in the fourth quarter. These two regions also look like they will be continue to be strong as bookings were higher than expected in Q1.

As expected all the operators in India are looking forward again in response to their aggressive build-out of a new LTE network by one operator. Although some expected us to lose share as the Indian market began to pick up, we’ve retained our share with the existing customers haven taking more than we expected with new customers.

Our success in Indian will affect our blended gross margin until we win more large projects in other regions and as they have time to impact our results. The important point is that we are the vendor of choice amongst specialist for product and performance in India and we have the cost structure to make money at lower margins.

At the same time, we have certain requirements for payment terms but we are not willing to compromise. In the currently highly competitive environment where there is always a chance that another vendor will be willing to give terms that we consider unacceptable.

As I indicated a few weeks ago, the overall level of new business activity continues to increase. We are busy responding to RFPs, participating in trials and evaluations and walking through the selection process for a variety of projects in all regions, some of them quite large.

We continue to have a sense that we will see gradual improvement in overall demand beginning in the second half. In addition, we’re making strong progress on some of the larger opportunities.

As we’ve said before, we will need to land a portion of few of these Q1 opportunities in the timeframe that will generate revenues in the second half in order to meet our objectives for the second half of the year.

To summarize, we are encouraged by initial strong demand for our new IP-20 platform translated into orders in Q1 which is leading for a very good pipeline into the second quarter and positioning us in a favorable place in large RFPs bringing this game-changing family of products to market quickly was a major focus of the entire organization.

We are now well positioned to take advantage of the growing need for higher capacity and advanced features. We believe our advantage will become more apparent as we move into the second half. Now I’d like to turn the call over to Aviram to discuss the financial detail, Aviram..

Thank you, Ira. I’ll go through some of the details of our Q1 results and provide some comments on the outlook for the current quarter. Our first quarter revenue was 70.5 million within the range of our revised guidance. Our GAAP gross margin was 22.1%. Non-GAAP gross margin was 23.3%.

The low gross margin was primarily related to the revenue level and the low absorption of fixed cost plus the geographical mix skewed more towards India.

The non-GAAP figure excludes $300,000 of amortization of intangible assets, $300,000 of charges in pre-acquisition indirect tax positions, $200,000 from restructuring related expenses and $100,000 in stock-based compensation. The first quarter GAAP operating expenses were 32.7 million.

Non-GAAP operating expenses were 27.3 million compared to 30.3 million in Q4 reflecting close to the full effect of our restructuring measures. The non-GAAP operating expenses exclude $4.2 million of restructuring related expenses, $200,000 in amortization of intangibles and 1.1 million of stock-based compensation.

On a GAAP basis, we reported an operating loss of 17.1 million. Our non-GAAP operating loss for the first quarter was $10.8 million.

Finance expenses in Q1 was 8.2 million, the non-GAAP finance expenses of 5.9 million exclude 4.1 million of currency devaluation in Venezuela and 2.2 million related to action taken in order to expatriate cash from Venezuela and Argentina.

In February, the Venezuelan government adopted SICAD 2 a new exchange control mechanism to replace the former official exchange rates of Bs6.3 to the U.S. dollar. At planned the SICAD 2 rate of approximately Bs50 per U.S. dollar is the reason for the charges in Q1. Tax expenses was about 1.7 million in the first quarter.

Non-GAAP tax expenses was $200,000 excluding 1.5 million of non-cash tax adjustments. On a GAAP basis, we reported a net loss of $27 million or $0.51 per share. On a non-GAAP basis we reported a net loss in Q1 of 12.9 million or $0.25 per share. The geographic breakout of revenue appears in the press release.

After a very strong Q4 Latin America accounted for smaller percentage of revenue in Q1 while India and North America increased. We had no 10% customer in Q1. Our OEM sales accounted for about 6% of total revenue in Q1. Turning to the balance sheet, trade receivables was similar to Q4 at 130 million putting DSO at 139 days.

Cash from operation was negative by $34.8 million. We used our available borrowing capacity to help fund the negative cash flow and our cash and equivalents declined to $30.5 million at the end of Q1. Sequentially we had received $17 million from Eltek settlements.

