Ira Palti - President & CEO Doron Arazi - CFO.

David Wishnow - Jefferies Alex Henderson - Needham and Company Gunther Karger - Discovery Group.

Good day, everyone. Welcome to the Ceragon Networks Limited Second Quarter 2017Results 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 risks associated with a decline in revenues; the risks relating to the concentration of Ceragon's business in India, Latin America and in developing nations and the political, economic and regulatory risks from doing business in those regions, including potential currency restrictions; the risk associated with a change in Ceragon's gross margin as a result of changes in the geographic mix of revenues; the risk associated with the loss of a single customer or customer group, which represents a significant portion off Ceragon's revenues; the risk associated with Ceragon's failure to effectively compete with other wireless equipment providers; 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. We are very pleased to report the highest quarterly net income in our history, if we exclude past quarters that contained non-recurring items such as one-time gains and tax benefits.

It is quite a testament to our strategy of managing for profitability, particularly when you consider that over half our revenue in Q2 came from India. We again achieved positive cash flow and continued to pay down debt. Naturally, we are proud of the financial results, but we are also proud of what this represents in the business sense.

It shows that we bring value to our customers in all regions, including the price-sensitive ones. We solve different challenges for different operators, and we do it more efficiently by reducing labor, power, rent, and spectrum-related costs, while increasing capacity to gain and serve more subscribers.

This means our customers obtain better value and we earn a profit that we can invest and reinvest in further innovation.

Clearly, the strategy we began to implement two-and-a-half years ago is continuing to serve us well, and we are targeting a 50% increase in our non-GAAP net income for this year compared to 2016 on a constant currency basis, and we believe we are on track to achieve this goal.

Our target is based on our expectation of further gross margin improvements during the second half and continuing to carefully control our OpEx. We expect to achieve this on somewhat lower revenue in the second half compared to the first half.

We continue to believe that, in current business environment, our revenue run rate should be in the range of $75 million to $80 million per quarter. This is a sort of normalized run rate for us, and we will continue to focus on achieving the bottom line by evaluating each opportunity project-by-project.

As expected, Q2 revenue was substantially above this normalized quarterly run rate. We reported US$93.3 million, which included more than $20 million of extra revenue. We recognized this quarter related to the very large orders we received from our major customer in India during Q1.

Ignoring the extra $20-plus-million from the large batch of orders from India, our revenue for the quarter was in line or slightly better than we expected.

The delayed budget approval at one customer in Latin America, and the issues in the network rollout at a North American customer did affect the quarter, but the impact was lessened by better than expected business in other areas, mainly in other parts of Latin America, including Brazil. Our book-to-bill was, of course, below 1.

But the level of booking in Q2, our backlog, and pipeline supports our expectation of continuing a $75 million to $80 million quarterly run rate. Near-term, we don't see any major changes in the overall market. In dollar terms, we continue to expect it will be flat at best this year, perhaps up a bit in terms of units.

So, to reach our goal, we need to keep winning a major share of the best-of-breed deals around the world with our superior technology and future-proof solutions and continue executing well. When we help operators address a major challenge or handle a critical pain point, we become more than an equipment vendor, we become a valued partner.

This help us gain market share over time. We are encouraged by customers' reaction to our Multicore Everywhere initiative and it gives us confidence that we remain the leaders in our space.

The attractiveness of our product goes beyond being a technically elegant solution that is built using vertically integrated RFICs and modern chipsets designed in-house. There are frankly some solutions that will provide more capacity and help deliver more services to more customers.

But what our customers appreciate about our technology is that they address their needs and consider the costs beyond the backhaul equipment alone. We solve the bigger challenge which is to provide more capacity and functionality with minimal use of valuable spectrum, tower space, antennas, labor, and installation time.

Looking ahead to the second half of the year, we expect some minor shifts among various geographies. We are working closely with our customer in North America to help them solve network rollout and expect to see a gradual increase in order from that customer in the second half.

