Ira Palti - President & CEO Doron Arazi - CFO.

Alex Henderson - Needham George Iwanyc - Oppenheimer James Kisner - Jefferies Viral Shah - Credit Suisse.

Good day, everyone. Welcome to the Ceragon Networks Limited Fourth Quarter and Full Year 2016 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 as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the current beliefs, expectations, and 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 risk 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 may be inconsistent with international requirements, such as anti-corruption and anti-bribery regulations, currency export control issues and recent economic concerns; the risk that the business coming from our bigger customers will go down significantly 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..

we had a very good year in 2016 and we're expecting an even better one in 2017. Turning to the global market conditions, we don't see any major change since our last call, when we said we expected the overall market to be down slightly in 2017.

We also conveyed a note of caution regarding the outlook in a few regions, notably further weakness in Africa and certain parts of Latin America, as well as continued softness in Europe. This is still our view.

There are three specific areas of the world where the first competitive situation between operators for market share is resulting in the need for more microwave backhaul capacity. Specifically, in India there are Reliance Jio and Bharti, in Mexico, there are AT&T and Telcel, in the U.S. there are T-Mobile and Sprint.

Each operator has its own business strategy and network plan. Just as their strategies are different, their microwave backhaul requirements are different. But we can address all the different variants with our IP-20 platform and provide the type of value that each carrier is looking for. Therefore, we have all six operators as our customers.

The key for us is having a global presence, having a comprehensive and flexible platform that can be sold on the value it creates for the customer, and the ability to provide strong support and execution within a very demanding timetable.

On our last call, we discussed being chosen by Sprint as the primary wireless backhaul vendor for their densification and network optimization project and said we expected it would begin to contribute to revenues in 2017. However, we were able to meet the request for an accelerated timetable.

We recognized some revenue from this project already in Q4, which is the main reason revenue, was a little higher than expected. This project is going very well and we believe we are in a very strong position. Recently, we announced that we received $60 million of new orders from a large customer in India.

The first thing I want to say about this business is this that the situation is much different than it was two years ago when we took on a big batch of orders with a tight delivery schedule.

As a result of the lessons learned back then, we reorganized the entire relationship with the customer in 2015 and the new orders we received are on the basis of the new relationship. This deal will add significant incremental gross profit dollars. We are doing well for one reason.

We have earned the confidence of each of the operators that happen to be buying a lot currently, and with some, we have earned the lion's share of their business. The last point I want to make is regarding the optics of quarter-to-quarter fluctuations in our results.

It would be great if we could get our customers to place orders with nicely-spaced delivery dates throughout the year and order the same quantity of everything each time, but that's not the real world. The large orders we received recently are expected to exaggerate fluctuations in gross margin with very lumpy revenue, during the first half.

Doron will explain in detail, but it's important to remember that no one quarter will provide an accurate sense of the impact of these orders on our results. This is why we are explaining our view of the full-year profit performance.

Before I turn the call over to Doron, I want to say a word about how excited we are about new technology and products we are developing. Another successful outcome of our strategy is that it has enabled us to continue to invest aggressively to maintain our technological leadership.

At Mobile World Congress in two weeks, we will be announcing the next phase of our advanced product introductions extending our multi-core strategy to deliver higher capacities to prepare for 4G advanced networks and to move forward on the evolution toward 5G.

One of the most frequent questions we are asked is about competition for the IP-20 platform. You know that it's been almost three-and-a-half years since we first introduced the IP-20 platform and you want to know if competitors have caught up with us by now.

The answer is that some have been advancing and closing the gap during that time, but we have not been standing still and we are about to increase the gap once again by building on our current success during the next phase beginning toward the end of this year.

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 fourth quarter revenue of $84.7 million represented a 7% sequential increase from Q3. As expected, our book-to-bill ratio was substantially below 1.

In addition to typical seasonality, Q4 bookings reflected the fact that orders we expected from our large customer in India were held up by the negotiation to increase the size of the deal.

Adjusted for this factor, our booking level in Q4 was in line with the expectations and we are expecting that our Q1 book-to-bill ratio will be significantly above 1, despite the fact that Q1 is also usually a seasonally weak booking quarter.

