Ira Palti - Chief Executive Officer and President Doron Arazi - Chief Financial Officer and Executive Vice President.

Alex Henderson - Needham George Iwanyc - Oppenheimer Gunther Karger - Discovery Group.

Good day, everyone. Welcome to the Ceragon Networks Limited fourth quarter and full year 2014 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 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; risks associated with the ability of Ceragon's to meet its liquidity needs; the profit enhancement programs; the risk that Ceragon will not comply with the financial or other covenants in its agreements with its lenders; the risk that sales of Ceragon's new IP-20 products will not meet expectations; risks associated with doing business in Latin America, including currency exports controls and recent economic concerns; risks relating to concentrations of our business in the Asia-Pacific region and in developing nations; the risk of significant expenses in connection with the potential contingent tax liabilities associated with Nera's prior operations or facilities; and other risks, 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 of the date they are made and should not be relied upon as representing our views as any subsequent date.

We do not assume any obligations to update any forward-looking statements. Ceragon's public filings are available from Securities and Exchange Commission's website at www.sec.gov or maybe obtained on Ceragon's website at www.ceragon.com. I will now turn the conference 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 Doron Arazi, our CFO. The sequential increase in revenue to $111 million was mainly a result of a strong booking from India during the first three quarters of the year.

With a huge amount of business coming from one customer in particular, the Q4 revenue mix skewed even more toward India than it was in Q3. We saw further pressure on our gross margin, which was something we anticipated and spoke about on the last call. Nevertheless, we managed to achieve a small non-GAAP operating profit.

And more important, during Q4 we took decisive action that will enable us to reach profitability and positive cash flow, as we move through 2015. Before I give you an update on those initiatives, I'd like to spend a moment looking back on the past year, to provide some context for how we see our future.

2014 was a year of major challenges, no doubt about that, but we also accomplished several things that will serve as the foundation for achieving better financial performance and creating value in the future.

We successfully launched an entirely new platform, with state-of-the-art technology designed to cost advantages and the highest capacity in the industry, well ahead of our competitors. This resulted in getting a lot of attention for many directions.

The [ph] IP-20 platform enabled us to get in front of operators, where we had only limited success in the past or where we had not been successful at all for variety of reasons; mostly due to the operator's own internal issues, a lot of this interest has yet to result in orders.

But that does not diminish the fact that we are actively engaged in places, where we had little or no traction a year ago, and where we are being told that they want to work with us.

Now, attracted by this prospect of working with a partner, that is out in front, in a rapidly changing digital world, prepared to meet all their needs with a single flexible platform, and one that offers multi-core technology for a future-proof network.

In other words, something beyond an interesting solution for one typical one-type of backhaul challenge or a nice feature, and are looking for the whole package, including the ability to accelerate network design and implementation. That's what we offer.

The positive reception for the [ph] IP-20 platform is occurring all around the world, even if the world orders in 2014 were concentrated in one region.

When very strong demand came so quickly in high volume from price sensitive areas, while project in other regions moved more slowly, it added to the normal challenges in ramping up manufacturing of new products.

It affected our gross margin, it put pressure on our supply chain, it caused us to really stretch to meet commitments and it strained our working capital.

After some very focused and intense efforts, we can say that we are now making progress, meeting those challenges, because we have had the year's worth of real and [ph] bold experience in the market with IP-20 platform. The fact that we were able to ship over 20,000 links of IP-20 in the first full year of availability is remarkable.

First, demand for new products usually doesn't build that quickly. And second, it is extremely difficulty to run production fast enough to ship those quantities, regardless of what you spent, but we did.

And now, we are focused on addressing the remaining issues in order to achieve solid profitability and generate positive cash flow as soon as possible. With this in mind, I'll provide an update on some of the initiatives we have been working on during Q4 and so far this year, going region-by-region.

We understand that there is intense interest in North America and Europe, so I'll start there. In North America, we are making progress in several areas. In fact, three of our top 10 customers by revenue in Q4 were in North America.

We are getting orders from existing customers and we continue to make progress with testing and trials that are part of the process for some of the larger pending project.

As you are aware from our recent announcement, we have made our first significant inroad to the local government and federal agency market with government and new customer, deploying our IP-20 platform across the Sate of Arizona, serving mission-critical entities such as emergency services, hospitals and schools.