In Latin America, we have seen the customer who we mentioned last quarter unfreeze their budget. They are coming back, but at a slower pace of deployment than previously.

At the same time, we have some additional projects from other customers in Latin America and generally improving climate in Brazil, so we expect our revenue in Latin America to be a nice improvement over the first half.

Europe also appears likely to show gradual improvement during the second half, offset by further weakness in Africa due to operators' inability to obtain hard currency, namely dollars, with which to pay.

We expect our customers in India to continue their expansion and upgrades, resulting in the continuation of business from India at a pace of around $25 million to $30 million per quarter, which is similar to the level we have been experiencing prior to the large batch of orders in Q1.

So, with this shift between the various regions, we continue to believe resumption of the quarterly run rate of $75 million to $80 million is the range we are likely to see during the second half of the year, as I noted earlier.

This geographic shift within a generally flattish market are the reason it is vital that we maintain a strong global presence and not be tempted to focus on one area because gross margin is generally higher there.

We are fortunate to have excellent, experienced people in each geography who know the operators and their unique characteristics and the requirements of the regions.

It's just not a viable strategy to wait for an opportunity to develop and then try to put a team in place, because you have to cultivate the relationship with the operator and demonstrate that you understand their needs and can deliver value, and then -- and only then you're invited to bid in the first place.

We continue to see signs of the industry shakeout we have been expecting for some time. When some of our specialist competitors scaled back their global operations to put more focus on North America to reduce their losses, we were skeptical of that strategy. Even within the specialist category, scale is important in several ways.

First, it is vital to have a global presence to be able to react to the cyclical nature of individual operators' deployments. Going after high margin business in vertical markets, makes sense, we are doing it ourselves.

But vertical markets alone don't represent a large enough market to enable microwave backhaul vendors to achieve sufficient scale to invest at the level required to compete globally. Second, scale means you can invest at a level that enables you to be a global technology leader, across all types of solutions and deployment scenarios.

Operators' challenges vary and so do the solutions. You can't be successful over the long-term with one good product. It takes a whole family of good solutions. Finally, scale means you can invest long-term in design to cost initiatives that continuously lower your product cost to keep pace with price erosion and maintain gross margin.

Once you fall behind in this area, it is very difficult to catch up. We do expect the shakeout to continue. As we've said before, it's difficult to predict exactly how and when consolidation will happen, but, as we've seen recently, a company can't continue indefinitely incurring losses or making a profit by cutting R&D.

This contributes to our confidence in our own strategy, because we expect to be able to gradually increase our share of the market by focusing on maintaining our technology leadership and design to cost advantage, so we continue to become a stronger and more essential partner to our customers.

This is also the reason we are being cautious as we evaluate potential strategic opportunities. As we continue to explore internal development projects and external opportunities, both in our current market and in adjacent areas, we want to be sure that any move we will make will be a step forward and create value.

One category of strategic opportunities we are seeing is the potential to turning smaller competitors into a customer via an OEM relationship. We have been approached by a few of these smaller competitors, spread among various geographies, who are struggling to keep up with the level of investment required.

They are struggling because microwave backhaul is something they sell as part of another solution such as point-to-multipoint systems or optical equipment. This is another example of how lack of scale is leading consolidation among vendors in the microwave backhaul market.

As you know, one of our internal initiatives is placing more focus on some of the vertical markets, particularly in the U.S. We are gaining traction in areas like public safety, utilities, and large ISPs, both directly and through channel partners.

In keeping with our objective of having a global presence, we are pursuing this vertical market initiative globally, and we see some encouraging signs in Europe and also in Asia. This vertical business tends to be lumpy, so it's difficult to track on a quarter to quarter basis.

As a baseline, our non-carrier business generally accounted for about 20% of our overall revenue when we began this initiative. We think it's generally running a bit higher now, and we believe it will continue to increase gradually, and also provide some additional diversification within the various regions.

