Ira Palti - CEO and President Doron Arazi - CFO and EVP.

James Kisne - Jefferies LLC Alex Henderson - Needham & Company George Iwanyc - Oppenheimer.

Good day everyone. Welcome to the Ceragon Networks Limited Third 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 the risks that Ceragon will not achieve the benefits it expects from its expense reduction and profit enhancement programs; the risk that Ceragon’s expectations regarding future revenues and profitability will not materialize; the risk that Ceragon will not comply with the financial or other covenants in its agreements with its lenders; 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 represents our views only as of 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 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. 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. We continue to make progress to the key business and financial objectives. In Q3 we achieved significantly higher gross margin compared with Q2.

We increased net profits, we generated significant positive cash flow and we reduced our debt, even though revenue declined almost 10% sequentially. Lower revenue is a result of our strategy to be very selective and focus on maximizing profitability with each and every deal.

In general, we are retaining the profit goals we mentioned on the last call, and we believe they are realistic. However, we also think we will see a bigger trade-off between revenue and gross margin than we thought previously.

This shift in both our revenue and gross margin expectations illustrates the important of the approach we are taking deal-by-deal. Our revenue trend isn’t directly correlated to marketable factors.

We continue to believe that the overall wireless backhaul market is likely to remain fairly flat, up or down slightly, depending on whether you measure it according to units or dollars. As we discussed on our last call, we are focusing on the best-of-breed segment, which represent about half of the total wireless backhaul market.

We are in a better position to take advantage of our strengths, when service providers are willing to invest the on-time and resources to assess backhaul vendors offerings individually and select by who brings the best value to the required solution.

By contrast, in bundled deals there is no separate vendor decision for backhaul and the primary sectors are priced in payment terms. As we noted on our last call, even within the best-of-breed portion of the market, there are wide variations between customers.

Not every customer that is looking for ultra-high capacity and advanced features is willing or able to pay an appropriate premium. Furthermore, some customers fully evaluate each, but still use price and payment terms to determine which vendor will be awarded the largest share of the business.

With our strategy of focusing on high value opportunities forecasting is a complex bottom up process where market trends aren’t always relevant. To better understand our booking trends, it’s important to recognize that we make a deal-by-deal analysis of the business we want and the best terms we are willing to offer to the customer.

We have also evaluated whether relaxing our deal criteria could significantly improve our top line revenues and generate additional profits. And our conclusion was that the vast majority of the business we don’t have, we do not want at the price or terms it was awarded.

We won’t be able to get every trade-off decision exactly right, as we are going to make a choice we rather make it in the direction of lower revenue with higher margins. In that context, we are very pleased with the strength in booking in North America.

As you saw in our recent announcement the strength is broad based and doesn’t include any business from anticipated project from one larger operator. We continue to believe those orders will be forthcoming, but the timing is being affected by the career focus on internal restructuring issues.

For now, we are being cautious in our assumptions until we have better visibility on this project. Business in Europe and APAC is soft by total standards. There’s no obvious reason for this beyond a variety of customer specific reasons that cause the projects to move slowly.

We don’t see this changing for the next several quarters and we will concentrate on improving our approach to this market to ensure that we are getting as much of the business as possible.

After very strong business in Africa during 2014, we are seeing relative weakness due to spending freeze at one last customer with everything in the continent and heightened competition in the market. The current phase of orders in Latin America seems likely to continue.

But our future assumptions are a bit cautious due to the ongoing political and currency issues particularly in Brazil. The trending of business in India is very strong, but difficult to anticipate, while there is ample evidence that a relatively high level of business could be sustained through next year.

We are somewhat reluctant to make this assumption because of the tendency for a pause after a period of work deployment. More good news is that our IP-20 platform continues to be viewed as leading the industry, and competitors have been slow to catch-up.

We believe a strategy of focusing on bringing unique value to our customers who will appreciate it will continue to be successful in increasing profits, which is our primary goal.

I’d like to note that we are able to achieve the higher margins because we have invested consistently over the years to have the best-of-breed solutions with a lowest product cost in the industry. Without this product functionality, quality and cost position, stringent control of OpEx alone would not be merely enough to sustainability.

Our IP-20 platform provides benefits and value that can only be achieved through the power of vertical integration with in-house chipset design and a broad portfolio of solutions fulfilling the entire scope of wireless backhaul needs.

We continue to invest more in R&D than most of our competitors and a significant proportion of our budget is devoted to design-to-cost investments. This is what makes our strategy viable.

That leaves us with a question, what has to happen for Ceragon to return to growth mode? We see two primary factors; one, on the operator side, and one on the vendor side.

First, operators must continue to roll-out more advanced 4G and eventually 5G networks with more capacity, better efficiency to accommodate the ongoing explosion of data traffic from connect smartphone and all types of ILT devices. On a global basis, 4G LTE still has a long way to go before being fully deployed.

