Good day, everyone. Welcome to the Ceragon Networks Limited Fourth Quarter and Full Year 2018 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 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 risks relating to the concentration of Ceragon's business in certain geographic regions and particularly in India, risks associated with the decline in demand from a single market segment and which we focus, risks relating to certain guarantees granted by Ceragon on behalf of Orocom to FITEL in the framework of the FITEL project; risks associated with any failure to effectively compete with other wireless equipment providers; risks associated with a change in our gross margin as a result of changes in the geographic mix of revenue; risks related to the fact that our operating results may vary significantly from quarter-to-quarter and from our expectations for any specific period; risks related to our ability to meet the supply demands of our customers in a timely manner due to the highly volatile in their supply beings; risks associated with difficulties in obtaining market acceptance of newly introduced products; risks associated with technical difficulties that may be discovered in newly developed products and other risks and uncertainties detailed from time to time in Ceragon's Annual Reports on Form of 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 dates.

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 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. We had a great fourth quarter and 2018 was an excellent year and we are targeting a fifth year of growth in net income in 2019. We are looking forward to sharing the details with you. With me on the call is Doron Arazi.

As most of you are aware, Doron is Deputy CEO and Chief Financial Officer, which means that Doron has two separate time-consuming roles. This morning, we announced that Ran Vered has joined Ceragon to assume the CFO role and he is here with us on the call today.

Both, Doron and I will continue to do what we have been doing, which is make sure that between the two of us we are maintaining at the executive level key customer channel and supply chain relationships. With Ran as CFO, we'll both be able to bring more focus to our work, so we're very pleased that Ran has joined us. Welcome, Ran.

Turning to our results; we had a very strong finish to the year. The fourth quarter exceeded our expectations for revenue, gross margin and net income. We also had a book-to-bill above one in Q4. The strong finish contributed to 2018 being an excellent year in several respects.

In addition to achieving our primary goal of net income growth, our revenue increased about 4% which is ahead of our original expectations. We were successful in virtually increasing our market share in Latin America, Africa, Asia and some vertical markets in North America. Gross margin improved and we kept operating expenses within our target range.

We also generated close to $10 million in positive cash flow in 2018 which enabled us to end the year with even stronger balance sheet. On balance, the organization executed very well and we continue to believe our strategy of managing to the bottom-line is the right one for our business.

Therefore, we are aiming for 2019 to be the fifth consecutive year of growth in net income. We have not seen any significant changes in demand or overall deployment activity anywhere around the world. We're expecting operators to be moving along the path to 5G this year before increasing the pace of ordering next year and beyond.

Within this very positive overall picture of our business, we need to mention one caveat, lack of linearity which causes lumpiness. Those of you that have followed our business for some time are aware that it is typical for Tier 1 operators to pause orders temporarily during a major deployment.

Usually, the reason is to bring site acquisition, installation capabilities and equipment inventory into alignment and it often means when the orders resume, they are larger than they would have been without the pause. As a result, we tend to see lumpy order and revenue recognition patterns as well.

Lack of linearity is normal in our business and we need to keep this in mind as we think about each region, the timing of orders, and how they combine into the overall picture.

Also, it's worth noting that we have also some potentially large projects in the pipeline, those could provide some upside to the detailed regional picture we are going to describe for you today. Turning to the regional update; we'll discuss India first.

There seems to be some confusion about our expectations in this region, so we'll try to be as clear as possible. Revenues from India were very high in 2018, in fact, the same high level as 2017 which we did not expect. We expected a pausing order during the first half of 2018 that didn't happen.

If it had, 2018 would have been somewhat lower than 2017 having nothing to do with demand or deployment plans or anything else except the timing of orders and revenue recognition.

With India sustaining such a blistering pace in 2018, it seems even more likely that we would soon see a pause in the order pattern, which is why we put a lot of emphasis on the potential lumpiness on our last call. Sure enough, orders from India in Q4 were lower.