So, to summarize from the strategic side, we continue to proactively evaluate a variety of potential opportunities as we continue to improve our financial flexibility by paying down debt and we have kept all the financial tools within reach by renewing the shelf registration.

Whether we decide to move forward with one of these opportunities will depend on many factors. As they say, "the devil is in the details". I can say for certain that we intend to proceed carefully so as to enhance the position of leadership we have worked so diligently to achieve.

We are focused on making moves that will enable us to continue to increase our net income, not just in 2017, but in future years as well. Now I'll turn the call over to Doron for some detailed remarks on our financials.

Doron?.

Thank you, Ira. Since you have all seen the press release, I'll just highlight some of the significant items. Our second quarter revenue of $93.3 million represented a 23% sequential increase from Q1, reflecting the recognition of about more than $20 million of extra revenue from the large batch of orders from a customer in India in Q1.

This puts India-related portion well above our run rate from India in the most recent couple of quarters. Meanwhile, Q2 revenue was up 33% from the second quarter of 2016. As expected, our book-to-bill ratio was below 1 in the second quarter.

Our bookings in Q2, plus our backlog and current pipeline, indicate that we should continue to expect a return to our previous quarterly run rate of $75 million to $80 million in the second half. As shown in today's press release, the geographic breakdown of revenue shifted toward India, as expected.

Asia-Pacific continues to be lumpy, and Latin America was about the same on a percentage basis but was higher in absolute terms with Brazil showing notable improvement. Europe is also looking a bit better. North America was slow in Q2, but, as Ira said, we expect to see gradual improvement during the second half of the year.

We had well above 10% customer in the quarter, our largest customer in India. Non-GAAP gross margin was 31.8% in Q2, which improved sequentially, as expected partially because, in Q2, we recognized proportionately higher software revenue from the large orders from India than in Q1.

We continue to expect gross margin in the second half to be above 32%, based mainly on a shift in geographic mix of revenue. Turning to expenses, in Q2, we continued to keep tight control in this area, with operating expenses up a bit sequentially but still within the target range of $20 million to $21 million on a non-GAAP basis.

We believe operating expenses will remain in this range during the second half. On a GAAP basis, we reported $8 million in operating income in Q2 and, after financial and tax expense; we had $5 million of GAAP net income, or $0.06 per diluted share.

On a non-GAAP basis, we reported operating income of $8.8 million and $6 million in non-GAAP net income, or $0.07 per diluted share. As Ira said, this is an achievement we are proud to report, particularly considering global market conditions and geographic mix were far from optimal.

We were able to achieve this net income by sticking to our strategy, consistently delivering real value to our customers, and winning their support as a preferred vendor. Turning to the balance sheet at June 30, 2017, receivables were $114 million, with DSOs of 125 days. At the end of Q2, we had cash and cash equivalents of $34.1 million.

We used our cash flow in the quarter, plus a couple of million in cash on hand, to further reduce our debt from $11.5 million to $8 million at the end of June. This gives us net cash of $26 million, as well as significant unused borrowing capacity.

Looking ahead to the second half of the year, we expect to resume our typical quarterly revenue run rate of $75 million to $80 million. We expect our gross margin to improve and expect it will meet our target of above 32% in both Q3 and Q4. We also continue to target substantial improvement in net income for the year.

On our Q4 2016 call, we raised our 2017 net income target to a 50% improvement over the $11.5 million we reported in 2016 on a constant currency basis. We continue to believe this goal is within our reach and we want to emphasize that net income growth remains our primary goal.

To summarize, we are looking forward to making 2017 the third consecutive year of significant improvement in our financial condition and results of operations.

We will continue to follow our strategy with an aim to continue improving our net income next year while we also continue to evaluate potential strategic opportunities that would enhance our longer-term value. Now, we would like to open the call to questions.

Operator?.

