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

George Iwanyc - Oppenheimer Alex Henderson - Needham and Company Michael Stager - Odian Capital.

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

Today's call will include statements concerning Ceragon's future prospects that are forward-looking statements 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 the decline in revenues due to our focus on the single market segment; risks relating to the concentration of Ceragon's business in certain geographic regions such as India and other developing nations, political, economic and regulatory risks from doing business in those developing regions, including potential currency restrictions and fluctuation; risks related to our abilities to meet the demand of our products due to shortages and raw materials, including certain passive components; risks associated with a change in Ceragon’s growth margin as a result of changes in the geographic mix of revenues and/or as a result of increase in cost of raw material, including certain passive components; risks associated with the loss of 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 that 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 obligations to update any forward-looking statements. Ceragon's public filings are available from the Securities and Exchange Commission's Web site at www.sec.gov or may be obtained from Ceragon's Web site at www.ceragon.com.

Also today's call will include certain non-GAAP numbers, for 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 our host, 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 strong second quarter results on top of a very good first quarter. We were above our quarterly revenue run rate in Q2 as we shaped a lot of the business we booked in Q4 and Q1.

Our gross margin was better than expected and we reported a sequential increase in net income. [Indiscernible] revenues are slightly above the first half of 2017 and strong bookings in the second quarter continued to put us on track to maintain our quarterly revenue of $80 million to $85 million during the second half of 2018.

More important, GAAP net income in the first half showed a nice increase over the first half of 2017. This is a more impressive achievement when you consider certain sectors we have been dealing with, such as the component shortages and currency headwinds.

We believe that we can continue to target an increase in net income for the year even with these external factors, and we are increasingly optimistic about the long-term outlook as we see the competition continue to weaken and we continue to gain market share. From the business perspective, Q2 represented more of the same.

As we benefit from operators challenges in addressing the data explosion in a highly competitive environment by upgrading, intensifying and optimizing the networks. And as they plan and implement, the journey on the road towards 5G deployments during the next several years.

Specifically in Q2, we saw similar market conditions to Q1 in most regions, further indications that we are gaining market share and continuous good execution on our part, including and managing outside factors such as the continuing component shortage.

In Q2, we continue to see strong demand for all outdoor solutions in India as we serve both the challenger and the large incumbent.

To give a little bit of color on India, I'll refer to a recent article in TeleGeography, which talks about Bharti Airtel, India's largest mobile operator in terms subscribers and their plans to deploy 10,000 new mobile sites across the state of West Bengal as part of what they call, Project Leap, a network transformation initiative.

The article also discussed Airtel’s plans to deploy 3 5G massive MIMO technology in Kolkata to offer superior experience to customers. This article could also be considered a report on some of Ceragon's activity. Since we are the micro wave vehicle vendor to Bharti Airtel in a significant number of circles, including those mentioned in the article.

Project Leap started in 2016 and we have been working with them on this and other projects, which will not be fully complete until late next year. As we discussed on our last call we estimate that our share of the best of breed market in India is probably close to 50%, owing to our all other solutions we introduced several years ago.

This has enabled both the challenger and the largest incumbent to launch 4G on a very, very large scale, while dealing with lack of real-estate spectrum, expensive power and high price sensitivity for the whole solution.

Now we see additional opportunities developing in this hyper competitive environment as Vodafone India and Idea appear to set to merge. They have recently received most of their necessary regulatory approval as they are being tied-up in the process of 16 month.

The combined company will become India's largest telco with over 400 million subscribers and the reported 37% revenue market share. In this three observers note that the merged company Vodafone Idea is vulnerable to market share losses given that both its major competitors are ahead in network investment to accommodate more data.

Based on our contact, we understand that they walking on very significant network upgrade plan. And given our leadership in India for years, we believe we are well positioned to participate.

With the advantage of our all other solution, we could expect to play a much larger role with the combined company than we have with either of them separately in the past.

Operators facing network upgrade and densification challenges are attract to our all outdoor solutions, because they have a smaller footprint, consume less power and are much simpler and faster to install.

So with the third large competitor fighting for subscribers, we expect the region India to remain a strong source of demand for the next couple of years.

As noted on our last call, it appears there’s some of the same dynamics in North America; although, the rational for the merger between T-Mobile and Sprint is to create a disruptive challenger, not to fight one.

Assuming the deal closes as expected, we believe we are very positioned to take advantage of the aggressive spending on Gigabit LTE and 5G from what will be our largest U.S. customer. In the mean time, spending by both parties to continue to be constrained, more so at Sprint than a T-mobile and it is likely to remain so until the merger is complete.