We expect another large batch of orders during the first half but we don't know the exact timing which creates a possibility that Q1 revenues from India could drop temporarily. The important thing to emphasize is that we expect the overall strength of the Indian market to continue for at least the next several years.

We are only talking about the timing of orders and how they cause revenues to be recorded in various reporting periods. You also are probably wondering how Vodafone ID fits into our expectations for the market in India. Nothing has been finalized yet, but we have very strong indications that we are a preferred vendor from the technology standpoint.

However, we would not necessarily be able to reach a satisfactory agreement on other aspects such as price or payment terms. There are considerable challenges in this regard before we have a deal that will meet our criteria.

If eventually we are able to overcome these challenges, this will generate significantly higher business and revenue from India than our current expectations. After increasing our market share in APAC during 2018, we expect this region to remain generally strong in terms of ongoing business during 2019.

There is a major bidding process going on for a large project in the APAC region where the service provider is preparing for 5G. This is factored into our projections in small numbers and could generate higher revenue than we currently expect toward the late 2019 and into next year.

Africa began to pick up in 2018 and this business looks likely to remain strong this year. Our major customer in Africa along with new customers we brought on board continues to invest in building out of 4G in various regions of the content. Meanwhile, Europe seems likely to remain flat during 2019.

4G technology has been widely deployed across Western Europe and there was no apparent disruptors among the European operators that seems likely to make an aggressive move on 5G that would force the others to follow soon.

In Latin America we are expecting a very good year that will certainly represent growth over 2018 due to the large project we won in Peru, which is aimed at bridging the digital divide in large rural areas of the country. In Q4 we began shipping to this Orocom project.

We also believe our customers in South cone will continue to invest as 4G penetration in several countries gradually increases. We also saw a pickup in revenues from North America in Q4 and we expect to sustain these high levels during 2019.

The temporary government shutdown may have had some effect on the T-Mobile Sprint process, but they're still targeting a closing during the first half.

Any further acceleration of orders from these customers is part of the potential upside we referred to earlier, but we are not building it into our forecast until we have better sense of the post-closing plants and the timing.

Meanwhile, we'll continue to target gradual gains in market share in various vertical markets and among smaller operators until we see a 5G-related pickup, which we don't expect until 2020. The trends we see in most geographic regions reflect the various stages service providers are in as they prepare for 5G.

So we should talk about how we see 5G affecting wireless backhaul. From a technology and market perspective, 5G means. It means orders of magnitude, more complexity to plan a network, to build or densifying a network and to operate a network. It means more sites, perhaps five times more sites. It means more capacity to all the sites.

It could be a hundred times more capacity. It means several providers must plan for new and more varied service offerings or what is called use cases. For example, gigabit mobile broadbands to support activities like mobile online game. For example, connecting billions of things from vending machines to parking meters.

For example, mission critical applications requiring very low latency, such a self-driving cars, real-time inspection of critical infrastructure and real time collaborative robotics. What 5G does not mean is orders of magnitude larger CapEx budgets.

So, we have to help our customers meet these challenges in ways that are not only simple and fast, but also conserve valuable spectrum assets, minimize expensive real estate for mounting equipment, reduced power consumption and so on. So, doing all these things at scales requires innovation in deployment and professional services.

It's also important to remember that not every network will suddenly need a hundred times more capacity all at once. Different operators and separate providers have different needs and are beginning the transition to 5G from different places.

So, we have to be prepared to meet customers where they are today and give them solutions that will take them where they need to go at the pace, they need to get there in a future proof way.

Yesterday we announced our new IP-50 platform that represents a premium solution providing certain additional capabilities which will command a premium in the market. The IP-50 platform is not a replacement for the IP-20.

It is an incremental and complimentary to IP-20 offering because not all networks require the particular capabilities of the IP-50 platform now or in the foreseeable future.