[Operator Instructions]. Our first question is coming from the line of James Kisner from Jefferies. Please go ahead..

Hi, guys David Wishnow in for James Kisner.

So you had mentioned that you're continuing to see weakness in North America on carrier spend is that the result of just one customer you’ve talked about that before as kind of working through some mergers on their side or this is a little bit more broad-based?.

Sorry, I was on mute. This is Ira. We see this mainly in one customer although we see it also in some other places. I would not attribute it to a merger or all sorts of other noises in the market.

What we see from the ground specifically is that that customer was very aggressive in their deployment plans, and in some areas they are meeting their deployment plans and in some areas they are not as quickly.

And while we look at network rollout issues, we see that the teams there are very -- working hard and diligently to make sure that they're meeting their plans. That's why we think that we will see in the second half a gradual improvement back in the North American market..

Okay, it's helpful. Thank you.

And did you guys -- do you have a sense for what the foreign currency impact was on the quarter?.

I'd say that the net impact of the foreign currency was probably insignificant to our results. If you net out all the changes in the currency both on the top-line and different cost and expenses, including the fact that we were able to hedge part of this exposure and especially the new Israeli Shekel at the beginning of the year.

The net impact is, I would say probably a couple of hundreds of thousand dollars on the low-end numbers..

Okay great.

And then one final question for me, when you guys talked about the potential strategic shift towards an OEM partnership in some of the regions is this something where we should expect if those do come to fruition to see a large spend to get up to scale in those areas or is this something where you're already all set in place, so you'd see this as just the incremental revenue with minimal associated overhead costs?.

Okay, then I'll repeat what I said because I specifically did not say large OEM. And what I said – okay, I'll say again I did not say larger OEM, what I referred to is that we do look at the industry shakeout.

And part of the industry shakeout that we do see, there are some -- by the way quite a few probably around eight or nine very small microwave backhaul vendors out there.

Mostly, they have other businesses, point-to-Multipoint, they might have optical, all sorts of other telecom equipment, usually very strong businesses in those areas, where at some point they ventured into the microwave backhaul space over the years.

As part of the shakeout, we see some of those coming to us and telling us okay, they do not want to do microwave backhaul because they cannot invest enough and keep up on the competition, and came for us to do kinds of OEM reselling agreements with us to fulfill their needs. Yes, it is a business, it's not large.

It will be factored into the numbers in some of the geographies because those vendors usually work locally in different geographies over time. So, it's not a large OEM. I do not expect a large OEM at this point.

Yes, it's an industry shakeout with many -- with some of the smaller vendors which are looking for ways to supplement their other product lines and replace their microwave backhaul as they move forward with the best-of-breed solution out there that they can offer..

Okay perfect, so this wouldn’t require require incremental overhead spending on your part to obtain that business from these smaller vendors?.

No, no..

All right. I'll turn it back. Thank you very much..

Thank you..

Thank you. Our next question comes from the line of Alex Henderson from Needham and Company. Please go ahead..

Hey, thanks. Hello, Ira..

Good morning, Alex..

So I just wanted to make sure that I'm understanding your guidance correctly.

Last year your net income was $11.5 million and you're saying your net income this year should be 50% above that still?.

Yes, Alex good morning. This is Doron, that is correct..

I'm having a hard time figuring out how you make those numbers work so, if I'm assuming somewhere between $75 million and $80 million a quarter and 32% to 33% gross margins in the back half and $21 million in profits, I am coming out with $2 million to $3 million a quarter in back half profitability, yet I would need $10 million to make $17 million which would be 50% above the $11.4 million or $11.5 million.

So can you help me understand how that math works, what I'm doing wrong?.

First of all, there is a range, and we did not indicate exactly where we think we're going to be in the range. Second is that we said more than one-time during this call that will be above 32%. We didn't put a cap on this number.

So well your assumption in what you stated is that will be between 32% to 33% there could be other scenarios that our gross margin will be significantly higher than that. And if you look back into 2016, there is actual results are showing that we can do much better gross margin.