Second, there needs to be a rationalization of the number of vendors in the best-of-breed portion of the wireless backhaul, which will bring the market to a more rational pricing environment in those areas of the markets where value is appreciated and scale with global reach are important.

In the meantime, we’ll continue to refine our strategy and work on further improving our execution. We see opportunities to gradually increase the amount of revenue coming from certain vertical markets with best-of-breed characteristics. Overtime, we expect to increase our market share as weaker players withdraw.

Our immediate plan is to continue focusing on profitability and cash flow, pay down debt and be in the strongest possible position to take advantage of new opportunities as we identify them. 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. Since you have all seen the press release, I’ll just highlight some of the significant items. Our third quarter revenues of 85.4 million represented a 10% sequential decrease from Q2. The geographic breakdown of Q3 revenue appears in the press release. There were no major shift in geography in Q3.

We had one above 10% customer in the quarter, a large operator in India that is an outstanding customer. A year ago we set a target of reaching 27% margin by Q4 of 2015. We not only exceeded that target level in Q2, but we substantially improved gross margin again in Q3 reporting 32.4%.

As Ira said we believe we can sustain this level and even improve a little more from this level in 2016. Also we should continue to note that we expect some fluctuations from quarter-to-quarter based on the exact mix of revenues we recognized during the period.

Non-GAAP results in Q3 excluded $2.3 million of the usual items, stock based compensation, amortization of intangible assets and non-cash tax adjustments. In Q3, we continued to maintain tight control of our operating expenses which were $20.2 million.

Given the booking level and outlook, we are going to focus on keeping operating expenses in the $20 million to $21 million range. With the improvement in gross margin, coupled with lower OpEx, we continue to improve our operating results reporting a non-GAAP operating profit of $7.5 million.

Our non-GAAP operating margin of 8.8% again exceeds our original goal of reaching a mid-single digit non-GAAP operating margin by the end of the year. Non-GAAP financial expenses were again down slightly from Q2 to $3 million.

The decrease was mainly due to lower exchange related expenses than in Q2 partially offset by an increase in fees for discounting receivables of a large customer in India to compensate for long payment terms. Our non-GAAP net income was $3.7 million or $0.05 per diluted share. As you’ll recall, we set a new profit goal for 2015 at the end of Q2.

We were looking to achieve $7 million or more in net income for the year on a constant currency basis. On that basis, our analysis indicates that our Q3 non-GAAP net income would have been approximately $1 million higher putting us near our annual target this quarter.

Turning to the balance sheet, receivables were $122 million with DSOs of 116 days, down from 126 days at the end of Q2. At September 30, 2015 we had cash and cash equivalent of $39.2 million, the same level at the end of Q2.

We generated positive cash of $7.2 million which we used mainly to reduce our debt to $44 million at the end of Q3 from 51 million at the end of Q2. This level of debt utilization is already below the lowest debt level we negotiated with our bank consortium to be available by the end of February 2016.

We believe that we will be in a position to make further reductions in debt as we continue to generate positive cash flow and expect to be in an excellent position to obtain favorable borrowing terms when it’s time to renew our loan agreement in the middle of next year.

Turning to the outlook, as Ira noted, we are retaining our goal of $7 million in non-GAAP net income for 2015, which implies a sequential decline in net income in Q4 compared to Q3.

Our book-to-bill in Q3 was below 1, as we’ve note before our focus on selecting and wining the most profitable deal in each region is bound to result in some fluctuations from quarter-to-quarter. As we’ve seen a very clear trade-off between bookings and gross margin during the past two quarters, we are not guiding for a specific revenue range for Q4.

In general, based on our booking trend we should be prepared to see a trend towards lower revenue extending to 2016. On the other hand, we expect our gross margin to remain solidly above 30%, and we emphasize that we believe we can achieve significantly higher profits in 2016 versus our $7 million non-GAAP net income target for 2015.

Another quarter of experience was implementing our strategy and making the trade-off between revenue and gross margin increases our confidence that we should continue with this strategy in order to continue generating more profits and positive cash flow. Now we would like to open the call to questions.

Operator?.

[Operator Instructions] And our first question is from James Kisne with Jefferies LLC. Please go ahead. .

I guess I wanted to clarify the gross margin result in the Q3, nice gross margin by the way. Could you just give a bit more color on how much of that is a result from perhaps renegotiate pricing versus purely just lower margin business just going away. I just wanted to understand that nuance a little bit.

And then also for 2016, I think you said that you would have gross margin, you could be at least as good as this for the year, but it sounds like there’s variability and perhaps you would fall below this level potentially and in individual quarter.

I just want to clarify that you weren’t trying to say that this level on Q3 wasn’t absolute for, thanks. .