As shown in the press release, the geographic breakdown showed a similar pattern to the one we saw in Q2 and Q3, with continued strength in India, a portion of Latin America, and some improvement in North America. We had one above 10% customer in the quarter, our large customer in India.

Non-GAAP gross margin was 32.9% in Q4, down a bit from Q3, and showing typical mix-related quarter-to-quarter fluctuations and the impact of some non-recurring costs such as changing the location of some of our distribution hubs in order to be closer to our customers.

In Q4, we continued to hold our non-GAAP operating expenses steady within the $20 million to $21 million range we have been targeting.

Although for comparability reason, the non-GAAP income figures are the ones most often tracked, it's worth mentioning that in Q4, we had non-recurring other income of $1.9 million and positive impact on taxes of $1.8 million, which caused GAAP net income to reach $8.3 million, or $0.10 per diluted share in Q4.

Non-GAAP net income was $5.2 million, or $0.07 per diluted share. For the full-year, revenue declined 16% to $293.6 million, while all other metrics improved significantly. Non-GAAP gross margin increased 460 basis points to 34.5% from 29.9% in 2015.

GAAP and non-GAAP net income were nearly the same at $11.4 million and $11.5 million, or $0.15 per diluted share, respectively, compared to GAAP net income of $1 million, or $0.01 per diluted share, and non-GAAP net income of $7.4 million, or $0.10 per diluted share in 2015.

Turning to the balance sheet at year-end, receivables were $107.4 million, with DSOs of 133 days. The DSOs continue to reflect several factors including the ramp up in revenues and longer payment terms typical of certain geographic regions where revenue have increased.

At December 31, 2016, we had cash and cash equivalents of $36.3 million, and we reduced our debt by $3.3 million during the quarter to $17 million at year-end. This gives us net cash of over $19 million as well as significant unused borrowing capacity.

To give you the cash flow figures, we generated $7.3 million of positive cash flow in the fourth quarter. And for the entire year, we generated nearly $18 million of positive cash flow which we used to reduce our debt. As Ira mentioned, we received recently large orders from India.

After integrating these orders into our overall operating plan, we now feel comfortable raising our net income target for 2017 relative to 2016 from 40% non-GAAP net income growth to 50% growth, on a constant currency basis.

On our last call, we indicated that our assumption was that revenue would remain relatively flat in the area of $75 million to $80 million per quarter during 2017, except for a possible seasonal dip in Q1. We continue to think this holds true with the exception of Q2, as we indicated when we announced the orders a few weeks ago.

Assuming the customer continues to push for a very aggressive delivery schedule, we expect Q2 revenue to be substantially higher than our original expectation. These orders will also have a significant impact on gross margin in the first half of the year. The entire deal is a combination of equipment, software and services.

Not all of these elements will be delivered in the same proportion in each quarter. This means that we could see significant fluctuations in gross margin between quarters in Q1 and Q2, returning to a more normal level above 32% in the second half, assuming that deliveries to India are not stretched out.

In Q1, due to seasonal factors and the requirement to deliver to India as quickly as possible, the revenue mix is expected to be very skewed toward India. This is likely to combine with a less favorable equipment software mix due to timing issues and suppress gross margin.

Based on our current view, we don't see gross margin dropping much below 30%, but it will depend on a number of variables that are not within our control. With the high volume expected from India in Q2, we expect gross margin will also be under pressure during that period.

Finally, to summarize the overall financial picture, after two consecutive years of improving our financial condition and results of operations, we are looking forward to making 2017 the third consecutive year of improvement for Ceragon. Now, we would like to open the call to questions.

Operator?.

Thank you. [Operator Instructions]. And first from the line of Alex Henderson with Needham. Please go ahead..

Thank you. So a couple of questions, if I could just to clarify the guidance a little bit.

So when you're talking about a spike in 2Q I assume that that also implies that the revenue numbers for the full-year would in fact be a little bit higher as a result of that as opposed to the prior guidance, I believe which was flat revenues for the year; is that correct?.

Yes, that is correct..

So we should still expect revenue in the $75 million to $80 million in the other three quarters?.

Yes, I think what we expect is, let's start with the second half of 2017; there we expect to maintain the level of $75 million to $80 million a quarter, per quarter. On the first quarter of 2017 we expect to be at the low-end of the range and may be slightly lower as we communicated in the past.