So our near-term expectation assumed very little incremental revenue from this source, while long-term we continue to view the combination as a positive for us. The report from Asia Pacific is a good one and this region continues to be a source of current strength to us. Here we’re continuing to gradually gain market share.

For example, in one of developed countries in the regions, we have been doing very little business with one of the large operators, because have been persuaded to grow with low-priced good enough solution. Now they appear to be reconsidering that approach and we see a potentially large best-of-breed opportunity developing.

This is an example of why we say the market is gradually moving in our direction, because operators are finding that good enough solutions really aren’t adequate good enough any longer.

When you consider the full array of challenges of close spectrum resources, tower space, power consumption and the time and expense of future upgrades, they immigrate towards our solution. We mentioned on our last call that we began to see signs of pick up in Africa as one of our large multinational customer has resumed investing in this region.

Last week, we issued a press release with more details, including that they received orders totaling over $7 million from this customer so far this year, and describing the unique challenges that make their existing solutions from competitors any adequate to the test.

They are replacing the current equipment we served on IP 20 platform that offer the added advantages of being able to review existing antenna, save on power and conserve expensive real estate for future growth. This is an excellent example of the fact that we don't need to wait for 5G to drive demand to our solutions.

Our ability to address the unique challenges is enabling us to gain share even when immigration is from 2G and 3G to 4G today. Business in Latin America remains steady.

In addition to supporting existing customers’ network extensions upgrade and densification programs, we are gradually expanding the best-of-breed portion of the market, and in turn our overall share of the backhaul market.

As we have noted before, a customer was the best-of-breed buyer in one region may take a price-only good enough approach in another region. This was the case with one of our Latin American customer where they recently came to us in a region and have been buying a lower price solution after being dissatisfied with the performance.

In terms of new customers, we recently received our first order as part of our indirect participation, and this is a consortium that successful bidder on government sponsored project to bridge the digital divide in rural areas in Latin America. We believe this project will begin to contribute to revenue beginning early next year.

Turning to vertical markets. We see a growing pipeline of projects and potential opportunities related to non-traditional service providers, maritime services, public safety and defense. Vertical markets continue to be an area of focus for future growth and diversification.

Looking at the long-term outlook, we are increasingly optimistic about 2019 and beyond. We are gaining confidence in our assessment of the markets and the suitability of our solutions. We certainly expect to benefit from immigration to 5G no questions about it. But as we have noted before, all the industry height is confusing a lot of people.

For those of you trying to disclaim the immediate impact of Ceragon from some of this announcement about 5G commercial service going live in certain cities and plans to spend several billion dollars on 5G radioactive network, let me put it plainly. There is probably isn’t any immediate impact specifically related to this development for us.

A lot of this is positioning for marketing purposes. But meanwhile, we have already begun to benefit from operator plans to deploy 5G because it's a process not a single event.

As we have noted before peers are faced with the challenge of figuring out how they will provide vastly greater network capacity to accommodate all this billion of things generating data traffic while also conserving scares space and extensive resources like spectrum, tower space and power.

Operators must begin now to modernize the existing network in phases over several years in order to have a full 5G network at scale by the time it's needed. This is why we are seeing increasing demand for future proof and scalable cost effective to operator solutions, using both microwave and millimeter wave spectrum.

The high-value we provide customers by offering all these capabilities in a variety of configurations regardless of speculum is the reason we are gaining share.

The ever-increasing complexity of planning and deploying a backhaul network is another reason we believe this process will continue for several years, even among those operators who have already begun. As we tell our customers, the future is closer than you think. 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 $88.3 million represented 6.1% sequential increase from Q1 reflecting the typical seasonal pattern, as well as the generally stronger bookings during the past several quarters.

We had above 10% customers in the quarter both are large customers in India, reflecting a continuation of the intense competition among operators that continues to drive network spending. The continuous strength in India is also demonstrated by the geographic breakdown with India accounting for 47% of the total revenue about the same as in Q1.

Non-GAAP gross margin was 32.6% in Q2 lower than Q1 but still higher than we expected. As you may recall, we thought gross margin could declined to 31% in Q2 with such a strong presentation of business in India. Eventually the portion of revenue from India was lower than our expectations and we are very pleased with the 32.6% for the quarter.

The slight sequential decline from 33.2% in Q1 reflect the more normal mix of equipment and software. We had an unusual amount of higher margin software in the revenue mix during Q1.

