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

George Iwanyc - Oppenheimer and Co. Inc. Alex Henderson - Needham and Company LLC Gunther Karger - Discovery Group.

Good day, everyone. Welcome to the Ceragon Networks Limited fourth quarter and full year 2017 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 risks associated with a decline in revenues due to our focus on a single market segment; risks relating to the concentration of Ceragon's business in certain geographic regions such as India, Latin America and in developing nations and the political, economic and regulatory risks from doing business in those regions, including potential currency restrictions; risks associated with a change in Ceragon's gross margin as a result of changes in the geographic mix of revenues; risks associated with the loss of a single customer or customer group, which represents a significant portion of Ceragon's revenues; risks 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. It's now my pleasure to turn the call over to Mr. Ira Palti, President and CEO of Ceragon. Please go ahead, sir..

building a better mousetrap and keeping tight control of costs. We are planning our 5G generation platform chipset to support full 5G requirements, including all network intelligence capabilities. It will again widen the gap between us and our competitors.

Our design-to-cost capabilities, enabled by our complete vertical integration, is going to enable us to raise the bar much higher with our next generation platform. With lots of incremental improvement in between now and then, we think there's been some confusion about what capabilities can be provided in what time frame.

So, we lay out some of this for you in some new slides that will be available in our investor presentation posted on our website after this call is over. How we plan to offer these capabilities is sensitive information.

We operate in a highly competitive environment and, while we want to be as transparent as possible to our investors, we are not willing to teach our competition what to do via our investor communications.

To summarize, the message today is that we have a very robust technology roadmap that anticipates the requirements of full 5G networks and we are improving our go-to-market capabilities and capturing a greater share of the market. 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 fourth quarter revenue of $86.7 million represented a 14.1% sequential increase from Q3. This revenue is above even the high end of our indicated run rate, mainly due to receiving large orders from India at the beginning of December.

I want stop here to make a point about quarterly lumpiness. It's a characteristic of our business. It's not something we can avoid or fix.

The fact is that a very minor timing difference in orders or revenue recognition can dramatically affect the optics of a single quarter or even the annual comparisons, but these timing issues have little or no significance with respect to business conditions, the general health of the company, or our prospects of the farther future.

This is why we insist on the importance of measuring over a long period of time. Returning to the analysis of Q4, we had two above-10% customers in the quarter, both in India. Some of the developments in the various geographies that Ira has been talking about can be seen in the geographic breakdowns for Q4 and for the full-year 2017.

India was 34% of revenue in Q4 and 39% for the full year. As we've said in the past, it's difficult to define what is normal for India, but we don't think revenue from India will be as high in 2018 as it was in 2017. Having said that, we expect India to still be a significant percentage of our total revenue.

The other thing to note is that revenue in North America was up significantly to 14% of revenue in a very strong quarter in Q4. North America was also part of the reason for our record bookings in Q4 with the highest level of bookings in that region for any quarter in 2017. All this bodes well for our ability to target higher gross margins in 2018.

Non-GAAP gross margin was 33.8% in Q4, well above our guidance of above 32%, but lower than Q3, which we explained was not a sustainable level.

As we look at gross margin for 2018, we think that, for the year as a whole, we will be above 33%, but Q1 could be a little bit below that level because India will still be a very large contributor to Q1 revenue due to the large batch of orders we received in December, so around 32% or slightly above is still the right way to think about Q1 of 2018 and some improvement in subsequent quarters.

Turning to expenses, at $23.1 million, Q4 non-GAAP expenses were quite a bit above the high end of our $20 million to $21 million range. This abnormally high level was mainly because the extremely strong bookings drove our provisions for incentive compensation significantly higher and, to a lesser extent, because of salary-related adjustments.

For all of 2017, expenses were at the high end, but still within the range we were targeting on an annual basis. Looking ahead to 2018, we remind you that we expect the strength of the Israeli shekel to create a headwind of around $2 million on our OpEx for the year as our previous-year hedges rolls off.

In addition, we expect to have a lower amount of grants coming in from the Office of the Chief Scientist in Israel. In order to maintain our high level of R&D effort, this means we will have to see some increase in R&D expenses.