And the second quarter is expected to be a very strong quarter. And as we also announced in the press release relating this deal we believe that this could boost the revenue by approximately $20 million may be $25 million relative to the regular level or the average level that we're indicating in the past..

Okay, that's clear. Thanks. Just going back to the Sprint stuff in 4Q. I assume that there is a fair amount of business behind that initial purchase that was a fairly small number relative to the scale of their facilities.

Is that the right way to be thinking about it, that's just the initial order and even though you've absorbed some of that in 1Q that there should be further ramp in that business as we go through the year?.

I think Sprint from that perspective; is a little bit more for Client Company than we see in other places.

We do expect to see regular pieces of the whole order and I think I said it less time over there a period of between two to three years, where each quarter we're getting a small piece and while it's in advance by installing the orders from the prior quarter and moving ahead. The start was in Q4 and we do expect that to continue throughout the year..

I see, okay.

And just for kind of bookkeeping purposes here, what are your expectations in terms of staffing levels, I assume it's fairly flat staffing over the course of the year therefore OpEx is fairly steady over the course of the year; is that still kind of the plan?.

Yes we intend to continue and keep the same level of OpEx as you have seen in the two recent years between $20 million to $20 million per quarter or $80 million to $84 million per year..

Okay.

And then just last one and then I will cede the floor, any thoughts on the tax rate numbers for 2017?.

I don't expect any major changes in tax rate let's not forget the entity that holds all the intellectual property of this company is primarily the Israel entity have suffered losses, accumulated losses from past years.

And despite the fact that we pay taxes in some of our Tata like subsidiaries, we don't expect a major change in tax percentages in the upcoming year..

So we're on the same dollar amount or same percentage amount?.

I expect in terms of dollar amount, I expect some increase but not a significant one to the total numbers that we hope to achieve..

Our next question is from George Iwanyc with Oppenheimer. Please go ahead..

Thank you for taking my questions.

Ira, can you expand on Latin America and just the positive trends you are seeing in Mexico versus the rest of the region?.

What we're seeing and I think I talked about it a few times.

One of the big drivers today within specific areas around the world is what I call first competitive situation for market share which usually comes up as someone defined, they want to gain significant market share within the territory, and start holding out, then you have the operators chasing them are trying to better them and do the work.

This is a situation we see in Mexico which drives large volumes in business.

If I look at the other parts of Latin America, there are big differences between the different countries, Brazil, which used to be a significant revenue generator for us because of market economy right now and other conditions, it's much slower from our perspective, also because when we evaluate specific deals in Brazil, the way we do as a strategy, they were not as profitable as we want them to be and in some places even in Brazil we said no, although it's still generating revenue.

On the other hand, we have other very good customers in some of the other countries where we work closely with and in some countries you still feel the economic pressures similar to Brazil.

But I think we highlighted Mexico specifically because of the first competition for market share which then drives network expansion which is today mainly 4G expansions or 4G advanced expansions with huge amounts of data which requires very large amounts of backhaul..

Okay.

When you look at your regional mix excluding India, do you feel visibility is improving or is it still a pretty mixed environment and what you are seeing on the pricing environment?.

First it's a mixed environment, okay. Independent by the way of the pricing issues because I think the main drivers are in the different places both local macro economics.

And I think, as I said, on the Q3 call also availability of hot cash to use because of the lower oil prices and other countries cannot buy as much as they want and we see that mainly in Africa, and some of it in places like Russia and others which is slowing down.

And which now then lowers the visibility but this is already taking into account in our plan for 2017. I don't think any of that effectively changes the price pressure picture. Price pressure picture has been here for long time and is still there and I don't think it has changed.

I think that our strategy going and to selling to best-of-breed where we can show the value and the value that we uniquely bring to the customers allows us to also mitigate some but not all of the price pressures..

Thank you. And just one last question. You have talked about TAM expansion opportunities into public safety and couple other areas.

With the product update that you are looking at, is that mostly incremental improvement and performance or are you looking at adding new functions and features that can help expand TAM further?.

We talked about expanding the TAM, the product features and the products we are putting on the table at this point is still to the same TAM that we're in, it will also expand our parts of within that TAM but not significantly..

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

Thank you. So going to India for a second, I mean it sounds like you have pretty good visibility and this is going to be confined to Q2.