Our IP-20 platform is helping customers move along the path from 4G to 5G by providing multiple types of radios each with multicore capabilities delivering high capacity in a variety of configurations, including all-outdoor split and all-indoor depending on the specific needs of the operators.

So we are continuing to develop the IP-20 platform, offering new releases with highest speeds and more functionality while we also make the IP-50 premium products available.

We believe the IP-50 platform is unique in that it offers certain advantages that are based on the concept of this aggregation, which in its simplest form means separating the path of innovation among radio technology, networking software and hardware to increase flexibility and available options. The IP-50 leverages software and hardware.

This aggregation to create an ultra-scalable platform that enables the customer to add capacity and interfaces by simply moving to a larger hardware variant while keeping all the software functionality intact.

Without getting into the all the technical details, in addition to offering multicore technology like the IP-20, the IP-50 offers additional capabilities that include a single radio for all deployments scenarios and routing software capabilities that are separated from the hardware to enable simpler, faster deployments with lowest possible total cost of ownership.

Our first IP-50 products will be showcased at mobile world congress next week and we expect to start recognize significant revenue from the IP-50 products beginning next year.

To summarize, we're looking forward to an excellent year in 2019 because we expect higher revenue from North America, Latin America and Africa to compensate for the impact of a temporary pause in India at the beginning of the year.

So currently, we are expecting overall revenue to be about the same in 2019 as in 2018 and with the more favorable geographic mix, we are again setting a goal of growing net income for the fifth straight year and again generating positive cash flow.

And we intend to do both while also continuing to invest aggressively in our next generation technology. The next generation of our multicore technology known as octacore will enable service providers to address the challenges of a full 5G world.

2019 promises to be a busy, exciting and profitable year that will provide an excellent position to 2020, when we expect to see 5G deployments start to make an impact. Now I'll turn the call over to Doron..

Thank you, Ira. Since you've all seen the press release, I'll just highlight some of the significant items in the report. The fourth quarter was a strong finish to the year and we achieved our primary goal for 2018 which was improving net income. Our primary branch mark non-GAAP net income was up 14.8% to $17.5 million.

As Ira noted, revenues grew about 4% for the year, which was likely more related to timing of orders and revenue recognition factors although we do believe we are gradually increasing our market share. For those of you on the call who might be new to our story, we manage to the bottom line, not the top line.

We look at each deal according to the amount of incremental gross profit it can bring and we keep stringent control of our operating expenses. We increased our GAAP gross profit by 8.2% in 2018 and our gross margin improved to 33.8% which was in line with our expectations despite some higher component costs.

Our GAAP operating expenses for the year were also in line with our expectations and higher than 2017 mainly due to foreign currency headwinds, increased R&D investment to continue our technology leadership and performance-related compensation expenses. Our GAAP EPS in 2018 was $0.28 per diluted share compared to $0.19 per diluted share in 2017.

I will further elaborate on the big jump in the GAAP EPS in 2018 when reviewing the Q4 results shortly. Turning to the details of our fourth quarter, revenues were better than expected and about even with both the third quarter and the fourth quarter of 2017.

We saw strength in virtually all regions except India, which was below the very high level of recent quarters is we ate through the backlog from the large orders received earlier in the year and in Q4 of last year. Even Europe picked up a little in Q4 compared with the last few quarters.

We had three above 10% customers or customer groups in the fourth quarter. One customer in India, a customer group with presence in India and Africa and a customer grew up in Latin America. India continue to dominate the breakdown of revenues but with a more moderate 25% of the total.

Aside from India, there were no major changes in the geographic breakdown. GAAP gross margin was 34.4% and non-GAAP gross margin was 34.7% in Q4 similar to Q3 and an improvement from the same period in 2017 promoted due to a more favorable geographic mix.

We believe the trend toward a more favorable geographic revenue mix will continue, which we expect to resolve in slightly higher gross margin in 2019 with the typical fluctuations from quarter-to-quarter.

