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

Alex Henderson - Needham Ittai Kidron - Oppenheimer James Kisner - Jefferies LLC Marty Elbaum - Horizon Network.

Good day, everyone. And welcome to the Ceragon Networks Limited First Quarter 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 risk that Ceragon will not achieve the benefits it expects from its expense reduction and 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 export controls and recent economic concerns; risks relating to the concentration of our business in the Asia-Pacific region and 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 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 the Securities and Exchange Commission's website at www.sec.gov or maybe obtained on Ceragon's website at www.ceragon.com. At this time, 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 Doron Arazi, our CFO. The main takeaway from Q1 results is that we are on track with various business and financial initiatives. In fact, in some respects, we are ahead of where we thought we would be at the end of Q1.

Our first quarter revenue of $94 million was within the range of our guidance, close to the midpoint. Gross margin improved and we begin to see the effect of our expense reduction initiatives.

We improved our non-GAAP operating result for the fourth consecutive quarter and we have made substantial progress towards our operating margin, we hope to achieve by the end of year. We will hear more details from the Doron, including some improved balance sheet metrics. We have seen no significant changes in overall demand.

The first quarter is typically impacted by seasonality, but the primary reason for the sequential revenue change from Q4 was less revenue from our large customer in India as we anticipated. Revenue in Latin America increased substantially compared to Q4 because we recognized revenue from a large government project in Colombia.

During the balance of the year, our revenue level will not necessarily be representative of overall demand because our primary focus is on reaching and sustaining profitability.

I’m pleased to report that we will continue to make progress on our initiative to achieve better pricing and better payment terms with certain customers in the most price sensitive regions.

This includes India where we continue to book orders from multiple operators’ with generally better terms during the first phase of orders related to large scale greenfield deployment there. It is still too soon to determine exactly what volumes can we expect to achieve with better terms in these price sensitive regions.

But our discussions continue to be encouraging. In Q1, our book to bill ratio was about 1 to 1 and the forecasted growth margin of those booking is improving.

Specific quarterly results will continue to depend on the actual geographic mix of revenues recognized during the quarter, but the margins are generally headed in the right direction and more favorable geographic mix can enhance the improvement.

Regarding North America, there has been no change in our expectations regarding the timing of the large tier one project there and we are pleased to report that we are in the process of formalizing our relationship with the operator. The business environment remains extremely competitive.

So, the reason we are able to make some progress on the margin front is very clear, the strength of our technology and our advanced IP-20 platform. Not every project requires the premium characteristics and value of IP-20, so we don’t enjoy a relative advantage in every situation.

But after having firsthand experience with IP-20 in demanding deployment scenarios, we are getting strong indications that customers understand the benefits and value of the solution. On our last quarterly call was before our main tradeshow Mobile World Congress in Barcelona, which was excellent this year.

This is the show where we would typically see major new technology or product announcements. While we saw a few relevant ones, none of them presented any significant challenge to our leadership. In fact, we were able to validate our sense [ph] that we are at least 12 months to 18 months ahead of the competition on most capabilities.

We have many points of differentiation, but probably the most important one is our unique multi-core technology. Although it has been proven in the field since end of 2013, to the best of our knowledge, it is not available today from any other wireless backhaul vendor.

At this show, we announced and demonstrated a ground breaking capacity enabling flexibility and deployment and boosting capacity called advanced frequency reuse, which removed spectrum bottlenecks by enabling the use and the reuse of a single frequency channel, where multiple channels were required before.

Most of you are familiar with ultra-high capacity aspect of our IP-20 platform that customers are also responding to this platforms ability to minimize the use of scares resources, including not only spectrum, but also reinstate on the tower with smaller antenna size and fewer radios. And of course lower power consumption.

As natural complexity continues to grow, we are also seeing a positive response to our backhaul operating system that simplifies network design operations and maintenance.

When combined with our ability to accommodate any network architecture including a future as the end capabilities, these capacities create attractive total cost of ownership and value proposition that IP-20 offers. To summarize where we are. We are on track with all the initiative we outlined you in Q4, some the results begins to show in Q1.

We continue to believe we have a technological lead. The market remains extremely competitive with our ongoing focus on profitability. It may take longer to close some deals and our potential growth may be tempered by our decision to be more selective.