We expect to be approximately cash flow breakeven in the second quarter based on our revenue expectation and assumption about gross margin. We expect revenue in the second quarter to range between 85 million to 95 million above the quarterly level we originally expected during the first half of the year.

With the improvement in revenue we expect gross margin to improve in Q2 reflecting better absorption of the fixed costs, but we’ll probably be slightly below the 30% gross margin level for Q2 and Q3 because of the continued manufacturing ramp-up for new products and the geographic mix of revenue that is likely to be skewed even more toward India.

We expect only a very small amount of restructuring charges in Q2. With non-GAAP operating expenses expected to grow only slightly from the current level as revenue improved, we are positioned to deliver return to an operating profit and generate positive cash flow assuming the market is beginning to pick up in the second half as expected.

It is too soon to assume we’ll be able to offset the weak revenue in Q1 during the remainder of the year, but we believe we are at least back on path we were expecting for the balance of 2014. We continue to believe we can exit the year at a quarterly run rate of about $100 million in revenue with gross margin slightly above 30%.

Now that we have seen the pickup in India that is greater than we expected it’s a bit difficult to know exactly what assumption to make about the timing and magnitude of the higher margin business from our projects in other region, except to say that we expect a more favorable geographic mix with steadily improving manufacturing efficiency for new products during the year.

Now I’ll turn the call back to Ira..

We believe that we will be back on-track in Q2 as a result of the improvement we’re seeing in bookings. We’re further encouraged by the high proportion of IP-20 products and we’re focused on continuing to ramp-up manufacturing to accommodate this demand. The next major milestone will be to win a share of the Q1 project we’ve been working on.

As you would expect some are moving faster than others. Projects in North America are moving along while one or two projects in Europe have been moving more slowly recently. While we can’t control the pace that the operator chooses to move forward we are pleased with the progress we are making and our position within each one of them.

The timing and magnitude for our share of new projects will obviously have implications for our working capital requirements. We acknowledge it’s getting a little tight and Aviram is working on adding some near-term flexibility by expanding our receivable financing capabilities.

And we are watching our cash closely and beginning discussions with the Board to refine the list of possible long-term options as we gain a better sense of the pace of pickup during the second half and beyond. Thank you. Now we’ll turn to questions. .

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Okay certainly. (Operator Instructions) Your first question comes from the line of Alex Anderson of Needham. Please go ahead..

Thank you very much. So I was hoping you could give us some clarification on the announcements you made here a couple of weeks ago or just recently on the North American Tier 1 reorder.

It wasn't clear in the press release whether that was one single order or four orders, or what exactly it was, and how many of those were new customers versus existing customers. The language was a little confusing.

Can you just clarify on that the contract what --?.

Thank you very much. So I was hoping you could give us some clarification on the announcements you made here a couple of weeks ago or just recently on the North American Tier 1 reorder.

It wasn't clear in the press release whether that was one single order or four orders, or what exactly it was, and how many of those were new customers versus existing customers. The language was a little confusing.

Can you just clarify on that the contract what --?.

I’ll clarify Alex.

It’s a single customer which has been a longstanding customer of ours for a few years, which for a while lowered the level of operations and have now returned to resuming and deploying LTE and expanding their network in the LTE competitive environment and this was an order from them as part of a sequence of orders we have been seeing over the last few quarters.

I think we have started seeing again significant orders in Q4 and now in Q1 as well..

The orders out of Latin America, you called out some issues in both Venezuela and Argentina which have to do with exchange rates.

Have you now pretty much extradited yourself from that geographic exposure or do you still have some exposure in those two currency-troubled environments?.

The orders out of Latin America, you called out some issues in both Venezuela and Argentina which have to do with exchange rates.

Have you now pretty much extradited yourself from that geographic exposure or do you still have some exposure in those two currency-troubled environments?.

Venezuela, we are not doing any business of entering -- of selling into the country. For Argentina we’re doing only transaction in U.S. dollar, so we’re not expect any more significant effect of those over the next quarters..

Right and then the situation in India, one last question there, can you give us some sense of what you think the second quarter conditions are going to look like are you going to see a continued follow through on additional orders out of that geography in the current quarter that would give us some visibility to get in the keeping the order book-to-bill above one here in the June quarter?.