Turning to operating expenses, non-GAAP OpEx of $23 million was slightly higher than our target quarterly a range due to higher variable compensation expenses primarily related to a strong business results.

Looking at 2019, we expect operating expenses to remain in our target range of $21 million to $22 million per quarter during the first half of the year and slightly exceeding $23 million per quarter during the second half, primarily due to our investment in our next generation platform and the expected higher level of revenue.

As we have noted in the past, we expect to continue to spend aggressively but carefully on our next generation 5G solutions. Our financial expenses declined sequentially again in Q4 declining from $1.8 million in Q3 to about $900,000 on an ongoing basis due to less exchange rate differences and lower discounting fees.

We expect financial expense to range between $1 million to $1.5 million this year, assuming no further significant fluctuations in exchange rates. I would like to spend a couple of minutes on our tax line in our GAAP numbers as this caused a big jump in our net income and EPS for Q4 and for the full year on a GAAP basis.

In Q4 we recorded income on the tax line primarily due to the need to record a tax asset of $7.2 million on our balance sheet that reflects tax benefits we anticipate as a result of utilizing our NOS against taxable income in Israel in future years.

This also means that we are expected to record higher tax expenses on a GAAP basis in the upcoming years. This tax asset does not reflect the full tax benefit of the approximately $200 million of NOS that we have accumulated.

The four assuming we continue to be profitable in the very long term, one should expect to see a similar accounting pattern of a tax-related income year followed by several years of tax expense.

Bottom-line is that, this is another indication of our strong performance in the previous couple of years as well as our expectations for continued strength in the upcoming years. On a GAAP basis, we reported $11.6 million in net income and non-GAAP net income of $5 million. This is a very good result and better than our expectations.

Turning to the balance sheet at December 31, receivables increased $123.5 million with DSLs of 131 days. This primarily relates to another timing issue and since year-end we have already collected most of the amounts that distorted these DSLs for Q4 relative to our collection expectations.

Mainly as a result of the timing of collections we just mentioned, we had negative cash flow of about $5.7 million in Q4. However, for all of 2018 we had positive cash flow of $9.7 million while gradually reducing our factoring activities by approximately $13 million, which is an even bigger achievement.

We expect to continue generate positive cash flow in 2019 as well. At the year-end, we had cash-and-cash equivalents of $35.6 million with a $40 million unused line of credit, which gives us ample financial flexibility. Although our book-to-bill ratio was above one in Q4, we expect a temporary timing related dip in revenue in Q1.

This is primarily due to timing factors related to our business in India as Ira described on top of typical seasonality.

Since all regions are generally the same or stronger than 2018 in terms of overall demand and activity, we continue to expect revenue for 2019 as a whole to be about the same as 2018 but with a more favorable geographic mix due to a lower proportion of revenue from India related to the timing of orders.

Since we're talking only about timing issues, the lower our Q1 revenues turn out to be, the higher we expect revenues to be in the remaining quarters of the year.

Our revenues could be higher if some of the projects in our pipeline that are currently counted in our projections at the very low amounts or not reflected at all, will convert to orders and backlog in time to be recognized as revenue in 2019.

We're targeting 34% non-GAAP gross margin in the near term with some improvement during the second half of 2019. Non-GAAP operating expenses will be slightly higher than 2019 versus 2018 due mainly to increased R&D investment primarily during the second half.

So, as Ira indicated, we're aiming to make 2019 our fifth consecutive year of growth in non-GAAP net income based on a similar level of revenue compared to 2018. We expect this additional net income improvement to be driven by a gradual increase in gross margin, tyco crawl of operating expenses and low financial expense versus 2018.

With continued positive cash flow in 2019, we expect to have a solid foundation for taking advantage of the opportunities related to 5G deployments beyond this year. Before we open the call to questions, I would like to also welcome Ron to our team and at how pleased I am that he is joining.

I'll supervise the completion of the 20-F and Ron and I will work together during the next several weeks on the transition of my CFO duties. He will take full responsibility for Q1 and you will be hearing from him on our first quarter results call in May.