By becoming more efficient and reallocating some resources, we think we will be able to reduce sales and marketing expenses slightly in 2018 versus 2017. Taking everything into account, we think $21 million to $22 million per quarter on a non-GAAP basis is the right range for operating expenses in 2018.

On a GAAP basis, we reported $7.2 million in net income compared to non-GAAP net income of $4.1 million.

That's mainly due to changes in certain pre-acquisition indirect tax liabilities pertaining to the acquisition of Nera as well as non-cash direct tax adjustments that were reported in our GAAP figures under other income and tax benefits respectively.

The way to think about non-GAAP financial expenses going forward is that, as long as foreign exchange levels do not fluctuate more than planned, we will have lower financial expenses in 2018, primarily as a result of paying off our debt on the revolving credit agreement.

However, in the future, we intend to use our borrowing capability under the revolving credit agreement as one of our business tools and may show borrowing on our balance sheet and increased interest expenses from time to time if we have higher short-term working capital needs.

Turning to the balance sheet, at December 31, receivables were $113.7 million, with DSOs of 125 days, returning to more normal levels after we collected the large payment from India as expected. At the end of 2017, we had cash and cash equivalents of $25.9 million, which is also our net cash compared to $19.3 million of net cash at the end of 2016.

This leaves us with a $50 million of unused line of credit. With our strong balance sheet and borrowing capacity, we don't see any need to access the capital markets in the foreseeable future.

We intend to keep the shelf registration in effect by renewing it periodically, so that we are in a position to make a large, bold move if and when we identify one that will create value.

To summarize the outlook, Q1 is usually seasonally softer, but due to Q4 2017's strong booking, we think we can have Q1 2018 revenue toward the high end of our current $75 million to $80 million run rate.

We expect around or slightly above 32% gross margin and OpEx at the $21 million to $22 million range, which is the quarterly range we expect for the entire year. Looking at the full year, we are currently assuming that we will continue to cruise along somewhere around the $325 million average of recent years that Ira spoke about.

As we mentioned, we see some opportunities for upside later in the year. As we get deeper into 2018, we are hopeful that we will be able to raise our quarterly run rate target to something like $80 million to $85 million for the back half of the year, but it is too early to have enough visibility to do that now.

We also remind you again, that individual quarters can be outside the assumed run rate. It's simply the nature of our business. We believe gross margin for the full 2018 will be above 33%, assuming no major shift in geographic mix relative to our current plans.

We are heading into the year expecting a total amount of around $2.5 million in currency headwinds only because of the Israeli Shekel, which is the equivalent of $0.03 per share. Nevertheless, we are challenging ourselves to execute extremely well and to report a fourth consecutive year of net income growth.

At this point, we believe that it is possible for us to achieve a small increase in net income in 2018 that would not be as small if it was currency adjusted for the Israeli shekel impact. Now, we would like to open the call to questions.

Operator?.

Thank you. [Operator Instructions] And first, we'll go to the line of George Iwanyc with Oppenheimer. Please go ahead..

Thank you for taking my question.

So, Ira, when you look at the overall market in 2018, are you anticipating a decline in revenue again?.

I think that if we look at the numbers, I think I indicated just the opposite.

I think what I indicated that, if we believe that during 2017, we were at the $75 million to $80 million range, I think both myself and Doron, we're saying that we'll be at the high end of that range and, if not, a little bit above that and maintain the yearly run rate of around $325 million.

And I think this is a good achievement even though we think that we'll see a mix change, a little bit more in the other regions. And this is specifically, as I said, we are gaining market share and taking advantage of our best-of-breed products across the world to be able to do that.

Yes, the overall background market will probably decline a little bit in 2018. And I think we will make the performance of also increasing our bottom line as well during the year..

George, this is Doron. I would just like to add one thing that is more on the financial side. We're trying to emphasize that. And I think, sometimes, it's very hard to understand, obviously, if you're not within the company. We could end up Q4 with $5 million or $8 million lower, but that would not have changed the trajectory.

And the trajectory we see is growth in our business. Will it eventually create a situation where, in 2018, we'll even exceed the numbers of 2017? Yes, it could happen. But, once again, sometimes it all depends on the timing of a specific order or certain revenue recognition terms that impact this result.