Right and then the situation in India, one last question there, can you give us some sense of what you think the second quarter conditions are going to look like are you going to see a continued follow through on additional orders out of that geography in the current quarter that would give us some visibility to get in the keeping the order book-to-bill above one here in the June quarter?.

We do believe that we’ll see continued significant orders coming out of India for the next one or two quarters at least all depending on rollout as we said we want one large operator with significant LTE which is rolling out and we’re seeing a sequence of orders from them as we move forward and our expectation and we starting to feel for pick up from other operators in India where we have also share it’s not a large share as they start running in the market.

It’s very typically of markets worldwide where we see once you have the first runner or the one who jumped out of the block everyone runs after them. And it’s typical and that’s what currently happening in India..

And so do you think that’s reasonable to think of a book-to-bill above one in the current quarter is it -- are the orders strong enough to continue to build some backlog here?.

And so do you think that’s reasonable to think of a book-to-bill above one in the current quarter is it -- are the orders strong enough to continue to build some backlog here?.

We’re not giving guidance on the book-to-bill it’s one of the assumptions we do hope as I said and I think I said in my script as well that we do see a strong start for the quarter in bookings which we hope will translate into above one book-to-bill for this quarter as well..

Great, thank you..

Great, thank you..

Okay. Thank you. And the next question comes from the line of George Iwanyc of Oppenheimer. Please go ahead..

Thank you for taking my questions.

Aviram, what was the gross margin target for the end of the year?.

Thank you for taking my questions.

Aviram, what was the gross margin target for the end of the year?.

We assumed now as we see more business coming from India which we see in large volumes going for the next three quarters, the revenue mix now is skewed to more a lower gross margin area and therefore we said that we will exiting the year with a gross margin of slightly above 30..

Okay.

And that’s including whatever improvements that you start to get from IP-20 as it starts to reach normal manufacturing volumes?.

Okay.

And that’s including whatever improvements that you start to get from IP-20 as it starts to reach normal manufacturing volumes?.

That’s correct..

Okay.

And from a OpEx standpoint, should we anticipate another quarter of some modest decreases and then kind of a flat number for the second half of the year?.

Okay.

And from a OpEx standpoint, should we anticipate another quarter of some modest decreases and then kind of a flat number for the second half of the year?.

We are seeing from between 27 to 27.5 OpEx for the rest of the year in every quarter even if we’ll see and which we expect in the second half increasing revenue we do not expect to see any increase in OpEx it should be between 27 million to 27.5 million per quarter..

And then the 17 million from the settlement, that will be immediately available in the June quarter?.

And then the 17 million from the settlement, that will be immediately available in the June quarter?.

Yeas, we received the -- it's an income in Q2 of course non-GAAP income of 17 million we collected the cash and it’s all in Q2, all have been collected already in Q2..

Ira from -- when you start looking at the second half, are there any areas that you are worry about from a booking standpoint or do you think you have been extremely cautious when you're looking at the trends in Latin America and Africa?.

Ira from -- when you start looking at the second half, are there any areas that you are worry about from a booking standpoint or do you think you have been extremely cautious when you're looking at the trends in Latin America and Africa?.

I think that’s as we talked on the call I think we usually are not either the optimistic or the cautious side, we usually give more color best estimate is at this point and I think that we’ll see still lumpiness in Africa we’ll see a slight decline in Latin America as we move forward. My expectation is a pickup in the U.S.

and in Europe and in the India region. And it’s all baked in into the numbers which is moving us to believe that we’re starting to see trends where the demand is picking up..

How much of the pickup is from share gains and how much is just coming from ramping IP-20 with your existing customers?.

How much of the pickup is from share gains and how much is just coming from ramping IP-20 with your existing customers?.

Very hard to tell, I think a part of it is a share gain. And again and we’re dealing with small numbers so we are not jumping from 10% to 20% market share but from a 10 to an 11 and that’s within the level of measurement I think within the market.

But what we see in different places is also a share gain knowing that we are taking specific deals away from others..

