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

George Iwanyc - Oppenheimer Alex Henderson - Needham James Kisner - Jefferies.

Good day everyone. Welcome to the Ceragon Network's Third Quarter 2016 Results Conference Call. Today’s call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Network's.

Today’s call will include statements concerning Ceragon’s future prospects that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the current beliefs, expectations, and the assumptions of Ceragon’s management.

For examples of forward-looking statements, please refer to the Forward Looking Statements paragraph in our press release that was published earlier today.

These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including the risks that Ceragon’s expectations regarding future revenues and profitability will not materialize.

Risks relating to the concentration of our business in India, Latin America, Africa, and in developing nations in other regions, including political, economic and regulatory risks from doing business in those regions and nations, including in relation to local business practices that maybe inconsistent with the international requirements such as anti-corruption and anti-bribery like regulations, currency export control issues and recent economic concerns.

The risks that the amount of business coming from our most significant customers will go down or cease; the risk that Ceragon will not achieve the benefits it expects from its expense reduction plans and profit enhancement programs, as may be implemented from time-to-time; the risk of significant expenses in connection with potential contingent tax liability; 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 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 website at www.sec.gov or may be obtained from Ceragon’s website at www.ceragon.com. Also today's call will include certain non-GAAP numbers.

For a reconciliation between GAAP and non-GAAP results, please see the table attached to the press release that was issued earlier today. 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. Our third quarter results were very good with the highest quarterly net income we have achieved in several years.

We continue to execute on our strategy by focusing on the best-of-breed portion of the market and evaluating each deal individually according to the value it generates. What I can report about this strategy is, it’s working. We are success in conveying this concept of total value our solutions provide to our best-of-breed customers.

We continue to benefit from a global presence, a very strong product offering and long-term focus on design to cost improvements and the stable organization. We are able to focus on execution rather than being pre-occupied with downsizing with some other companies in our industry are. We are winning the deals and that we should and want to be winning.

Price is always parts of the equation, but we excel in situation where it's not the only factor. The overall value including efficiency performance, reliability, and peace of mind also influence the selection process. In Q3 India remained so, so strong along with Mexico similar to the last quarter.

In North America, we were pleased to be awarded and designated by Sprint as the primary wireless backhaul vendor for the network densification and optimization project. We have received the first order for this projects as part of a multiyear contract.

Providing that we performed well, we expect to receive the lion’s share of the wireless backhaul business. We are one of only two vendors selected after a rigorous process, they evaluated seven different vendors.

We expect this to contribute to our revenues beginning in 2017, but due to complexity of the project orders may not occur in an entirely linear fashion throughout 2017 and beyond.

To summarize, we expect continued strength from Indian at least through next year, similarly Latin America, most notably Mexico is likely to remain a source of strong bookings. And beginning next year, revenues in North America are expected to increase as a result of the multiyear contract with Sprint.

However, with this very positive outlook in certain regions, we must also deliver a note of caution regarding others. The spending outlook has recently started looking weaker for next year, mainly for operators in emerging market economies that are sensitive to the price of natural resources such as oil and minerals.

In addition, it can be difficult for some of those operators to obtain sufficient hard currency, which is a problem for us if they can comply with our payment conditions. In 2017, lower revenue from Africa alone could offset a significant portion of the gross expected from North America.

With pockets of weakness possible in parts of Latin America, we don’t see a lot of justification for raising expectations for next year. At this point, we are not counting on significant revenue growth in 2017 compared to 2016, to achieve our target increase in net income and we will not encourage analyst to increase their revenue assumptions.

To those of you who may find this cautious top line outlook a little disappointing, we would like to put it in the context of the market in which we operate. Two of our large generalist comparatives have been lowering expectations and somewhat specialist competitors continue to struggle.

Against this break drop, we expect relatively stable revenue, in line for typical seasonality. Our focus will not be on the top line, but on delivering another year of solid improvement in net income, regardless of the exact revenue level.