It also bears repeating that we continue to experience the effect of the ongoing passive component shortage, which is having an impact on our COGS and costing us around 100 basis points of gross margin. So far we have been able to meet our delivery commitments, but only as a result of paying [indiscernible] prices for these components.

We continue to assume the shortages will continue through the end of this year and currently, we estimate that this issue will increase our cost of goods sold by more than $3 million in 2016, marking some of the cost improvements we are making and will likely cost us about 100 basis points of gross margin for the full year.

As I noted, our geographic revenue mix was better than expected in Q2. And based on the booking trends in our pipeline of potential business, we believe we can achieve gross margin above 33% during the second half of the year. Turning to operating expenses.

Non-GAAP OpEx of $21.7 million was in line with our expectations, and we continue to expect OpEx to remain in the range of $21 million to $22 million per quarter this year, probably towards the high-end of the range as we continue to invest in maintaining our technology leadership and variable expense increase along with higher volume of business.

Our financial expenses were higher than expected again in Q2. This time there were several reasons, including the continuously growing strength of the U.S. dollar relative to all other currencies cost to absorb higher expenses from exchange differences resulting in a negative impact on hundred thousand dollar.

The sequential increase in bank commissions primarily related to letter of credit and bank performance guarantees that are required for a big portion of our business with operators, more business is good but it also means more fees.

And finally, the significant increase in LIBOR against the dollar also had an impact, because our factoring and LT discounting fees are LIBOR based. It’s important to note that current exchange rates were a big factor in Q2.

So looking forward, our analysis indicate that assuming no further major fluctuations in exchange rates, we can expect financial expenses to decline from $2.6 million in Q2 to around $1.5 million by the end of the year as some of the bank guarantees roll off and we expect less discounting receivables as some customers completed projects.

It's also worth noting that it’s difficult to predict the quarterly run rate for financial expenses, because they can vary according to the factors just discussed, which are beyond our control.

While we wanted to explain these financial expenses, the most important point is that after taking all this into account on a GAAP basis, we reported $3.2 million in net income and non-GAAP net income of $3.8 million. This is a very good result and what we are managing in our business toward. Turing to the balance sheet.

At June 30th, receivables were $118.5 million with DSOs of 129 days. We generated $3.4 million of cash during the quarter and we continue to expect that we will generate substantial positive cash flow for the year as a whole. We have a very strong balance sheet.

At the end of June, we had cash and cash equivalents of $29.4 million with $40 million of unused line of credit. To summarize the general outlook, we continue to have enough visibility to expect our quarterly run rate to be between $80 million to $85 million for the next several quarters.

We are targeting above 33% gross margin during the second half of the year, and we see operating expenses continuing in the $21 million to $22 million per quarter range. So we continue to target an increase in net income in 2018 based on certain assumptions about factors we cannot control such as ForEx.

If these factors are in line with assumption, we would expect this to be the fourth consecutive year of net income growth.

Looking ahead to 2019, our preliminary view is that we can achieve further net income growth through a combination of more of this top line growth and slightly better gross margin due in part to a more normal situation for passive components and better revenue mix with continued focused and on tight control of OpEx.

We continue to have confidence in our strategy and our ability to execute within the balance of what we can control. We believe we are well positioned as the leader in the most attractive portion of the market, and we remain focused on delivering net income growth over the long-term.

We look forward to seeing some of you at the Oppenhiemer Conference in Boston tomorrow, and we look forward to speaking with you if you’d like to discuss some of the things we talked about on the call today. Now we’ll open the call to questions.

Operator?.

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

So it sounds like your visibility into 2019 is starting to improve a bit.

How much of that is just continuing momentum in the current trends and how much is the start of some 5G contribution during that part of the outlook?.

As I said on the call, most of it is continuing from the stuff that we think today, but let's remember again, it's a mixture. But I don’t see the step function happening as a step function, it's a continuing.

What we see operators doing is planning for 5G, and already starting and optimizing, and densifying the network towards that goal with the requirement of wireless backhaul on those networks. I assume we’ll have very little 5G base stations on our network next year, if any at all, except for experiments and testing we’re doing with certain operators.

But we’ll see lot of 4G Gigabit LTE type of base stations, which is the confusion between now and for 5G somewhere down the road towards 2020, 2021..

Now the positive growth that you’re anticipating next year, do you expect the market to grow as well, or do you feel that the best of breed portion is growing faster and you’re picking up share as well, that’s where the improved outlook is coming from?.