I’ll start with the deal, we are selecting on a deal-by-deal basis, and we are doing all the things that you have said in different proportion, different regions and different customers. We walked away from some deals with very low margins, which you can see a little of that in the reduction of the revenue level.

We also renegotiated some deals in some geographies and changed the terms and conditions for better gross margins and being a little bit more careful in new deals that we are selecting on the table also contributes to the same mix.

Together by the way, with activities at the backhand of continual product, cost reduction, operational efficiency and other measures which also contributes to the gross margin mode. .

This is Doron. I will just add one comment. Actually looking out to 2016 and obviously before doing the thorough work of annual operational plan, I think that the booking of the last couple of quarters is giving us confidence that the 32.4% that you’ve seen it’s not just a one-time occasion, and it looks like it becomes a trend.

And obviously trying to be cautious, we said on the script that we have acquired high confidence that we can sustain our gross margin above 30%.

But we also commented that we believe that on average for next year, we can be at the level of the gross margins of Q3 and maybe invest slightly above, and all of that as I said is based on the trend that we have seen in the last two or three quarters. .

Okay, that’s helpful. So just turning to the revenues for a second, if you don’t mind, so you said that your book-to-bill was below one.

I mean I don’t know if you could give any more detail there, was it 0.5 or 0.7, like how bad was it and I am just kind of wondering was there any kind of - were there some deals that hit in Q3 that you did not expect to land in Q3 that perhaps you might have expected to land in Q4? I am trying to understand the dynamics around the sequential decline.

And I guess sort of relatedly, are you seeing any slowing and if you could give a reason, in any regions specifically other than just were you backed away on deals, is there any kind of softening in the environment reflected in that book-to-bill also. Thanks. .

We see the book-to-bill below 1. It’s not equal to 0.5 bad; it’s mainly because of selecting deals. So it’s causing a little bit of a slowdown. I think I mentioned also on the call a little bit. We see relatively strong environment in the North America region, flat in mainly in the APAC, and in Europe.

We see Latin America continuing, while within Latin America we see Brazil weakening because of the local currency. We see Africa weakening at this point, mainly because a competitive environment and one of our larger customers’ in that area which is a multi-country operator is exiting the continent at this point.

So while the transition is there, we’ll take time to pick up sales again to the local operators within the region. And we see, by the way India keep on going strong with a caution that we’ve seen India sometimes after rapid deployment at some point drop off drastically for a digestion period of deployment.

We do not see a softness I would say globally. It’s all local, sometimes country by country, operator by operator, mixed with decision making processes on our side what we walk in to and what we don’t walk in to.

So we can maintain both a healthy profit and margin and which usually works both hand-in-hand with better payment terms and less need for working capital, which also has an effect on our cash flow. .

Next questions’ from Alex Henderson with Needham. Please go ahead..

So when I look at the numbers on the topline I actually was not all that surprised that revenue was weak considering the macro conditions.

If you were to parse between the pricing issues that you’re addressing and the discipline that you’re bringing to the gross margin and the broad macro conditions in emerging markets where raw material pricing has been under such pressure causing a lot currency pressure.

How would you parse between those two factors in the weakness in the revenues?.

Without bidder I would say detailed analysis of both half and half, actually and that’s without doing it better, that’s more of a gut feeling in between. I know differences in different geographies, but if I need to mix them up, it’s about those numbers. .

So when we’re looking at the first quarter of 2016, I know you don’t give guidance that far out. But historically that’s been a sequential declined quarter fairly steeply from the fourth quarter.

Based on the change in the way you’re addressing business, does that happen going forward or alternatively is the price dynamic the dominant factor and therefore less seasonality in that quarter than normal..

I don’t think that the seasonality will have a major impact. I think the way we pick and choose the deals even if it’s on an account of keeping statistically the booking trend in a nice trajectory, this is the thing that is probably going to count more.

Adding to Ira’s comment about your original question, we know that we had an impact just for the fact that some of the business is in local currencies, and that was quantified and I would say that it was definitely higher than $1 million this quarter.

Obviously some of the delays we see in projects that were either canceled or delayed is coming from the macro economy, and on that we definitely do not have any control, and this is why it’s hard to quantify this piece and say okay, we probably lost 5 million or 3 million or 6 million..

Given your comments last quarter that you expected essentially flat revenues in ’16 based on the change in the pricing structure and you’re now down considerably first half to second half, should we still be anticipating flat for the year or should we be putting a decrement down for ’16 based on the fact that your current run rate looks like it’s more on the 82 to 85 range quarterly, and use that as sort of the base line.

.

At this point our expectation is that there will continue to be a trend off between gross margins and topline and basically that drives to a conclusion that we expect lower revenue levels that then what is out in the market up until now. But I want to emphasize that this is a trade-off.

And to the previous question, the answer is, the trade-off is going to be in the gross margins that we see much better gross margins. .