Also while premature to get into any specifics, we have an ongoing internal process and its identifying new high value opportunities that would expand our addressable market. We mentioned one of them on the last call when we discussed some new opportunities in public safety and fiber secure backhaul driven by initiatives like FirstNet in the U.S.

a new network dedicated to first responders. They are also deep into internal analysis and design, the best way for us to capitalize on the evolution to 5G. The new emerging standard is being designed the take advantage of both microwave and millimeter wave frequencies where we have strong relevant experience.

This will open up new opportunities to fuel future growth. With that, I would like to 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 second quarter revenues of $79.1 million represented a 7% sequential increase from Q2, and our book-to-bill ratio was above one.

We have been saying that we believe Q1 was a [tough] (Ph) quarter in terms of revenues and our results in Q3 continue to reinforce that view.

Our booking pattern provides another indication that we can expect revenues stabilized in acceptable range of around $75 million to $80 million over the next several quarters with the possible exception of a seasonal dip.

As shown in the press release, the geographic breakdown showed a similar pattern to the one we saw in Q2, with continued strength in India and Latin America. We had two above 10% customers in the quarter one large customer in India and one in Mexico.

Non-GAAP gross margin was 33.8% in Q3, which was our fifth straight quarter of non-GAAP gross margin above 32%. We had a very strong product offering that continues to succeed in the market and our strategy of focusing on profitability deal-by-deal is working.

Seeing the level of our anticipated gross margin in our bookings during the last couple of quarters, we are raising our gross margin goal and we wouldn’t rule out the possibility of staying at an average gross margin near 34%, assuming a revenue level that is around $75 million to $80 million a quarter and subject to geographic mix.

In addition to geographic mix, gross margin could be affected in a particular quarter by accounting requirements that could create differences in the timing of revenue recognition for different elements of a particular project.

Almost two years ago, we acted decisively to reduce our operating expenses to a level that would enable us to invest for the future, while remaining solidly profitable.

We have been successful in holding these expenses steady for six quarters now and we believe we can continue to keep them under control, while maintaining our leadership position from a technology standpoint in the market.

While we are still working on our plans for next year including some strategic initiatives that could require some additional investment, at this point, we target keeping non-GAAP operating expenses around $20 million to $21 million per quarter.

We have reported a non-GAAP operating profit for nine straight quarters and a net profit in five out of the last six quarters. In Q3, our non-GAAP net income reached the highest level in recent memory. $4.8 million, which was $0.06 per share.

On an annual basis, our goal is to achieve around 50% improvement in non-GAAP net income in 2016 compared to 2015. This is a goal, not a forecast and it would require us to reach $5 million in non-GAAP net income for Q4, which is doable, but by no means assured.

Many of our competitors are lowering their expectations for next year and continue to cut expenses in an effort to stem their losses. It is within the overall environment that we are targeting other increase, in non-GAAP net income for 2017. This is where we are keeping our focus.

Turning to the balance sheet, receivables were $109.6 million with DSOs of 141 days. This is somewhat higher than our targeted range of 105 to 125 days, but it is not of concern to us.

The higher DSOs reflect several factors including ramp in revenues, reduced factoring, and longer payment terms typical of certain geographic regions where revenues have increased. At September 30, 2016, we had cash and cash equivalents of $32.4 million.

We had very small negative cash flow of $1 million related mainly to lower factoring of receivables and we reduced our debt by $1.2 million to $20.3 million at the end of the quarter.

This gives us significant unused borrowing capacity and the financial flexibility to fund additional working capital needs if we experience higher than anticipated growth. To repeat what Ira said from a slightly perspective, we are discouraging you from focusing - quarter-to-quarter revenue changes for a few reasons.

First, as we continue to remind everyone, we are managing the business to maximize profits not revenues, and we continue to target a third year of significant profit improvement in 2017. This is our management focus and this is how we think we should be measured.

With our secular market trends looking flat to down and our larger competitors talking about lower top line in 2017, we continue to believe revenue can increase slightly next year, but again this is not our focus. Our aim is to achieve another significant increase in profits and continue to generate positive cash flow.

Although it is our very ambitious goal, we are targeting something on the order of 40% increase in non-GAAP net income on a constant currency basis for 2017 compared to 2016. We believe that if we are able to even come close to this target level, it will represent excellent performance in the current market environment.