And just on the competitive environment overall how do you feel IP-20 stacks up with the competition and from a pricing standpoint mix of side and what’s going on with the margins in India, how are the other regions comparing?.

And just on the competitive environment overall how do you feel IP-20 stacks up with the competition and from a pricing standpoint mix of side and what’s going on with the margins in India, how are the other regions comparing?.

I think that the IP-20 is stacking up very-very good against the competition. We have two advantages with the IP-20 that we are using at this point; one is the technology, it’s the best radio out there. Better than most of or all of the solutions out there in many parameters, which is opening as I said a few times, it is opening doors.

It’s allowing us to do other deals.

It also have very high capacities with very good cost point which allows to do deals in those spaces in a good way and also do deals in places like India where the margins are very low and it excludes a lot of the other players except the very big guys which are probably cost financing some of the deals, and it gives us the leverage to really see open doors and increase demand.

If I look at that compared to other product strategies I don’t see any one at this point coming closer but as we always expect it will chase us and will catch up with us in whatever year, year and a half from now and other strategies but it does mean that it proves that the investments we’ve done over the last few years in building our technologies and proving yourselves very nicely..

Thank you. .

Thank you. .

Okay, thank you. And the next question comes from the line of Sid Sinha of Canaccord Genuity. please go ahead. .

Hi, thanks for taking my questions. I had just a quick question on India. You made a comment about certain competitors might get price aggressive or give better payment concession terms.

With regard to that, are you seeing that currently as you're rolling out in India and do you think your IP-20 product strength and portfolio strength could create an effective barrier to prevent share losses to these vendors?.

Hi, thanks for taking my questions. I had just a quick question on India. You made a comment about certain competitors might get price aggressive or give better payment concession terms.

With regard to that, are you seeing that currently as you're rolling out in India and do you think your IP-20 product strength and portfolio strength could create an effective barrier to prevent share losses to these vendors?.

The comment is not India specific. It was one in the India context of the core but it’s, something that we sometimes see.

One of the things we sometimes see over the competitor’s strategies and the position we are, people do not have the product or in a very pressurized market where the people use tactics of falling prices very drastically or giving very-very long payment terms.

One of the things that we’re doing to be cautious with within our environment and really guiding the company forward is there are deals we are not taking when they become totally crazy in any one of those terms. And it’s something that looks to be put on the table..

Got it.

In terms of North America for this Tier 1 that you are -- this carrier that you got orders from, is it fair to assume that the ramp continues through the year and perhaps probably gets a little stronger in the second half as they build on the second phase of their LTE network? And then strength in North America in the second half; is it this category that's driving this trend or, are the other operators, perhaps Tier 1 carriers, that are also driving this trend for second half in North America?.

Got it.

In terms of North America for this Tier 1 that you are -- this carrier that you got orders from, is it fair to assume that the ramp continues through the year and perhaps probably gets a little stronger in the second half as they build on the second phase of their LTE network? And then strength in North America in the second half; is it this category that's driving this trend or, are the other operators, perhaps Tier 1 carriers, that are also driving this trend for second half in North America?.

I think that that operator it’s safe to assume that we’ll probably see similar orders on the flat level for the rest of the year and the strength we’ll see in North America we still need to win some big and significant deals for increasing the volume there, where we feel very comfortable with those deals and comfortable with our position but nothing has been decided, but I think that once those will start kicking in we’ll start seeing also ramp up in North America as well..

Okay, great.

Just one last one from me, could you give us an update on the number of customers who are trialing the IP-20 products or who you are shipping IP-20 products to?.

Okay, great.

Just one last one from me, could you give us an update on the number of customers who are trialing the IP-20 products or who you are shipping IP-20 products to?.

I think that’s -- the number is around 50, I don’t have the exact number but the number of customers we are shipping IP-20 to, that would depend, some of them are very large, some of them are small, I can count about eight or nine large customers where we’re shipping the IP-20 and then quite a few smaller ones.

Now the interesting part is that almost anything that we do right now is around the IP-20 we do ship a lot of the older products.

I think we talked on the call that we had the target of reaching above 60 and up to 80% by Q4 bookings on the IP-20 family and we ramp up and I think we think it’s a very achievable target, with the strong demand we’re seeing at this point..