So, I think the message is the business is healthy. We think that the demand, at least for our solution, is improving and increasing. And eventually, we believe that the average that we have seen of $325 million as an average of the last three years can be sustained and we hope even to do better, but this is yet to be seen into 2018..

So, two follow-up questions on that.

The type of seasonality that – when you're looking at that $325 million to $330 million type of annual number, is it heavily first quarter and fourth quarter or do you see a pretty stable year going forward from quarter to quarter?.

At this point, because of the tailwind that the – strong booking of Q4 is giving us, Q1 going to look relatively less seasonal than what we were used to in previous years. So, I believe that between quarters, you won't see big fluctuations. But as I said, it's under a big, big caveat because you know that we have limited visibility August.

Obviously, now it's better because of the strong booking of Q4, but I still cannot comment with that level of confidence about the second half of the year. Generally speaking, we hope to see lower fluctuations. But as I said, this is not necessarily the nature of the business..

Okay. Now, I know you see an earlier contribution from 5G opportunities with some early spend starting to already happen or happening soon.

How much of that is embedded in a 2018 upside opportunity and is that more of a 2019, 2020 type of market catalyst for you?.

Depending on, again, how we see the 5G evolution happening, some of it is baked into our 2018 numbers. But, remember, what I said is that operators out-planning for 5G. And today, they're looking at 4G gigabit – 4G LTE gigabit capabilities, which are very close to the 5G capabilities and you see a transition within the operators.

So, it's baked into our numbers for 2018, but it's part of the potential growth as we move forward into 2019 and 2020. And it's really the hand-in-hand going of people deploying backhaul, densification, hyper-densification and slowly shifting into 5G total type of trials.

From a technology perspective, we believe in an evolution which puts pressure on the networks. And that pressure is already there now, with some of our customers which, in their thinking, need to build the backhaul network to support 5G equipment and will start being deployed in 2019 and 2020.

So, it's [indiscernible] perspective, it's part of why we believe that we are very strong in the market and can slowly take market share..

Okay. So, one last question and I'll turn it over to someone else.

Your market share comment, are you seeing that primarily from other merchant suppliers? Are you also seeing it at some of the Nokias and Ericssons of the world? And with that as a lead-in, how do you look at the competitive landscape right now?.

We think we take market share from all of them, mainly from the specialists, what you call merchant, but also from somewhat the bigger guys in some places. Now, let's address it again. It's a slow market share that we are gaining.

It's very hard to judge the short timeframe, but I think I indicated ten new customers and then I'm getting calls from tier one customers coming to help us with best-of-breed. All of this will be translated, over time, to gradual gaining markets out there. You asked about the competitive landscape.

I think all the specialists around us are weakening because they don't have neither global reach nor the technology in place and are trying to play catch-up, which is hard for them. And I think that also, from the very big guys, we do see competition and face a tough competition.

But I think that, from that perspective, we do have an advantage because, if I look at the big guys right now, and you know the numbers, their focus is probably elsewhere and not on the backhaul. They need to compete on the run and win on the 5G radio access network first. So, it gives us also an opportunity to open the gap again against them..

Thank you..

My next question is from Alex Henderson with Needham. Please go ahead..

A lot of material in the call today. So, I guess, there's a couple of pieces that jumped off the page at me too. First off, ten new customers is a pretty big improvement over the course of the year.

Do you expect to be able to achieve that level of new customer additions, again, in 2018?.

Probably yes..

And then, the second one that jumped off the page was two new relationships without indicating what kind of relationships we're talking about. Very cryptic. Lack of detail on that.

Can you give us a little bit…?.

I'll give an insight on that. And that's on the top there. We said it's part of the go-to-market strategy. Go-to-market means ways to do distribution and ways to reach the customers.

When we announced them – I'll get into the details – but it gives us the channels to enhance those sales and touch on customers in places where it's been very hard for us over the last few years..

Is it reasonable to assume that – go ahead..

Sometimes because of the type of the customers, sometimes because of geographies and helps us in those areas..

Is it reasonable to think that that's to reach in the non-telco segments of the market?.

Some of it is telco. Some of it is non-telco..

I see..

It's both..

Going back to the outlook, certainly, the shekel is a big headwind, but the other side of the coin is it does look like your balance sheet has improved substantially.