So that’s a snapshot of where we are and what we are aiming for from the financial perspective. Now, we would like to open the call to questions. Operator..

[Operator Instructions] First one line of George Iwanyc with the Oppenheimer. Please go ahead..

Thank you for taking my questions.

So looking at the immediate coming up quarter, the fourth quarter what type of seasonality do you expect here? Do you expect revenue to be in that $75 million to $80 million range or a seasonally lift and then a seasonal correction in the March quarter?.

As I always said and we are saying that all along, we are not discussing specific revenue guidance. I can tell you two things, first of all, our backlog allows us to meet the level that we have recently seeing and even higher than that and obviously it's up to us whether we are able to deliver in a single quarter the ramping up backlog.

I think that we need to think in terms of the net profit and I think that you can do the math and understand that if we want to make $5 million in the bottom line they levels of revenues cannot be that different than what we have seen in Q3..

And when you are looking at the gross margin target that's 34% on average does that assume a strong contribution from Sprint and is that something we should be looking at more as of mid 2017 and later target and not in the immediate quarters given the heavy contribution from India?.

Let's start with the last, you mentioned India. India is a significant portion in our revenue this quarter and yet we are able to achieve a percentage that is very near to 34%. Obviously, Sprint is going to contribute to our margins positively, but I would not say that this is a main factor we build on when we assume we can come near the 34% average..

Okay Ira and one last question.

Can you dig in maybe a little bit on the pricing environment with some of the larger infrastructure vendors pulling back expectations? Are you seeing more price pressure and are you seeing at tougher competitive environment in general when you are looking at what have been good deals?.

What we see is the tough environment. I don’t think it's any tougher than it used to be. Let's remember that mainly the big operators or the big generalists go after system deals worldwide and depending on large system deals less on specific microwave backhaul deals, which go for the best-of-breed.

Although we see some of it also in the best-of-breed segment, I don’t expect that environment to become easier. In some of the markets also a little bit more difficult for us like I mentioned that's why we are balancing the outlook for next year from revenue growth perspective.

But I do not expect a significant change in the pricing worldwide, which is tough as it is at this point..

Thank you..

Our next question is from the line of Alex Henderson with Needham. Please go ahead..

Hey guys. So just trying to band what you mean by fairly tough environment here on the revenues for 2017. Is it that you are saying that you think it's going to be flat at that 290 range or do you think that you can pierce 300 or is it is flat 5% to 6% or is flat 1% to 3%.

What were you are talking about here? Can you give us a little bit more granularity to that..

Alex, I think you need to think of it in terms of how we can achieve 40% increase in our net profit relative to the expected net profit in 2016. For this, obviously we are not magicians and we will probably not find ourselves reducing our operating expenses a much more significantly than what we have done a couple of quarters back.

So obviously, we do believe that we will see some change in the revenue in the top line number, but you can do the math with 34% and which a number that I’m sure will be cohesive to the bottom line and a target we are just communicating here on the call..

So your gross margin in 2016 looks like it’s on track around [34%, 36%] (Ph), you are saying 34% for the year, your OpEx is online to do to standard $20 million a quarter, you are saying it’s going to be 20 million to 21 million a quarter going forward. And I’m trying to make sure I understand the mechanics of how you get to that bottom line.

So your gross margins are going to be down and your OpEx is going to be up, relative to the averages for the year right?.

Our gross margin at this point as we said is around 34% that’s what we expect to see as a level that is at least from our perspective the lower end. And we were talking about $75 million to $80 million of revenue range for this level of gross margin. So I think that you have all the information to do the calculation..

All right and we go into the fourth quarter, I assume that the Sprint stuff is really more 2017 and not as fourth quarter event given the timing here?.

Yes, I'll mention that, obviously there is a push coming from the customer, but we have our plans. The impact is probably going to be much bigger on 2017..

And, did you have any 10% customers in the quarter?.

Yes, we already said that. We had two 10% customers one in India and one in Mexico..

Then what was the headcount, for the quarter - at the end of the quarter?.