Great. Thank you for taking my questions..

Great. Thank you for taking my questions..

Thank you very much, Sid..

Thank you. (Operator Instructions) And you have a question from the line of Gunther Karger of Discovery Group. Please go ahead. .

Ah, yes, thank you for taking the call. Two questions; question one, regarding competitive postures, do you see any increase in market share generally with regard to your competitor? And the question number two has to do with any impact from your instability in the Russian area? Those are my two questions..

Ah, yes, thank you for taking the call. Two questions; question one, regarding competitive postures, do you see any increase in market share generally with regard to your competitor? And the question number two has to do with any impact from your instability in the Russian area? Those are my two questions..

So, last quarter we started asking about market share, we do see in specific places where we are taking market share it’s very-very hard to judge from the overall numbers, the reports out there and the numbers are not that accurate but from specific deals we see that we’re taking market share as we indicated for example in India we expected certain market share but in some of the deals and we are getting a larger share than we originally planned that means we are taking the market share out of those deals we’ve seen similar things in other regions.

As of the questions around the Russian, no, not yet, but we are usually too small for that to judge those very large I would global political movements to feel any of those differences at this point. At this point all the RFPs and RFQs and processes and the sales in the Russian territories are progressing as normally..

Thank you.

A follow-up question on the Russian area; do you see any opportunities in that region going forward?.

Thank you.

A follow-up question on the Russian area; do you see any opportunities in that region going forward?.

The answer is yes we are and as I mentioned we are involved in large RFPs some of them in the European regions some of those are within Europe and the Russian territories and some of the big Tier 1s in Russia..

Thank you, Ira..

Thank you, Ira..

Thank you very much..

Okay. Thank you. And the question comes from the line of Alex Henderson of Needham. Please go ahead..

Yes, I was wondering if we could just go back to the manufacturing comments for a second. I understand that you are trying to ramp this a little faster than you had expected, and that's causing a little bit lower gross margin in the second quarter.

But can you talk a little bit about when you expect to get the benefits of the improved production margins on the IP-20 and how that will play out over the course of the year? Do we expect to get back towards that 35% gross margin relatively quickly as that increases as a percentage of sales? And how should we think about that over the course of the year and into next year?.

Yes, I was wondering if we could just go back to the manufacturing comments for a second. I understand that you are trying to ramp this a little faster than you had expected, and that's causing a little bit lower gross margin in the second quarter.

But can you talk a little bit about when you expect to get the benefits of the improved production margins on the IP-20 and how that will play out over the course of the year? Do we expect to get back towards that 35% gross margin relatively quickly as that increases as a percentage of sales? And how should we think about that over the course of the year and into next year?.

There are three elements in the gross margin elements, the volume, the regional mix and the ramp-up and getting the production of the IP to any smoothly.

What we said on the discussion that we are seeing for now based on revenue that is skewed more toward India and that volume that we are seeing which is exiting the year at 100 million support the higher gross margin and gradual improvement in the ramp-up that we exit this year with slightly above 30% in the gross margin we still can get back to the 35% but it’s depending on how fast we will win, new projects in region that have a profile of margin which is higher.

So this is dependent. What we have in the pipe is some project I mean very large projects in areas where the margins profile are much higher which if we win them in the second of the year we probably can say that we will see early in next year back to the closer end to 35% of margin..

So just to be clear, you had said on the prior commentary that the end of the second quarter was slightly under 30%, but I'm assuming that that is not the case in the back half of the year..

So just to be clear, you had said on the prior commentary that the end of the second quarter was slightly under 30%, but I'm assuming that that is not the case in the back half of the year..

In the back half of the year we said that we expect to be slightly below 30% in Q2 and Q3 and slightly above 30% in Q4..

Okay. Thank you..

Okay. Thank you..

Okay. Thank you. (Operator Instructions) And there are no further questions in queue, back to you gentlemen..

Thank you everyone for joining us on the call this morning. We would gladly entertain questions on the one-to-one sessions. Please feel free to reach myself and Aviram if you want further clarifications. Thank you and have a good day..

Thank you..