Right. So just to answer the question though, the question was first half versus second. So I assume that the $80 million to $85 million run rate we’re talking about here in the back half of the year is the reasonable level of run rate in the first half and second half of next year.

We shouldn’t be expecting any meaningful change in that, correct? We are not going to see another down graph to 10%-15% in ’16 I assume on the revenues?.

Obviously things may fluctuate between quarter-to-quarter, and as we said, we are not guiding for a specific topline. So I will just say that we need to continue following cautiously on the trends. Definitely the numbers that we have seen in the first half of 2015 are not the numbers we are planning for next year. .

One last question, actually two. One data point I forgot to ask, headcount at the end of the quarter and then one last question. So you made the comment about rationalization of vendors in the space, doesn’t really seem like anything is changing on that front.

Is there some reason why you think that that might occur or is there any perception that there’s going to be a change in the structure of the market, because otherwise looking for 5G and rationalization of vendors is a long period?.

We talked about long period of yes both trends are longer term type of activities. I think the market is getting in to a position where things will start to happen. I think also you see it from the top, you see the Alcatel - Nokia merger will start taking place in the beginning of the year.

So we believe that both were (inaudible) and we started seeing also some of the 4G, 5G stuff starting to rollout. We have a lot of 5G discussion with people. People are pushing in that direction. It’s not a tomorrow type of thing, but think it will drive our growth a little bit further down that road..

Next question is from George Iwanyc with Oppenheimer. Please go ahead..

Ira can you give us a sense, just following on the same line of questions; the type of visibility you have in to 2015, when you look at on a regional by regional basis you talked about how India might change quickly.

Do you have a deal flow that supports a one quarter view, the six to nine month view, how far out does it go?.

We work in merely, I would say, three or two and a half [type] out there. Nothing has changed from our visibility perspective of the way we work.

We have immediate deal flow which is usually for the next three months, which we see on the table which is really a thing that we negotiate already both terms and probably also the terms and exactly the content and stuff.

Further out probably for another four to five months its deals that we are involved in, and further down than that almost a year out, we have customer relations and contacts that we have with the customers, we note what their plans are.

Let’s remember that at this point in time from our perspective, we are planning the budget for next year, and using the rolling there I don’t see at this point any change in that type of visibility. Sometimes the visibility changes because of macroeconomics and stuff which is happening sometimes quite rapidly.

At this point, I think that most of the, what we see around the macro economy we are starting to factor in to what we see further down the world..

And then when you look within each of the regions, is the gross margin that you saw on this past quarter reflective of what you think is sustainable on those regions.

Is India contributing at the level that you expected to hold at, or do you still see room for improvement within any particular region?.

As I think Doron indicated, we’ll probably stay around the number we achieved in this quarter, which means under the current mix that we have, we believe that the gross margin profile in the different regions will stay about the same of where we are.

I don’t see at this point significant changes neither by the way to the high upside and with outside within those profiles within their different regions. We do overtime expect by the way a little bit of shift geographies, which will probably further improve the gross margin slowly.

And we said that I think on the call in the vision, we are going up to some - we see promising niche market within the vertical spaces which we go after, which might also have a little bit of an effect. .

And then last regional question, when you look at North America, I hear you seemed fairly positive about the order opportunities there.

But that’s not including any new business from the one large carrier so what’s giving you the confidence, what’s your existing business there?.

What’s given us the confidence is talks with those customers who are in a very good position and are continuing to deploy based on their plans and their plans in to next year. .

Doron, when you look at [FX] are there any factors that we should be aware of?.

No, I think there’s a good very tight control over OpEx and there is a bit behind in terms of some of recruitment in some areas. But as I said, it looks like we can keep our OpEx at the level of $20 million to $21 million without affecting the business and the different initiatives that we have within the organization.

So I feel that this level of OpEx is something that we can retain. .

Okay, so when we look at R&D, sales and marketing, the levels that we’re looking at right now are kind of the ones that we should look to see them settled on that. .

Yeah more or less, there could be some shift between G&A to R&D or G&A to sales and marketing as you move along, but generally speaking if we look at the bottom line of the total OpEx it’s going to be in the range of 20 to 21. .

And just my last question on the currency side, are you seeing any unusual headwinds in any other regions?.

Obviously we have big challenges especially in Latin America, in particular Brazil, and basically after a huge decline in the last quarter, we hope for some rebound. But this is something that we don’t have too much control, except for trying to be more sophisticated in the future in the way we handle our exposures. .

[Operator Instructions] And Mr. Palti, we have no questions in queue. .

Okay. I’d like to thank everyone for joining us this morning. If you have further questions or any clarifications, both myself and Doron are available for direct questions. And we would like, we would be glad to elaborate a little bit more on the details on one-on-one calls both on the phone and face-to-face over the next few weeks.

Thank you very much for joining us this morning and have a good day. .

Thank you. Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may disconnect..