Nevertheless, we are very encouraged by our progress and we intend to keep driving toward our near targets of profitability and positive cash flow. 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 adding some details on our financial performance and discuss the outlook. Since we have all seen the press release, I’ll just highlight some of the significant items.

Our first quarter revenues were $93.7 million, represented a 16% decline from Q4, reflecting less revenue from our largest customer in India then the previous quarter, as well as typical seasonal patterns in most geographies. The geographic breakdown of Q1 revenue appears in the press release. We had two above 10% customers in the quarter.

Our largest Indian customer and our government project customer in Columbia. Last quarter, we indicated that as we move through 2015, we expected a trajectory of gradual improvement in non-GAAP gross margin from the level of 24.4% reported in Q4.

The improvement in Q1 was a little higher than expected and we can see some variations from quarter-to-quarter based on the exact mix of revenues we recognized. In general, we expect to continue making progress towards our goal, which is to exit 2015 with non-GAAP gross margin of 27% or more.

In addition to the usual items such as stock-based compensation and motivation of intangible assets and non-cash tax adjustments our non-GAAP results in Q1 excluded $1.2 million of restructuring costs related to the initiatives announced in Q4.

We also reported additional financial expenses of approximately $3 million, resulting from another re-measurement of certain assets related to Venezuela, primarily accounts receivable prior to 2014 and cash balances.

As we mentioned in the last call, this further devaluation became necessary when the Central Bank in Venezuela published regulations for new system during Q1. We have not given us collecting these receivables and in fact customers want to pay.

We will continue our collection efforts in cooperation with our customers, but we do not expect to be successful anytime soon. In Q1, we saw the majority of the effect of the expense reduction measures implemented toward the end of Q4 with non-GAAP operating expenses declining to slightly above $22 million, compared to $26 million in Q4.

We expect to see the full effect in Q2 when we expect non-GAAP operating expenses to be between $21 million to $22 million. With improvement in the gross margin and lower OpEx, we were able to continue to improve our operating result, reporting a non-GAAP operating profit of $2.5 million.

Our non-GAAP operating margin of 2.7% represent a good start toward our goal of reaching a mid single-digit non-GAAP operating margin by the end of the year. Non-GAAP financial expenses were down slightly from Q4 to $3.4 million. The decrease was mainly due to lower interest expense and less impact from exchange rate differences.

Our non-GAAP net loss in Q1 was $1.3 million or $0.02 per share, a significant improvement from Q4. Turning to the balance sheet, receivables were $142 million after the additional re-measurements of the assets in Venezuela with DSOs of 131 days, down from 160 days at the end of Q4. At March 31, 2015, we had cash and cash equivalents of $37.3 million.

Our cash consumption in Q1 was only about $1 million, reflecting our strong focus on working capital management. The balance of the reduction in our cash position from year-end of approximately $3 million related to currency devaluation primarily in Venezuela that I mentioned a moment ago.

I will also briefly mention other currency-related adjustment to the balance sheet required by the accounting rules. It’s related to the recent 20% devaluation of the Brazilian real during Q1. According to the accounting rules, these had no P&L impact. In this case, the change in net asset reduces shareholders’ equity by approximately $4 million.

It is important to emphasize these has nothing to do with collectability of receivables and we fully expect to collect our AR and to be able to take the excess cash out of Brazil.

As we have said before, we have been monitoring the situation and we have selectively reduced our exposure in certain countries in the region because of the economic conditions we cannot control.

We did not have any change in our borrowing during Q1 and we successfully amended our loan agreement to afford us higher capacity for discounting the receivables of our large customer in Indian, more flexibility on certain covenants, and extent the term with certain reductions in the maximum available credit to June 30, 2016.

We are pleased with the progress we are making with those factors we can control such as improving our working capital management. These are ongoing initiatives. We are pursuing to minimize the working capital requirement and generate positive cash flow.

Turning to the specific outlook for Q2, we expect revenue to be in the range of $90 million to $100 million. We expect Q2 to reflect the full effect of our expense reduction measures and we continue to target positive cash flow beginning in Q2.

We expect gradual improvement in gross margin during the balance of the year and believe we are on track to reach our target of mid single-digit non-GAAP operating margin by the end of the year. Now, we would like to open the call to questions.

Operator?.

Our first question comes from the line of Alex Henderson from Needham. Please go ahead..

Thank you very much. I’ve got a couple of questions for you.