The network is compatible with FirstNet, a nationwide high-speed broadband network in the U.S., dedicated to public safety. Government is using our IP-20A ultra-high capacity multicarrier solution for its backbone, in order to meet current requirements with a necessary scalability to expand in response to changing requirements and traffic growth.

Our all-outdoor IP-20C expands the network to the far corners of the state, covering 88,000 square miles. The unique multi-core architecture combines superior performance with reduced power consumption in a small form factor, providing the ability to download capacity to address future needs without requiring a site visit.

This is a good example of how versatile the IP-20 platform is, how it can help us penetrate new customers and new segments over the market. In Europe, we are making some progress in penetrating new Tier 1 customer, mostly at the periphery in smaller regions and with specialized applications.

The feedback is positive and we believe this will be some help in our effort to penetrate the larger Tier 1 opportunities. As part of our expense reduction initiatives in Q4, reduced our commitment of resources to Russia, where there appears to be the diminished opportunity with acceptable margins for the foreseeable future.

In Latin America, we are taking different steps, depending on the country and customer. As you know, over the past year we have shifted our focus away from certain countries, where currency issues and government policies may be too challenging to do business, most notably, Venezuela.

In other sub-regions, where we are seeing good demands, but inadequate profitability, we have and are continuing to negotiate contracts that afford us better margins. While it's too early to assess what the impact will be, we are assuming that it will see a reduction in volume from Latin America going forward.

In Africa, we are doing very well in the long-haul business. We have extended some contract into 2016 and continue to deploy with good margins. Similarly, in most of APAC we are seeing good and steady demand with acceptable margins. This applies mainly to Southeast Asia and the Pacific sub-regions.

I'm happy to report that we are also making progress in India. The fourth quarter marks the peak in revenue, being recognized from the large volume of orders we received from our largest customer during 2014, and we expect to see revenues from India taper-off during the next several quarters.

Without being too specific about any particular region or customer, I can say that we have made progress in raising prices and negotiated better payment terms on future business in several instances. This is not a single event. It's an ongoing process and it's too early to tell exactly what the result will be overall.

So far, we are encouraged to hear customers telling us, that they like our products and want to find a way to continue to do business with us. Nevertheless, we assume that it will take us longer to close some deals, and in the end we probably won't get as much volume.

In addition, to all the organizational changes we made in Q4 to reduce expenses, we have put a plan in place to outsource to contract manufacturers the production of our plant in Slovakia. This will provide more flexibility and improve our gross margin once the transition is complete toward the end of this year and into 2016.

We also brought the worldwide sales force together to reinforce our focus on profitability and to go through the best methodologies for exposing the value of our products to various customers. At the same time, we made adjustments to the compensation scheme in order to better align sales incentive with corporate objectives.

We have made very strong efforts to identify ways to further improve our decision support system, and Doron's group has been making major efforts to improve working capital management, working closely with the field.

The initial results can be seen in the strong collection during the fourth quarter, and I will let him share the details of the initiatives on the financial side.

Before I turn the call over to him, I will just conclude by saying that, in October, we laid out the framework for improving our financial performance and we provided the details of our expense reduction plans in December, together with the expected impact.

Since then we have completed the restructuring and made good progress on some of the other initiatives. We are executing well on the things that are within our control, and so far we are on track to reach the goals we spoke about for 2015. But it's still early in the process, so we remain cautious, until we have more tangible evidence.

With that, I'll turn the call over to Doron to share more of the financial details and key business metrics with you.

Doron?.

Thank you, Ira. I will try to focus on providing some perspective on our results and discuss the outlook. I won't go through every single line item, because I assume you have all seen this information in the press release. Our fourth quarter revenue were just above the midpoint of the range at $111 million.

The 12% sequential increase reflected strong demand from India. The geographic breakdown of Q4 revenue is presented in the press release. We had one above-10% customer in the quarter, our largest Indian customer. As Ira mentioned, we believe Q4 represents the peak in the revenue from India, resulted from the big surge of orders in 2014.

We continued booking additional business in India during Q4 and so far in Q1, but not of the same magnitude as the first three quarters of 2014. With the revenue mix in Q4 skewed even more towards India and the other factors Ira mentioned, we saw further downward pressure on our gross margin as expected.