I don’t think the market overall will grow next year if then by very, very low percentage points. But let’s remember that within that the best of breed is growing a little bit.

And more importantly within the best-of-breed because we lead the all outdoor change, disruption, revolution out there, where we are the largest provider of all outdoor solutions. This enables us to take share from our competitors within the market. Now again, not in large quantities but as a gradual picture, it's a very, very good move for us..

So that’s equally true for 4G and 5G..

Yes, equally for 4G and 5G..

And then just one last question for you, Doron. With the current supply chain tightness and FX headwind.

If those continue, how much of -- anyone with that be on 2019, would that cap growth in anyway?.

It’s hard to tell. I usually doesn’t -- I really don’t like to give prediction for ForEx, because I think even the best experts in the world find it very hard to give predictions. What I would say is that the value of the U.S. dollar in the last couple of months has, I would say that trend -- we think that will stop at a certain point of time.

But if this continues in the same pace, we will probably find ourselves in a situation where our quarterly finance expenses will be above $2 million a quarter. But this is just a guess assuming the same pace of the U.S.

dollar strengthening against all other currencies, which I don’t think it’s a very good guess because of all the factors I mentioned..

Doran, can I add to that, that probably if this continues into next year, we’ll have a balancing effect also, because some of our expenses are in other currencies, which will increase when they are hedged this year and next year probably, it will be the opposite effect we are not gaining from this year.

So it might be also balancing effect on next year..

Our next question is from Alex Henderson with Needham and Company. Please go ahead..

I just want to just go back to that discussion we were just having. So the shekel is down 6% during the June quarter, and stand at rather 3% here so far in the September quarter.

And if we assume flat exchange rates at that level, yes, that might impact your interest line negatively against those hedges that you put in place at the beginning of the year.

But won’t those fall up, fully out assuming a flat exchange rate into '19, therefore, brining your interest expense line down to 1.5 or less in '19 quarterly?.

Alex, I think we need to distinguish between two kinds of hedging, and one is hedging our cash flow. All the results of hedging our cost cash flow -- this steady cash flow primarily Israeli shekel of the R&D expenditures, facilities and so forth, all the results of this hedging are part of our operating expenses.

And for now, this exchange rate or effective exchange rate is fixed, because as I explained in the past the budget -- for the part of the cash flow we are hedging, we are doing the hedge for the full-year. We don’t want to deal with any fluctuation and this is why we do that.

So in terms of the impact on the OpEx, the positive impact on the OpEx of the higher exchange rate between the dollar and the shekel will be effective and reflected in our OpEx only next year. The s that you see in the financial expenses is another type of hedge where we hedge our balances.

And in that case, the way we do it is on a quarterly and even sometimes on a monthly basis. And this is why eventually it all boils down into what would be the fluctuations and how far ahead we’ll be able to anticipate this fluctuation, and do the hedging in the way we believe is the right one for the balance sheet..

So if we assume a flat, what would be the run rate -- if stays exactly or flat exchange rates across the board, what would be the run rate level? Is it 1.5 or less?.

The answer is yes with one caveat. We will go back to 1.5 probably in Q4, because in Q3 there is still, I would say, high level of performance guarantees that are provided to our customers for performance or receipt from our customers as a mean of payment and that we eventually discount them.

And I think the current skew of the commission will only go down to Q4..

The second thing I wanted to talk a little bit about was some of the new technology you've got coming down the pipe. There is a broad perception out there that the role of micro wave, millimeter wave is negatively impacted as we move to 5G.

Can you talk a little bit about some of the technology you've got in development around delivering 100 gigabit products, where you are in terms of actually 35.42 demonstrating that that works? And then second, talk a little bit about the cross talk noise cancellation advantages you have, allowing more angular efficiency in transition.

I think there is some pretty impressive stuff there..

So I’ll touch that from a different perspective for a second, I’ll start that on a regular basis. Every second here I'm hearing that wireless backhaul is dying because the fiber, because of it doesn’t catch up, it’s not clear, it cannot provide the capabilities needed for 2.5G, for 3G, for 4, for 4.5, for 5G.

We still have a very vibrant and strong market across all technology, the same for 5G.

Now, as we move into 5G, some of the trends we see and that’s where our leadership in all outdoor, both in micro wave and millimeter wave solutions gives us the advantage, because one of the things that will happen with 5G you will see two trends happening at the same time.