But I'm just wondering if there is any potential for there to be additional orders in India in the second half or is it pretty much if recalls are needed there won't be follow-on orders?.

We do expect follow-on orders from the same customer towards the second half. And we do expect also to have a flow of orders from other customers in India which we are getting on a regular basis..

Okay, that helps. So what about this year, I just want to understand how in terms of your revenue outlook, the way you're kind of physically assuming in terms of the U.S.

business, is it going to be up tens of millions this year within that outlook or not as dramatically just any thoughts on that portion of the mix?.

As you can see the portion of revenue in 2016 was even slightly lower than what we had in 2015. We expect to actually I would say, resume the growth in revenue in North America and our target is to exceed the numbers of 2015 as a minimum..

Okay that helps. I mean can you step back again it sounds like business is going to be kind of flattish excluding India, it sounds like U.S.

is going to be up, Mexico is going to be up, just kind of recap just geographically what's up, what's down in the revenue outlook based on what you are currently assuming?.

Yes, if we go back second to our previous conference call, I think except for these big orders from India nothing has really changed in our anticipations and dimensions.

So to summarize what we said, we said within Latin America we expect to maintain the same level of business more or less and also making a conscious statement that Brazil is still weak and might be even weaker for Europe. We said that we expect I would say flattish year.

We did mention Africa as the place that we expect even further reduction in business in 2017 relative to 2016. And in APAC we hope to start seeing signs of a small growth not that big that make things change dramatically.

So all in all, what we expect is North America to be stronger than this year and this place will be probably offset by the relatively weakness in other places especially in Africa and now you can add to this equation the big order we received from India and this will probably drive the total revenue to go up slightly relative to what we are anticipating before these orders were received..

That's a good recap and just one final one if I could.

Just general I mean how do you expect cash flows to kind of call away with revenues this year, I mean should we take into kind of similarly thoroughly a portion through the year could we see back half loaded cash flows, any thought on the impact of the balance sheet in respect to the events will be helpful. Thanks..

Yes, so generally speaking if I'm trying to look at the full 2016 we still maintain our view that we are going to continue generating positive cash flow, probably in magnitude that is relative to what we have done in 2016 may be slightly lower but not dramatically lower because obviously and increasing the business especially in countries where payment terms are relatively longer, we anticipate to have a higher working capital that will definitely be on account of some positive cash flow.

If we try to look into the year, I think that we expect the first part of the year to be around cash flow breaking even and there is a good chance to be even slightly positive and we expect that we will generate majority of the cash during the second part of the year..

[Operator Instructions]. And next we will go to line of Viral Shah with Credit Suisse. Please go ahead..

Hi thank you. I have three questions. One could you help me again with size of the orders that you have received from India. The second question being what is the timeline that you are looking at in terms of the implementation of the order.

And can you bifurcate that into what percentage would be completed say in 1Q relative to what would be completed in the second Q? And the third one being can you compare this order with what order you had previously received from the same customer? Thank you..

Okay. I will try to give some color into it but not all the color because I don't want much or all the details. I think we said on our press release very clearly order size was around $60 million from that customer, with a requirement for very quick delivery within Q1 and Q2 delivering to the customer.

We do expect the conditions to do not change; we will deliver most of that order within that time period.

And again I refer you back to Doron comments, because there is all sorts of pieces there which is equipment, which is services, which is licenses, revenue recognition there is a little bit more complicated and a little bit lumpy and probably might extend a little bit longer than the two quarters.

For your last part of the question, we continue to be and receive the major lion's share of microwave backhaul orders from that customer, the same as has been in the past depending on their rates of deployment..

Can you help me with the size of the past order that you had received from the same customer?.

We didn't announce it in the past; I don't think we want to put it on the table at this point..

And Mr. Palti, no further questions in queue..

Okay. So thank you everyone for joining us on the call today. Like always, we will be glad to entertain one-on-one calls. If people have further questions by reaching out both to myself, Doron and have more detailed types of questions.

I do encourage anyone who is going to be participating in Mobile World Congress in two weeks in Barcelona, please come in to a booth and we can show you around discuss the new products we are excited about and have further on conversation face-to-face in Barcelona. Thank you everyone and have a good day..

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