Our GAAP gross margin was also affected by the impact of writing-off $4.4 million of discontinued product inventory related to our restructuring initiatives. We expect the trajectory of gradual improvement in non-GAAP gross margin from the 24.4% level reported in Q4, as we move through 2015.

Our goal is still to exit 2015 with a non-GAAP gross margin of 27% or more. In addition to the usual items such as stock-based compensation, amortization of intangible assets and non-cash tax adjustments, our non-GAAP result excluded $42 million of restructuring and other one-time charges, in addition to the restructuring-related inventory write-off.

Let me give you more color about these other items or at least the major ones. $5.9 million of restructuring cost. Note, that the major of the cash related to the Q4 restructuring will be paid out during Q1 2015. A portion of our restructuring cost cannot be recorded in Q4 due to accounting rules.

Hence, we expect to record approximately $1.5 million to $2 million of restructuring costs in Q1 2015. Yet, expecting to be approximately at the higher-end of the restructuring cost range we had announced in December, which was $10 million to $12 million.

In addition, we recorded a charge of $14.8 million for impairment of goodwill from the Nera acquisition. Due to our stock price decline at yearend, our market value had gone down below our equity book value.

Conducting our asset impairment test, as required by GAAP, resulted in impairment charge of goodwill, which caused us to be in breach of one of our equity-related loan covenants.

We are engaged in constructive discussions with the lenders to address this issue, while redefining our credit facility terms in a manner that will enable the company to address its expected cash needs, including certain relaxation of covenants, extension of term and certain gradual decrease of credit amount.

We expect to finalize this agreement soon. We reported additional financial expenses of $20.5 million, resulting from the re-measurement of certain assets, primarily accounts receivable prior to 2014, denominated or linked to the U.S. dollar due to restricted Venezuelan Government policy on payment in foreign currencies.

It is important to note that the additional financial expense were calculated, based on the SICAD II relation during the fourth quarter. Now, the Central Bank in Venezuela has published regulations for a new system. Our initial understanding of the new relation is that we will likely be required to do another revaluation and re-measurement in Q1.

The remaining value of our net assets in Venezuela as of December 31, 2014, is $4.3 million, so we expect this to have a smaller effect than the revaluation and re-measurement last year. On an ongoing basis, we achieved an operating profit of $900,000 in Q4, a modest improvement over operating breakeven in Q3.

Although, nearly all of our expense reduction measures were implemented by yearend, they occurred towards the end of the period, so there was very little impact on Q4 operating expenses.

We will see more of the effect in Q1 and expect the full effect will show in Q2, when we expect to reach our target run rate for non-GAAP operating expenses of $21 million to $22 million, down significantly from the $26 million in Q4. Non-GAAP financial expenses were up slightly from Q3 to $3.8 million.

The increase was mainly due to higher interest expense and to a lesser extent the impact of exchange rate differences. Our non-GAAP net loss in Q4 was $3.7 million or $0.05 per share, about the same as Q3. Turning to the balance sheet.

Receivables were $163 million, after the re-measurement of the assets in Venezuela with DSO of 160 days, down from 169 days at the end of Q3. At December 31, 2014, we had cash and cash equivalents of $41.4 million. We borrowed an additional $400,000 under our revolving credit agreement, bringing our borrowing at yearend to $51 million.

In the fourth quarter, we consumed $2.9 million of cash. We are pleased with the progress we have made towards improving our working capital management. We continued to pursue our ongoing initiative to control our working capital requirement and generate positive cash flow.

We expect our consumption of cash in Q1 to be about the same, and we continue to target positive cash flow in Q2 onward. Turning to the specific outlook for Q1.

We expect revenue to be in the range of $90 million to $100 million, a decline compared with Q4, primarily resulting from the completion of the biggest portion of the large orders from our Indian customer. In Q4, our book-to-bill ratio was below 1, but we are entering the year with a substantial backlog of business.

It is too soon to assess the impact of revenue from our initiatives to improve pricing and terms with certain customers, but we are encouraged by the progress so far, and we are determined to continue the process. We will focus on returning to solid profitability and positive cash flow, whatever the revenue level.

Our goal is to reach a mid-single digit operating margin by the end of this year, and we look forward to providing updates and additional information on our progress. Now, we would like to open the call to questions.

Operator?.

[Operator Instructions] And our first question is from the line of Alex Henderson from Needham..

Couple of clarifications, because you went through a lot of numbers pretty quickly. The cash flow number that you cited would be similar in 1Q.

Just to be clear, what was the exact usage that you were referring to? Want to make sure we're on the same basis?.

Yes, I was referring to $2.9 million of cash consumption in Q4, so roughly we expect the same number, which is $3 million of cash consumption in Q1..

And second, I took away that you said you expected your profit to improve in the first quarter, is that correct?.

We said that the trajectory of the gross margin is towards improvement. I didn't indicate specifically about Q1..

Did you make the comment that you expect improvement in profitability, operating income in Q1? I thought I heard that in the commentary?.

No. What I said that I expect the trajectory of improvement in the gross margins during 2015 exiting at 27% or higher, and that's it..

The North American mix obviously is an important piece of the puzzle. You've got a number of major contracts that you're working on.

Then when do you expect to see North American orders that you can point to, to give clarity on the visibility of that improvement in mix?.

We are continuing to receive orders from government and customers in the U.S. And we see even a little bit of increase of that and some other deals that are appearing within the U.S. market.

I think we indicated before we expect to see towards the second half of the year, beginning the second half of this year, probably we'll start seeing orders from some of the other projects as well..

And on the covenants, obviously question here is how much confidence do you have in finishing the negotiations quickly to get back in compliance and what is the cost associated with that exercise?.

So we are in relatively advanced stages of the negotiation and we believe we can close that fairly soon. In terms of costs, I don't think that the cost from bank commissions and so forth are going to be that significant. So at this point, I don't want to refer to that..

And then on the interest income line, can you give us any guidance of what we should be using for the first quarter in that line item?.

I think that what you have seen in Q4 is probably a good baseline, but we hope to do something that is better than that, but not in big numbers..

Our next question is from George Iwanyc from Oppenheimer..

Ira, when you look at 2015 as a whole, how do you see the India contribution? And how much confidence do you have in managing that and continuing to grow the overall business, let's say, over the next couple of years?.

I think, first of all, India contribution in Q4 peaked at, I think, almost 37%. I don't expect on a yearly basis in 2015, we'll be close to that number. India will return to probably the normal ranges that we had. Remember that this quarter was much above our running rates, because of that as well, and peaked at $111 million.

So I don't need all of it to run forward. When we build that plans for next year with gradual improvement in the gross margins, and reduced expenses, that will bring us to the result in profitability that we want and a positive cash flow. We do not need very, very large India.

We will be still getting good business from India, like we are planning in all other regions, and we're taking similar measures there as well..

If you look at exiting 2015, do you see the market growth allowing you to get back, let's say, $110 million, $150 million quarterly run rate?.

You're talking about beyond 2015 and into 2016, and exiting or too early to tell. I think that's the challenge that we have on the table right now, and I think both, myself and Doron referred to that, we put the focus of the organization much more on the profitability, then just on the topline.

And I'm not yet 100% sure what will be the total outcome of that. Yes, it will have probably some effect on the topline, probably not very large, but at this point we are not focusing on driving the topline growth, but making sure that we'll reach to the bottomlines that we want..

And then when you look at the supply chain type, as such you had on the IP-20 ramp.

How do you feel you are positioned right now? Are the gross margins on the product where you would like them to be?.

I think that probably if I look at the supply chain issues that are ramping up, we are 80% there. Now, as you know it's a very rough number somewhere there. I think I indicated on the call, we delivered more than 20,000 IP-20 links this year.

And if you'll take a ramp up number, you will see that's because of ramp up performed very slow start in Q1 and in Q2, there were very large quantities already coming out in Q4. So I think we are well-track in there within the new supply chain issues and our manufacturing facilities..

And just a last question.

Of that $21 million, $22 million OpEx run rate, what type of topline can that support before you start having to add new headcount?.

Our assumption is that this account can support approximately level of $400 million. But it's yet to be seen, because we made significant organizational changes just to create better efficiency. So we need to see how this plays out. It could be that we'd be able to do more. But at this point, it's very hard to tell..

Your next question is from the line of Gunther Karger from Discovery Group..

Question as to the vertical markets.

What percentage of your total business in terms of revenue, would you estimate vertical markets to be, which would be inclusive of homeland security, the defense-type business? And secondly, if you can give some outlook on that part of the business?.

The whole homeland security market were, and if I look at that the whole -- I'll start from the top, 80% of our business is mobile operators, carrier-related type of activities worldwide. About 20% of our business comes, what we call, vertical and other applications, where homeland security is part of that business.

I would put it, and I don't have the number off top of my head, but if I made an assumption, its a few percent points at this point from the total business..

A follow-up question on this.

Given the unsettled circumstances worldwide with regard to defense, terrorisms, and that sort of thing, what kind of outlook would you give for that sector of the business, particularly in the defense and verticals?.

The whole defense business worldwide; we seek for many years, by the way, also the demand. If I look at the telecom equipment from our perspective, we see a very, very small piece of it. It's quite constant, but it's one of kind. It's sometimes here, it's sometimes there.

I cannot identify right now the market and the sizes of it, or neither can I tell you if it's growing or not with the worldwide unrest of different places..

We have a follow-up question from Alex Henderson from Needham..

I was wondering if you could just go through the geographies, and give us a reminder of what the relative margin is, whether it's above or below or at corporate average by geography, just to give us some gauge on that.

I would assume Europe is somewhat above; North America is higher; APAC is average, excluding India; and India is much below; Latin America, I assume is also below.

Is that right?.

So I would say that India is probably at the lower-end and so is to some extent Latin America. APAC is close to the average. North America and Africa are higher. And Europe is more or less in the average..

Europe is average. I thought that was above average. And Africa is slightly above average, that's an improvement.

Do you see any change in those trends?.

No. Those trends are what we have been seeing for a while. You mentioned Africa and Europe. It depends on those two tend to fluctuate between average and above average in between them, depending on the type of projects. If we do a lot of long-haul with specialized vertical applications in Europe or vice versa, they tend to move into the above average.

If it's a normal mix, it's about average. So it's a little bit more product-specific in those two regions..

Can you give us a sense of what portion of your business is long-haul versus short-haul?.

I don't know. I'll look it up for you. I don't have the exact number on top of my head at this point..

And we have a question from James Kisner from Jefferies..

This is actually [indiscernible] for James Kisner. So you talked about your cash usage in Q1 should be similar to Q4.

So for 2015, what is your estimate? You said the latter quarters will be positive?.

Yes, we said on the initial announcement that we expect Q2 to be cash flow positive. And the current plan is to continue with this trajectory until the end of the year..

And then for the credit facility repayment, how much would be due in 2016?.

So basically our credits facility contracts ends at the end or at the middle of March 2016. A part of our discussions are regarding for possible extensions, but this is still something that is in negotiation and we need to see how it's going to play out..

And so we have the amount around $50 million before, is that something in the range still?.

I'm not sure I got your question, but just to put the things in perspective. As of the end of December, we utilized $51 million out of basically $68 million, I'll say, credit facility that is available. In terms of trajectory, we believe in accordance to our plan that we'll probably not need to grow below this level during 2015..

And the last question is about India.

So basically your improving gross margin trajectory, is that because of stabilization of the ramp in India or what other factors are there?.

Basically it's a combination. First of all, one, we generate our revenue from other geographies and this is a bigger portion of our revenue. Obviously, due to the region mix, the gross margin should go up. On top of that as we mentioned, we took some initiatives and we're working with some of the customers to basically renegotiate the prices.

So that is another contributor. And the third contributor is things or initiatives like we mentioned, there is moving production to outsourcing and looking very closely at our supply chain cost that will reduce our cost. And all of these initiatives together should eventually result in a trajectory of a better gross margin..

Thank you. And there are no further questions for today. End of Q&A.

I'd like to thank you for joining with us today. I know we are scheduled to meet some of you at the Mobile World Congress in Barcelona next week, which is the first week of March. I'd like to invite anyone else who will be attending to meet with us.

Doron and I will both be attending and we would welcome opportunity to show you some of the unique new capabilities of the IP-20 Platform and further the discussion. Please contact Claudia if you have follow-up question or you would like to meet with us in Barcelona or elsewhere. Thank you very much for joining us today..

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