Is there anything you'd like to say before we take questions, Ran?.

Hello, everyone. I just have to say that I'm very excited to join the Ceragon team. I think we're in great position to take advantage of the transition to 5G technology and I look forward to contributing the CFO. I will be sticking with you on the next quarterly results called and I'm eager to meet those of you I haven't met before. Thanks, Doron..

Okay, now we'll open the call for questions. Our first question comes from George Iwanyc with Oppenheimer. Please go ahead..

Thank you for taking my questions. And congrats on the solid quarter.

When you look at the March quarter, Ira, how much of a down-tick do you expected revenue fall below the $80 million a line that you kind of have set as the low end of the quarterly run rate?.

Hey, George, this is Doron.

The short answer is yes, but if we are looking back on the trends in previous years, if you look on the Q1 2017, or even if you go far back to 2016, when there is seasonality and when you don't get the big orders towards the end of the year from India, we expect the numbers to be somewhat in between the numbers of Q1 of 2017 and Q1 of 2016.

I believe that we'll be able to end up towards -- closer toward the 2017 numbers. .

Okay. Thank you.

And then when you look at India, can you tell us where the confidence is that the revenues will come back at strong levels and how good the visibility is, is it 2Q, 3Q or is it sometime just during the second half of the year?.

It's probably 2Q, 3Q and 4Q. We have very good visibility as I think we indicated the coal, the timing issues is usually having to do with people needing to align site acquisition installations, the equipment and there are pauses like that that happened in almost any one of our large installations.

We know almost exact plans of how the progress for needs to look like the demand and this time it's the alignment of them having more equipment than they were able to do installations.

By the way, we talked in the past about the alignment on the other side where we had issues to deliver quickly enough, the equipment to meet our site acquisition installation. And the alignment issue is where it is. I think we have very good visibility as in moving forward while discussing with all the customer, the specific plans..

Okay. And now shifting a little bit, Ira, the IP-50, it's a nice-looking platform.

Can you give us a sense of how that could impact the second half of this year? How that changes your go to market, possibilities for a market share gains and how that helps address 5G?.

We will be introducing the IP-50 platforms in pieces over the next 18 months. The first pieces will be available at Mobile World Congress and will be available in shipping in the second half. As I indicated on the first part, we do expect significant revenues from the IP-50 only in the first half of 2020 not this year.

There are certain areas where this will be part of the mix, towards the second half of this year of '19, but only in smaller numbers.

Just as a question on that, one of the reasons for introducing is that usually planning times and walk in with customers is a long process and we are planning with them already the networks of 2020 and beyond and there's a mixture between the IP-20 and the IP-50 that is required on those networks and that's part of introducing and making some of the products available at different times.

.

Our next question comes from Alex Henderson with Needham & Company. Please go ahead..

Hey, thanks. This is Roger Boyd on for Alex. Just a quick one on Africa. Nice to see revenues kind of ramping there.

Can you remind us what the margins look like there in comparison to the rest of your business?.

I would say that the margins are not too bad. Obviously, they're not as low as our margins in India. And I would say that if you look at the average corporate they're not far away from these margins..

Okay. That makes sense. And then just another quick one with the shekel, I know you mentioned that you began hedging in 4Q and presumably continue that as it reached kind of a 52-week lows.

How does that offset the plan increases in OpEx? Have you quantified the benefit you receive from that?.

Yes. So, just to remind you, we usually hedge a portion of our shekel exposure during the year and once we finalize the budget and it is approved, we hedge the later. So obviously relative to previous year, the exchange rate in which we were able to hedge the expenses, the shekel expenses is higher than the exchange rate we had last year.

However, the increased investment in R&D especially relating to our next generation chip set is impacting the R&D level that we expect. So to a certain degree it's aids some of our potential reduction in the OpEx..

Our next question in queue will come from Michael Stager with Odian Capital. Please go ahead..