That is has not changed significantly since we have announced our restructuring back at the end of 2014. We are our own 1000 employees all over the world. Sometimes it's slightly less, sometimes slightly more, but there is no growth in headcount. And at this point, at least there is no planned growth in headcount..

Ok. Thanks. I will exit the floor..

Our next question from James Kisner with Jefferies. Please go ahead..

Hi, just a quick clarification, although a great quarter and that answered my question. Let's say clarification, I mean you are talking about Tier-1 in this release and you are not named the operator, you are talking about Sprint now in the call quite clearly.

So are we talking about two different operators or are we talking about just Sprint?.

Just Sprint..

Okay, thank you. So regarding that, do you have any idea what the annual spend is for whatever is backhaul at Sprint. For 2017 target maybe and what the trajectory might be, might it be a very strong 2017 kind of tail of. I mean some way to [Multiple Speakers]..

I cannot get into all the numbers, we see the Sprint numbers and their plans for densification and optimization. The only thing I can say that the overall project long-term for microwave backhaul is closer to probably $100 million but that’s over a six or seven year period.

How will this to be divided in between the different years and the different vendors is not 100% sure although we think and we know we will get the lion’s share of that.

How quickly and how fast over the next few years? I don’t know yet, highly dependent on the way and how quickly Sprint executes on the overall plans on the densification and optimization.

And we are confident in their capabilities to execute very rapidly as they meet their target goals, but at this point that's all I can talk about from that perspective..

That's pretty helpful. But I also appreciate you guys sort of so you are next out on next year and kind of giving us an outlook. I'm just really curious like how are you sizing at your business opportunity for next year, are you looking at a pipeline, are you looking at a market research vendor forecast like what is you are kind of….

We are doing everything that you said. I'm looking at the macro and the macro has effects and then we are in the midst right now of doing our annual operating plan for next year.

This is being done both top down and bottom up customer-by-customer where our sales team which has spread geographically talking and walking with the customer on the different expectations.

And like always, the plan at the beginning of the year and the actual for the year usually have large variance for it, but this is part of the planning process and thinking the accounts experience on variation and fluctuations within the different market and balancing risks from the different places.

Our best estimate at this point is, what we indicated on the call on the one hand, continued strength in India and Latin America, a little bit of growth coming from the North American regions and regions which are or countries which are more inclined on natural resources become very hard on hard currency, which usually slows down investments in telecom business.

And that's where part of the balances are..

Okay, that's great. And just one last one, I mean do you think there is any - so much talk about [4G] (Ph) and 5G in China. It's very clear, it says we are going to try to be leader as developing or deploying new wireless technology. In any chance that there might incremental opportunity there for you and that’s my last question. Thanks..

In China in general for many years we did not see any microwave backhaul. In China is a country where we are almost by - I won’t say regulation, but government directive you reach every site with fiber.

Over the last year we started seeing some change in those, but the numbers at this point are still overall not significant and less significant for us. Yes, we are monitoring the market, we did see a very small order something we didn’t see for a long time from China last quarter, but I don’t think it will represent an avalanche at this point.

I think, it will be a little bit of pieces, I don’t see it as a significant at this point on the table..

Great. Thanks very much..

Our next question is from [Indiscernible]. Please go ahead..

Thank you for taking the question. The question has to do with market shares. Do you believe you have gained market shares over the last six months? That's part one of the question.

Part two, do you expect you will increase the market shares over the coming year?.

Depending on which specific market, because this is highly dependent on specific geographies and different things. I do expect for example, in North American market, yes, we will gain market share. I think in some places in Latin America we will gain market share, I think we lost some market share in other territories like A-Pac.

Depending on regional local performance of significant customers. Overall and that’s the important piece, if I look at the overall picture worldwide, we think we are slowly gaining markets not in significant numbers, but in partial percentage points year-over-year..

Thank you..

Thank you..

[Operator Instructions] And with no further questions coming in, Mr. Palti, I'll turn it back to you for any closing comments..

I would like to thank all of you for joining us on the call. Like always, we will be glad to entertain any one-on-one calls and open discussions on the quarterly results and our outlook into 2017. Thank you very much, and talk to you face-to-face on the phone soon..

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