One is they have significant densification of base stations, mainly because of the use of higher frequencies, and you will need a lot more data into those. And that’s where we are developing and showing some of the things. You mentioned two things, which are supporting this in all outdoor configurations.

One is advanced frequency we use, which is angular separation capabilities, which allows us really to free the operators from having limitations of where and how they hang the base stations from angular separation, which allows them to simplify the densification and where they want on which roof and where they want to put the base stations they want, which is only for 5G.

And the other one is our continuous chip development and our capabilities in that area where we are going our own chipsets, both digital and analog chipset, which allow us to packaging the same form factor also reviews which will do 40 and 100 gigabits in there.

We're well into the chip development cycle on those but we do expect to see products coming out with those chipsets somewhere in the end of 2020, enabling those types of capacities..

So looking at the numbers in the commentary, it sounds like you expect revenues to be up in ’19. It sounds like you’ve got 100 bps of component costs for capacitors and things of that sort that are hurting your gross margins all year this year that should fall out in ’19.

And you’ve got about an 8% moving the shackle, which should up your cost structure on the OpEx lines next year. And on top of that, your interest income and other expense line should come down based off of assumption of flat exchange rates.

Seems like every single line item should improve, the only one that don’t have any commentary on is the tax line.

Should we assume a continuation to current tax level?.

Usually, when everything about the tax line goes up, the tax line goes up as well because usually we pay taxes on the earnings we make.

I would say that generally speaking since the majority of the taxes are being paid in the satellite companies where we have services, as well as some sales activity and we need to leave margins due to transfer pricing rules or regulations, I would expect that I would say gradual increase in the tax expenses level, I don’t think it's going to be a revolution.

But I think we should account for the fact that when we’re most successful and more profitable, we will also have to leave some more profit in the satellite entities, which will in turn will increase our tax expenses slightly..

You talked about the M&A event with Vodafone and in India. When there was type of transactions happen, often there is a brief hiatus on spending.

Have you built that into your assumptions for the back half of the year? Or are you still expecting continuation of the spend level at both for the entities that are merging?.

Built-in into the second half of the year, because I think they’ve been in that status of doing almost nothing for the last 16 months. So we are waiting for them to complete everything and then we will….

So to be clear, that's not a meaningful contributor to the first half numbers.

And therefore, there’s nothing to fall out?.

No, it hasn’t been for a while and for about almost 16 months not a meaningful contributor..

Our next question is from Michael Stager with Odeon Capital. Please go ahead..

Can you give us a little more of an overview on competitive front and respect with chipset? And how long do you think your eight core solution will lead relative to the competition?.

Slowly.

Because I heard you a little bit broken, so you’re referring to the chipset and our octa core solution for the next chipset and the question was?.

How long do you think that you'll have a competitive lead on that front, and just a general overview on the competitive front, in general?.

Usually, we maintain 24 to 36 and sometime 48 months lead over the competition, usually that's where we are. It’s somewhere in that area where we believe we’ll maintain a lead.

And you hear may hesitating a little bit, because it might be that the lead will be a lot more significant in that area, because one of the things is that commercial chipsets and the people were dong the commercial chipsets, at least our knowledge at this point, we believe they will not do a next spin of the chipsets to compete with the eight core, which might be that the lead will be even longer, but that's yet to be seen, a good assumption on our working is somewhere between 36 and 48 months lead..

And then you mentioned some software contribution that you have gross margins. So is there any ability in the future to increase the software content to improve the gross margins.

Is there something you’re working on, or is it something we should be expecting?.

If I look at the software content and that’s mainly what we call carrier activation, what we do is we sale our dual core solutions and going back to the chipsets in some of the situation as a single core only and then people buy the add-on second core when they activate that in the network and that’s what contributes to the gross margin.

If I look at our sales forward, we have a mixture for dual core solutions, which are sold as both single and dual core. And part of what you see as an increase in the gross margin and our belief is on the upfront sell, we sell more dual activations than in the past, because people upfront need the dual capability and more of the capacity within that.

And that’s the slow contribution that we see to the increase in the gross margins that we see on the regular basis..

There’s no further questions. I'll turn the call over to Mr. Palti for any closing comments..

I’d like to thank all of you for participating with us. Just a reminder, we will be participating with the Oppenheimer Conference tomorrow anyone out there is welcome to join us.

And if anyone has further questions, clarifications, you’re welcome to contact us directly and we’re happy to entertain further calls and some more color on things that we discussed during the call. Thank you and have a good day..

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