Can you us a little bit of guidance on the interest income line, where that starts the year and the tax line, what we should be thinking there?.

As I said, on the financial expenses line, we do expect some sort of reduction relative to the amounts we saw this year. Let's not forget that the way we classify our financial expenses, this line also includes commissions and fees we pay for performance guarantees and so forth that are an integral part of our business.

So, we expect a modest improvement relative to 2017 of approximately a couple of hundreds of thousand dollars relative to 2017. On the tax line, I think we will still maintain the level of $2.5 million to $3 million of taxes non-GAAP that represent more or less our cash-out in terms of taxes on an annual basis.

I don't think we should expect, at this point, any significant change there..

So, just to be clear, when you say a couple hundred of thousand improvement, I assume that you mean from the $1.1 million down towards like $950,000 expense on a quarterly basis, not the full year number?.

I'm talking about a couple of hundreds on a full year number. So, any number between $100,000 to $150,000 on a quarterly basis, assuming we average everything out and we don't take into account that there could be some fluctuations, that would be the right assumption..

I'm sorry.

So, you're saying from $5.889 million, taken it down by a couple of hundred thousand on a full year basis?.

Yes..

I see. Okay. Going back to the 5G question, it sounds like you're changing your discussion here considerably. In the past, you had said 5G was a 2020 event. You had also talked about the significant new radio technology that you expect to have ready for that when that market materializes in 2020.

Now, you seem to be talking about pressures on the network causing people to add capacity in anticipation of more volume, of traffic.

Without necessarily being directly related to major deployments, but more of in a point-to-point here and piecemeal kind of deployment, is that what I'm hearing you say because I'm a little confused by why the timeline has accelerated so much?.

The answer is yes. I think that's what you're hearing. And I think that's what we're hearing from our customers. We went in exactly with that thinking, 5G is a 2020 event.

But when we started talking with the customers, we started telling us, oh, okay, yes, it's end of 2019, 2020 event, but we need to deploy 4G gigabit LTE now in the network, we need to anticipate, we need to densify now, we know 5G will be some kind of inhibition overlay in different places. So, that's what we're seeing from the customers.

The customer that's approaching and walking with us, it's on their plans. They say that there will be significant 5G run equipment before 2020. Probably not, but we started seeing the pressure from people saying, okay, this is coming around the corner. We have things between now and then to do around 4G gigabit LTE. We need to densify the network.

They need to do a lot of things. And as we see, both of those requirements on the table and some of the way people think about our product and our capabilities today to deliver capacity in very cost-efficient and value-significant way are on the table..

I see. I'll cede the floor. Thanks..

Thank you, Alex..

And next we'll go to Gunther Karger with The Discovery Group. Please go ahead..

Good morning. First of all, congratulations. Excellent quarter and outstanding year. And especially, the third year of executing your original plan. That' actually remarkable in today's environment. And the second is the question.

Do you see any inroads into your business on the HTS side of your satellites?.

Gunther, can you repeat because I didn't hear your last part of the question.

Inroads into?.

I'm sorry. We missed that.

What was that again, sir?.

Inroad into?.

And number two, with the advent the HTS, the high-throughput satellites, and some aspect in that area of backhauls and satellite assistance [ph], do you see any inroads from that into your business?.

The answer is no. Let's remember – and the reason I'm saying, though, is let's remember that the need for capacity grows all over the place at the same time. So, when we are delivering much higher capacities, I would say part of it Italy [ph] is the urban, sub-urban and rural areas.

Satellites are providing capacity in the remote areas in the same way that the older satellites were providing very low throughput to those very rural area. The high-throughput satellites will do exactly into those areas and increase the capacity. So, in a way, everything grows. Yes, all the technologies need to grow in parallel..

Thank you. Good luck..

Thank you..

Mr. Palti, no additional questions..

So, I'd like to thank all of you for being with us.

Yes, it was a little bit off a longer call today, but we felt that we needed to, a little bit, elaborate on our successful 2017 and the results and where they came from and a little bit give a heads up on where we're heading both in the go-to-market and the technology sections as we head into 2018 and 2019 and beyond as 5G starts to appear on the horizon.

Thank you very much, everyone. Please feel free to call us and have one-on-one calls for further elaboration and we'll be glad to talk. Thank you..

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