First one, you’ve taken some hits on the write-down in Venezuela, are we now done with that, is there anything less there to write-down or are we still have carrying exposure around it?.

I would say there is not much left. Obviously, we reported as part of our 20-F that our net assets in Venezuela consisted of like 2% of our balance sheet. So, if we are doing the graph, probably left with like $1 million.

The only caveat to that as we continue to provide services in local currency, this obviously generates some cash and this cash is basically locked and will still suffer from an evaluation should the government of Venezuela continue to – with the current policy..

Are there any other geographies where you think that there is a additional risk to the balance sheet for further write-downs on the AR receivables?.

I think this pertains to the fact that is very clearly stated in our 20-F that we’re operating in developing countries. When you operate and generate the business from developing countries we are always in some level of risk to kind of find yourself in a situation where your assets are being evaluated.

We don’t see any particular issue at this point, except for Brazil that we mentioned on the call..

And the comments about the range of numbers just sort of I have some sensitivity to it. That’s a pretty wide range obviously.

I assume if you have hit the mid-point of that that’s a little bit of a sequential improvement of the first quarter, and with the cost cuts that you have made since you’re practically breakeven now it would be reasonable to think that you would be at or even slightly positive at the mid-point of that guide?.

As we have said many times during the last couple of months. The focus is profitability. If I am a little short on revenue, but I am still generating better profit, I will go with this approach. So this is why the range I understand it, well understand it a relative wide, I think what matters is the trajectory of improving our operating results..

Okay, but you still didn’t answer the real question, the real question is given the mid-point it looks like you should be able to be at least break even if not profitable, is it reasonable to think that the first quarter your intentions are to get to profitability based on the guidance, do you think that that’s a reasonable expectation..

I think that generally speaking that’s a reasonable expectation, but as I said what will be very critical to reaching for this goal is the revenue mix. Our profit, although the trajectory is in the right direction of improving our gross margin, we should not forget the fact that the mix can impact us in each and every single quarter..

Of course, going to the gross margins in the backlog, you were implying that the current order book of new transactions that went into the backlog had higher gross margins, can you give us some sense of what the delta is on that versus what you just reported and what’s taken out, are we talking about getting over that 27% hurdle in that backlog or are we still working to get to that 27% hurdle and do you think longer-term that you can get back over 30%?.

So, at this point, it is very hard to speak about getting over 30%. In my [indiscernible] I would not be considered seriously a full, if not when we are struggling with 26.5%, I’m talking about above 30% at this point.

To your first question, I think yes, the backlog that we or the bookings of this quarter are indicating a significant improvement in the gross margin relative to the previous quarter. With that it translates into exceeding the 27% goal we put on as a target. It is yet is early to make that statement and we have to wait longer..

Just going back to the mix issue, is it not true that if you see substantial acceleration in the U.S. and European business that that in fact does carry margins generally well above 30% and, therefore, that mix shift towards the U.S.

and Europe would help results and you are expecting an improvement in EU, in the North America U.S., Canada end market?.

Basically, I agree with your statement. The only thing is that I’m waiting for things to really happen to start seeing the business in North America really ramping up. When it will ramp up, probably, your description will actually come true..

So, if that happens, then the 30% starts to look achievable, yes?.

I think that we can be beyond 27%. Once again, it’s depending on the mix that we will have in other regions..

Okay. Thank you..

But generally speaking, the right trajectory..

I will leave the floor. Thanks..

Thank you. Our next question comes from Ittai Kidron from Oppenheimer. Please go ahead..

Thanks. I wanted to kind of drill into Brazil.

Ira, can you give me a little bit more color as to how much Brazil is for your business and what are the trends that you are seeing in that market specifically?.

If I need to look at Brazil, Brazil is about half of our Latin America business. In general, I’m not sure – [indiscernible] a little bit around the quarter, but it’s about half the Latin America business. Trajectory in Brazil – business in Brazil is tough at this point.

We believe we will continue to have the same level of business there, but A) it’s very, very competitive and B) because of the economic reasons, I don’t expect it to grow, it might shrink a little bit during the year.

We have already started seeing some effects on government business although the operators themselves continue to drive the business a little bit more cautiously. We did make changes because of that environment and relative to 2014, we will see a lot less business than we are planning and not less business in Brazil relative year-over-year..

How much is financing a problem in that market versus real underlying demand?.

We don’t finance. So….