So I think that if you will do the combination right, you'll get to the target that we are talking about..

So, am I correct in assuming $21 million in OpEx? Can you also said on the interest line as you've been paying down the debt should we be -- should we be using as an interest income net in the third quarter?.

I think that the recent finance expenses that you have seen we probably go down slightly towards the second half of the year because we continue reducing our debt. Obviously this is subject to currency fluctuation that is also included in this amount. So, I think we should expect trend down..

So like a $1 million, $1.02 million somewhere in that range quarterly?.

Alex, if I would wanted to give you a very specific numbers regarding this item is I would have probably done that on the call already. I think that at this point we are talking about the trends and that is what we're willing to say..

Okay, which again good for trying right?.

So we are always trying and in most cases we are successful that is very nice..

Okay, so just as I going out and looking at the numbers for 2018, I know you don't want to give guidance for that but it sounds like you're thinking of a range of $75 million to $80 million is kind of a normalized run rate and baring major additional contract wins or major OEM wins that's kind of the environment that we're in 2018, is there any reason to think that the change in the revenue trajectory beyond what you're suggesting here in the back half?.

Are you talking about the back half of 2018?.

Saying in the back half of the 2017, you’re saying $80 million, $75 million to $80 million in revenue run rate sounds like you kind of in that general ball park continuing in 2018 is that kind of the right way to think about things?.

Yes, I think at this point this is the -- I would say the best estimation, let's not forget guys the visibility in this business is very low. Yes, we have long-term relationship with customers and we know that orders will come.

But when exactly and how it's going to be kind of spread over the year, I think the big order from our Indian customer in Q1 is just a great demonstration of how the visibility is not the strength of this business.

So overall after this long caveat, I think that we should think about 2018 at the same run rate maybe, maybe, maybe a slight increase, very slight single-digit assuming we continue we're successful in taking bigger piece from initiatives like the OEMs that Ira mentioned and others..

So to the extent that India falls back opposite as a percentage of business, I would assume that that would also in mind suggested that higher gross margin run rate also persisted at that level, so unless India pops in with a big chunk of business your margin should be more along the lines what you're looking in the back half as well; is that again the right way to think about it and if you get big order from India margins come down but revenues go up and then [indiscernible]?.

Yes, that's the concept, we've been saying that all along geography is big I would say factor in terms of showing the -- in terms of the gross margins. So if India goes down, gross margins will go up.

I just want to mention Alex that eventually what we want to achieve is the maximum absolute dollar value of gross profit with the minimum increase in OpEx that's the exercise and this is very simplistic but this is exactly what we're doing in the company..

Just one last question, I forgot to ask, so the OEM contracts I would assume would come in more of a wholesale price were little lower gross margin but no OpEx costs associated when if you do to sign an OEM? Is that fair way to think about?.

Think of it this way it's all probably factored into the run rate. I don't expect the OEM to be large numbers what we're doing it's here and there but remember we are looking at the smaller players within the space..

Thank you. [Operator Instructions]. We have a question from the line of Gunther Karger from Discovery Group. Please go ahead..

Yes hello, other than question [indiscernible] you're well on doing an excellent job certain for a period what you have one question is did you have any comments relative to the Eastern European area perpetually including the Russian Federation geography, any comments on that respect?.

Good speaking to you Gunther. You asked about Russia and Eastern European, at this point this is one of the areas where we see a relative weakness.

Although we started seeing some signs of because of the currency changes, prices coming out of there but from our perspective at this point is one of the areas which is a sub-region of Europe from our perspective which is showing relatively weakness..

Thank you. At this time, we have no further questions in queue. Please go ahead..

Thank you very much for joining us today and being on the call. We would love to have also one to one conversation with each and every one of you, if you want further question and further details both on the phone and when we travel hopefully on the face to face meeting. Thank you and have a good day..

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