Hey, good morning. Thanks for taking my question. And hey, you're focused on growing net income in 2019.

Is there a range we should expect and would this also be reflected in the free cash flow generation? And then one follow-on would be, if you overcome some of these challenges in India in 2019, is there a sort of a revenue growth range that you would expect from India? Thanks. .

So, let me start with the first question first. We are not the indicating a specific number of increase to the bottom line, but I think as a reference, if you look back, at the achievements of this year relative to previous year, this would probably be a good ballpark.

In terms of cash flow or free cash flow, yes, indeed we intend to continue generating a free cash flow and we don't see any reason why not to do that. Let's just not forget that usually or what we intend to do is to use our cash for increasing our business.

So the bottom line is that as long as we continue with this plan and we don't see any huge pickup or any, I would say strategic moves in which we will have to spend more cash, our free cash flow is going to increase according to our plans in 2019.

Regarding India; so as we were trying to explain, India is very volatile because of the behavior of the operators. And we are very, very careful in giving indication where -- whether the revenue or the business from India will grow in a certain year or will go down because of this volatility.

So my preference is not to comment specifically on any growth in India, but just say that we are highly confident that based on what we see now we can make 2019 in terms of total revenue quite similar to 2018..

Next in queue is Gunther Karger [ph] with Discovery Group. Your line is open..

Okay, good morning and afternoon. Actually, two comments. First of all, I want to congratulate the team for executing their long-time strategy. I've been following the company for some years and you have done a great job and executing your plan. Second; my question, well actually in the industry world that has not been observed generally.

So this is very unique accomplishment.

The question is vertical markets -- and could you care to make any comments on vertical markets?.

I'll comment on vertical markets by saying that we do put an effort on vertical markets mainly in the North America and the European business. A large proportion of both our North America and European business comes from different vertical markets. We do make progress in some of those, mainly around what we call industrial NISPs.

We are targeting public safety application, which we won a few and continuing to push there to gain market share with those in other places. We also focus and we had a nice initial successes but in small numbers in all sorts of maritime type of applications.

So it's a very segmented niche market and we need to walk in a lot of those segments, and in some of them we did gain market share doing 2018..

We do have another question and that's from David Allen with Woodbury Financial. Please go ahead..

Good morning, good results, guys. Two quick questions; number one is to you -- can you talk about the competition in terms of landscape. And number two is the cost structure for the 20 products versus the 50 products which you're anticipating coming out, basically I guess in the spring. Thank you. .

So, I'll talk about competition in general. We do have and I don't think the competitive landscape have changed significantly over the last year or even longer than that. Although we see some of our competitors weakening because in some of the markets it's where we gained market share.

I've seen some of them weakening somewhat is public, some of it is less than public on the table, but we still do have strong competition both from other specialists and the large generalist out there. As a comment, and this is a question I'm being asked once in a while lately is what does the Huawei [ph] ban have an effect on us.

It does contribute in some places, but in other places sometimes it balances out with them being a little bit more aggressive as we move forward and we still need to see how this develops in different markets and with different operators.

As going back to your question around the cost basis, there is a difference in the cost basis between the two, but there's also significant functionality difference between the two of them.

But if we look at the needs and value generation and the total cost of ownerships from the operators as we move forward, the IP-50 in where it's targeted in in 5G networks will continue to offer a reduced total cost of ownership or significant additional value to our customers over the IP-20..

I'm showing no additional questions in the queue. Please continue..

So, I'd like to thank everyone who joined us on this call. I would to welcome Ron again to the team here and we will be exhibiting and whole five in Mobile World Congress next week.

So any one of you who plans to be in Barcelona, please, we would love to welcome you to our booth show, both the current product and the IP-50 products and have further discussions as we move along. Thank you very much and have a good day..

Thank you. Ladies and gentlemen, that does conclude your conference call for today. We do thank you for your participation entering AT&Ts executive teleconference. You may now disconnect..