Well, the lack of a more natural system over there to support customers that do want to buying gear?.

I think – look, I think that the mobile operators have the way to get the financing that they need for deriving projects and running it. And in the non-carrier world, most of the projects are small. Some of them are financing, but it’s payment terms issues and the projects are relatively small..

Okay. Now, it seems like you’ve made in your prepared remarks a very clear statement about what business you want to do and what business you don’t want to do and the tradeoff in that. In that you probably don’t see much in the way of revenue growth and you leave business along that doesn’t meet your margin threshold, the requirements.

I guess my question is in that context, how long is it do you think before you kind of reach a point where you’ve done all you can as far as picking the right business and it’s at that point, how do you grow the business from there, how much of the market do you think you are now going to address with that business philosophy?.

Okay. That’s I think the biggest question we have on our mind as we drive the business. We do expect and that’s when we talked about this year and the next quarter guidance and everything that we will not show a significant growth for this year on the revenues if at all versus 2014.

We are driving towards probably a little bit of growth as we move through the year.

My belief that, a mix in between being a little bit more careful and using our technology and cost advantages, we will slowly return to growth as other market changes and use that as an advantage, but I want to do it very, very carefully with the number one priorities first and foremost reaching profitability and the cash flow goals and then returning to growth..

Okay.

Can you talk about the Nokia Alcatel deal, what you think that means to your business if it does close?.

I will say it first of all, I think the first meaning of that in general by the way, we are in an industry in the telecom equipment industry in the mobile space, which is over time changing and maturing and part of that is consolidations that are carrying in all sorts of sectors within the industry.

For us specifically, we do business a little bit with Nokia solutions less, we don’t business with ALU, I don’t expect at least in the next 12 months to 18 months to have any effect on our business, and I think that the microwave backhaul solutions within the portfolio will be one of the last items for them to make decisions on what do they do with that..

Got you..

I think it is not high priority. The only place that mix makes is I think it is the opposite way around is ALU’s very strong position in the North American market and that’s what will strengthen them, I’m not sure on the microwave backhaul and how much of that will be a focus..

Now, Doron correct me if I’m wrong, you’ve talked about gross margin improving in the second quarter, did I get that right?.

I was talking about the trajectory of improvement and the only caveat I put to that is that since eventually the gross margin in single quarter is predominantly resulted from the mix of the revenue coming from the different geography, there could be some fluctuation, but the general trajectory is yes, we want to improve our gross margin and we believe we can do it..

Okay, so let’s talk about mix then, you’ve had a big customer, government customer in Columbia, I think you mentioned just looking at the regional numbers and the fact that it was 10% customer clearly the biggest jump in that whole region was that specific transaction, as we move into June, how much more leg is there in that transaction and carrying business through or you are kind of done with it.

In which case there is a $10 million kind of hole here to fill in into June, so from your standpoint and the way you are looking at your business what is it that you’re seeing kind of making up for that Columbia business in the second quarter and how do you think about your mix in June from a regional standpoint?.

First of all this relatively sizeable deal is basically a done deal. There is a couple of $100,000 left and definitely they are not going to make even similar impact to the impact they made in Q1, but at the same top line, we had other revenue with much lower profitability that has impacted obviously the average, which is the 26.3%.

So, if I look forward, yes the revenue coming from Latin America in general is going to be significantly lower, but I think that in the other regions there were some lower profit deals that were recognized in revenue in Q1 and we look, when we look forward to Q2, in these other regions the deals that are supposed to be recognized as part of the revenue are going to come with a higher gross margin and this is why in general we believe that we will be able to improve the gross margin further..

Okay. And lastly for me on the DSOs, it still remain very high, I think you’ve – clearly you’ve stated that it’s something you want to work on, but it sounded like from your comments on the call, also I didn’t get you right, is that, you don’t see any material change in DSOs going forward.

So A) did I get this right? If so, what is the challenge in trying to improve on that point?.

So first of all, let me make sure I conveyed the message clearly. We did a very good work in the last two quarters and actually the DSO went down to 130 days from a level of 160 days. So, at least in our eyes, this is a major improvement. Said that, the intention is continue pushing very strongly on collection and payment terms.

So, I would say it in a different way, the last word has been said yet about our ability to improve the payment terms and the DSO..

Very good. Good luck, guys..

Thanks..

Thank you. Our next question comes from the line of James Kisner from Jefferies LLC. Please go ahead..

Thanks. Just wanted to drill down on gross margin again for a second. So, I mean, it was better than we expected despite a pretty big quarter from India, I think your revenues from India were actually higher in Q1 than they were in Q3 last year. Your revenues are lower, you gross margin is 60 bps higher.

Can you talk about what the factors are there? How much of that is renegotiation, how much of that is your cost restructuring efforts, how much of that is a lack of expedite cost? Just wanted to understand the gross margin strength in this quarter a little bit better..

I think it’s basically – there is not one single factor that I can say that tells the whole story. It’s basically a mix of couple of things.

But I think that, first of all, and I think the most important part is our ability to negotiate better terms and that’s quite clear if you still see a level of revenue from India that is more or less similar to Q3 and we’re still improving our margins.

You rightfully mentioned the expedite fees, we have started seeing a trend down in the expedite fees and that’s obviously another element that helps us. And I believe that as we move forward, these will be the main factors that will impact our ability to generate higher gross margins.

So to summarize, it’s the ability to bring better business in the relatively lower margin regions that we are working on and the ability to have a more efficient delivery method that reduces significantly the expedite cost and, obviously, the shipment cost that are also are a big piece of our cost.

And if we can improve there, obviously, it will go all the way down to the gross margin and below..

Okay. That’s helpful.

So does it feel like – I mean it seems like given your comments around backlog and mix and expediting cost going down, this could be the bottom for gross margin, should we not assume that could there still be a quarter here which we now and at end of the year where you see a down ticking gross margin due to the mix or some other factor? Just wanted to understand if this is kind of what we should expect to be the low for gross margin in the medium term..

I want to be careful, I don’t want to kind of say something when I know that the gaps between the different gross margins – sorry, the gaps in the gross margins between the different regions are so high that I don’t want to be in a position where I kind of give an indication that this is the bottom gross margin that we are going to see in 2015.

I will say that, I’m cautiously optimistic seeing what we are getting in the backlog, but as I said, as a longer-term trajectory, we are on the right direction..

Okay, that helps. And let’s turn to the balance sheet for a second. I see you guys renegotiated your credit facility.

I guess, first is a housekeeping question, should we expect any change to your financial expense here in Q2?.

No, I don’t see any reason for that at the moment. We have closed the issues and I think that the terms we announced as part of the 20-F are going to be the prevailing terms for Q2 and on..

And so, can you sort of update us on what the end game here is for this maturing next year, I mean do you anticipate that perhaps late this year you might just refinance it or and just what are your thoughts in kind of how things are going to proceed from here with respect to the debt and that maturity in the next year?.

Yeah, I think that the banks are not that different in their view from the shareholders.

So, they want us to execute on our 2015 plan and this is why on the one hand since they saw the positive side, they were willing to give us some comfort and some wavers on the covenants and help us also to generate more cash in basically discounting some AR that is part of their obviously security, but as I am talking they said you know what, let’s go through 2015, let’s see how you progress and based on that we will probably have a discussion about extending their current facility for longer term.

So, I think that if we execute in accordance with our plan, we will probably be able to either extend their agreement with the current consortium for a much longer period and hopefully will get even better terms, but if not I think that we have many other options of refinancing and getting the funds we need and this will probably be a task for Q3..

Yeah, thank you very much..

Our next question comes from the line of Marty Elbaum from Horizon Network. Please go ahead..

Ira congratulations. I’m very excited about how you’ve turned the company around and I think we have an exciting story.

Do we have any plans in the near term to go to some of the financial conferences and tell our exciting story to the financial community?.

Yes, a thanks, and b, I think we will be participating in two financial conferences over the next two weeks. Next week, beginning of the week we will be here in Tel Aviv there is a conference by Oppenheimer and then the second part of the week there is a conference by Jefferies in Miami, we will participate in both..

Great congratulations again..

Thank you very much..

[Operator Instructions] And Mr. Palti, we are currently showing no questions are queuing up at this time, please continue..

Yeah, I would like to thank all of you participating in the conference. We are very encouraged by our focus and we intend to keep driving towards our near term targets of profitability and positive cash flow.

We will be glad to entertain one-on-one discussions and further on detail and give color about the quarter as we progress and I hope to see some of you also on the financial conferences we discussed. Thank you for joining us today..

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect..