Good day everyone and welcome to Ceragon Networks Limited Third Quarter 2019 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 include statements concerning Ceragon's future prospects that are forward-looking statements and as designed by -- defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on certain 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 released -- 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 relating to the concentration of a significant portion of Ceragon's expected business in certain geographic regions, and particularly, in India, where a small number of customers are expected to represent significant portions of our revenues including the risk of deviations from our expectations of timing and size of orders for these customers; the risk that the current slowdown in revenue from India could extend for a longer period than anticipated; the risks of delays in converting design wins into revenue; risks associated with any failure or effectively -- to effectively compete with other wireless equipment providers; the risk that the rollout of 5G services could take longer than anticipated; 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 that 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 website 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 Ran Vered, Chief Financial Officer. Our third quarter results were disappointing. We had a very strong quarter in APAC, but performance was below our expectations in most other regions for various reasons.

At a high level, the main factors impacting Q3 were the slowdown in India and short-term delay on one large project in Latin America. I want to emphasize a few key points which aren't apparent from our Q3 results before we get into the regional business details.

During the quarter, we made excellent progress with new customers we mentioned as 5G design wins on previous calls and we are making good progress towards another new 5G design win during Q4 as well.

This demonstrates two things; that operators are continuing to move ahead with their 5G plans despite a more cautious environment; and our leadership position is being recognized outside our existing customer base. We expect quarterly revenue in most regions to improve in Q4 and also during 2020, allowing for typical seasonality in Q1.

We see general strength or at least stability in most regions of the world outside of India. This is an important point because it's not apparent from the results we just reported. We are also subject to the same macro issues that you have been hearing about from other companies in the telecom equipment industry and elsewhere.

Nevertheless, we are targeting overall revenue growth next year. Driving this growth would be both ongoing programs and new 5G design wins which will contribute mainly during the second half of next year. We acknowledge that our growth in 2020 will be from a lower level of revenue in 2019 than previously expected.

In the current global telecom environment being able to see a path to profitable growth next year is a significant positive point, one, which we owe to our leadership position, an ongoing commitment to maintaining a global presence. So, we intend to grow and we intend to do it profitably.

We have the resilience to deal with these developments without the need to make drastic changes. With that overview in mind, I'd like to discuss development region-by-region, beginning with India.

In our Q2 call, we said the picture in India seem to indicate a deliberate slowdown in the pace of expanding and densifying India 4G networks with more focus on the 5G spectrum auction and on urging the government to lower minimum bid prices. In Q3, India fell slightly short of our lowered expectations.

And after receiving in July, half of the large batch of orders delayed from earlier in the year, we were disappointed but not overly surprised that we did not receive the second half of this batch of orders in Q3. We now believe, they will come sometime during the first half of 2020.

So, the slowdown in India is definitely real and affecting us for more than just a quarter or two. The lack of profitability and heavy debt burdens among most of the large operators in India even after consolidation and restructuring is becoming a more serious concern due to a recent decision by the Supreme Court in India.

This decision, which settled the dispute between the operators and the Indian government, over how certain fees should be calculated, is expected to result in an additional $13 billion in fees owed to the government by the large operators. This decision represents the biggest development in the region since our last call.

Meanwhile, the pace of investment will be curtailed, pending decisions from the government on the fees and the minimum bid prices of 5G spectrum. The only solidly profitable operator in India, Reliance Jio was not affected by the court decision, but it had already announced its intention to spend at a less aggressive pace.

Now, we would like to understand the reasoning.

With all the major operators scaling back spending, either because they must or because they can afford to strategically, our assumption about annual run rate for India this year and next year is less than half the average run rate of 2014 through 2018, more like $50 million per year in 2019 and 2020 versus over $100 million a year in revenue on average for the past several years.

We strongly believe, we are retaining our market share in India and we have some positive indications about strengthening our position in the region. Specifically, we believe, we will be selling to Vodafone ID next year in addition to continuing with Bharti and Reliance Jio.

We have been working very hard to find a way to sell to Vodafone in India with an acceptable level of risk and we believe we are closer to finding such a mechanism.

This feeds into the reason we now expect business in India to stabilize at around the 2019 level during the transition period, the operators are going between the 4G build-out and the evolution to 5G.

Regardless of the financial woes, these operators need to support more coverage in the rural market, which requires compact low-cost solution of the type, we already deliver.

Meanwhile, Indian operators will also have to address growing data demand in the urban markets, using high capacity links, which is also an area, where we excel by providing compact all-outdoor solutions.

So, within the context of the typical lumpiness and timing issues in India, we see some potential upside in demand next year, but we prefer to remain cautious and look for a flat year in 2020, given the operators' financial situation, recent developments and our recent experiences in the region. Moving on to Africa.

We've also seen more cautious from customers recently with the decision cycle taking a bit longer. We expect some improvement in Q4 as we begin to ship to the new African customer we mentioned on the last call.

But looking into next year we are a little more cautious about the near-term potential of this region, because of the ongoing issues the operators are having with obtaining foreign currency, because of their tendency to pay slowly. We are addressing this risk by negotiating additional upfront payments and other measures.

Latin America continues to be strong overall due to the continued expansion of 4G networks. We had a hiccup in Q3 because a project for Orocom aimed at bridging Peru's digital divide was delayed due to the after effect of the election in Peru and elongated financial arrangements. However, we believe it was a delay of only one quarter.

We have a nice backlog in Latin America and expect to see further growth in this region next year as well. APAC was particularly strong in Q3 as we recognize significant revenue from the large-scale network expansion we are supporting in Southeast Asia. You may recall this was the subject of a press release we issued recently.

We continue to expect growth next year on top of the excellent year we are expecting in 2019, as we begin to recognize revenue from a 5G design win in the Pacific region we mentioned on our last call.

Europe remains steady at somewhat higher run rate than we saw in 2018, and now seems likely to remain steady at a similar run rate through next year as well even with additional macro uncertainties, again owing to some recent design wins.

In North America, the near-term risk we highlighted last quarter was manifested in Q3 with the pause -- we believe the pause in Q3 was related to the State's attorney general filing a lawsuit to block the proposed merger between two of our customers, despite the fact that it had received most regulatory approvals.

We continue to be confident in the long-term business regardless of the outcome of the lawsuit, but we are now assuming only modest improvement in Q4 versus Q3. Next year, we expect North America to grow versus 2019 when our new Tier 1 customer in North America begins to contribute to revenue during the second half.

Meanwhile, we are tempering our overall expectation for North America a little in view of the additional timing uncertainty. On the positive side, as I said at the beginning, we are making good progress toward another significant 5G design win that might provide some additional upside toward the end of next year.

To summarize, the main challenge from now through next year continues to be India. To put it another way, the basic difference between an assumption of an $80 million to $85 million of quarterly run rate for 2020 and a new assumption that next year average quarterly run rate will be closer to $75 million is India.

Since our overall growth next year is coming mainly for new business we won recently or expect to win soon, the timing of the revenue recognition is likely to be skewed more to the second half of the year. So, the first two quarters have to be below the average quarterly run rate and the final two quarters have to be above the average.

We expect at least stability and in some cases revenue growth for most regions due to ongoing 4G project as well as new 5G design wins in APAC, Europe and North America. There's a more cautious environment, but the journey to 5G has not stopped. We are winning 5G business and expect to continue to do so in the coming quarters.

Meanwhile, we have a slowdown in India, which will continue to affect us until the dynamics in that region improve. Of course, we recognize the risk associated with geographic concentration, as India grew rapidly during the past several years. One objective of our various strategic initiatives has been to mitigate our geographic concentration.

Some aspects of strategic moves have been effective in reducing our future geographic concentration, for example, the relationship with NEC and 5G design wins in other regions. Other initiatives aimed at changing the geographic balance more rapidly did not come to fruition.

These initiatives included exploring strategic opportunities for consolidation and/or diversification via external investment. Over the past two to three years, we have held a number of serious discussions with various companies in multiple countries in some cases more than months.

In fact, we were so committed to the process that we consciously increased the depth and strength of our management team in order to be well prepared to manage the integration of either consolidating or diversifying transaction or both. We created an organization that would support a larger more diverse business in the real world not just on paper.

But in the end, we could not conclude a deal on terms that we and our Board could be confident would create shareholders' value in an accepted length of time with an acceptable risk profile. So the personal objectives of the people who created such a strong management capability are not being realized in the timeframe expected.

So predicatively a few of our most senior people will be leaving the company between now and year-end to pursue other opportunities. Specifically, Doron Arazi who most of you know; our Yuval Reina our COO; and Nurit EVP and H-of-HR will be leaving.

The Board and the management team recognize the many contributions of this valuable Executives, not the least of which was their outstanding succession planning. We wish them all the best in their new endeavors. They are friends, as well as colleagues and they will be missed.

On the positive side, I have a great organization that is well equipped to make a seamless transition. Also we can now create a flatter organization that can quickly adapt as the business evolves. As I said in the beginning on the expense front, we are not planning drastic moves. Our plans are not focused on cost-cutting.

We will continue to invest in maintaining our technology leadership and design to cost advantage, while also exercising very tight control over operating expenses.

We will put even more focus on working capital management in order to generate more cash flow and we intend to repay most of all of the outstanding debt under the revolving credit agreement to give us the financial flexibility to be opportunistic under the right circumstances.

Some strategic initiatives, we are working on include moving to more software-based solutions in order to exploit changing market dynamics and we may consider more opportunity to become a basic technology provider in order to create a new source of revenue.

We will continue to look for external strategic opportunities and be financially prepared to move aggressively. Meanwhile, we believe the primary indicator of future success to watch in the near term is the number of new 5G design wins we can achieve. The time for winning the business is right now and onward.

The time we recognize the revenue will be as full 5G deployments begin to ramp, mostly in late 2020 and beyond. In our view, this has always been the general timeframe. You will recall that we commented several quarters ago that 5G is a journey, not an event.

We have had a couple of challenging development like the Indian operators slowing down and the State's challenge to the merger of two U.S. customers. So the journey has bumps in the road, but the journey continues and we remain well-positioned to capitalize on it. Now I'd like to turn the call over to Ran to discuss the financial side in more detail.

Ran?.

Thank you, Ira. Since you all have seen the press release, I'll just highlight some of the significant items in our third quarter results. Revenue declined slightly from Q2 to $72.2 million and was substantially below our revenue in Q3 of 2018.

As you have already heard, this is primarily a function of the continued effects of the slowdown in India; a delayed one customer in Latin America, which was mostly offset by stronger-than-expected revenue from APAC; and lower revenue from North America, which was below the run rate of the last several quarters.

Revenue from both Europe and APAC grew sequentially, endeavor revenue from Q3 of 2018. Revenue from India increased sequentially from the very low level of Q2, as a result of shipping a major portion of the first batch of orders which were shipped at the end of July. In Q3, we had two above-10% customers, one in India and one in APAC.

Both GAAP and non-GAAP gross margin was 32.2% in Q3, a sequential decline, primarily reflecting the less favorable geographic mix. We continue to expect gross margin for all of 2019 to be slightly higher than 2018 at 34% or slightly higher depending on the mix of revenue in Q4. Turning to operating expenses.

Non-GAAP OpEx of $20.7 million in Q3 was slightly below our target quarterly range of $21 million to $22 million per quarter, because of some delay in ramping planned R&D expenses and lower commissions due to the lower level of sales.

We expect OpEx to move back above $21 million per quarter, during the next several quarters but slightly shifting our priorities, we expect to remain in the $21 million to $22 million per quarter range probably through next year, though we haven't finalized budget at this point.

To emphasize what Ira said, we are not flowing or cutting any major R&D programs and continue to invest to retain and expand our leadership. Our non-GAAP financial expenses decreased slightly from Q2 to $1.5 million in Q3, due to lower bank fees and exchange rate differences, partially offset by slightly higher interest expense.

Tax expense was slightly lower than Q2. Q4 has a tendency to be higher than other quarters, so we are expecting to increase sequentially by a few hundred thousand dollars. On a GAAP basis, we reported $186000 in net income and non-GAAP net income of $497,000.

This was a decline from Q2 due to slightly lower revenue and lower gross margin due to the revenue mix. Turning to the balance sheet at September 30, receivables increased approximately to $126 million with DSO of 154 days.

The increase was mainly due to a further shift in mix towards customers with more extended payment terms than our average and two customers paid at the beginning of October, which has also affected our net cash flow. Inventories decreased from Q2 by approximately $6 million to $67.7 million.

Inventories have been unusually high due to our preparation for the fast delivery of the large batches of orders expected from India. Given the current outlook in India, we are focusing on bringing down inventories as quickly as possible and on aggressive working capital management including collection efforts.

To meet working capital requirements during Q3, we increased our borrowing under our revolving line of credit by $8.5 million to $17.4 million. We had negative cash flow from operations of $14.2 million in Q3 with cash and cash equivalents at the end of September, totaling $20.5 million. We expect cash flow to turn around in Q4.

Since we expect to generate strong positive cash flow next quarter, we are aiming to pay most of our outstanding balance under our revolving credit agreement. This means, we would end up the year with a minimal debt and close to the maximum of $40 million of unused credit. Turning to the near-term outlook.

With the book-to-bill ratio which was above one for the quarter, we believe we can target a run rate of $70 million to $75 million in the near term. To repeat what Ira said, we expect to grow in 2020 compared to 2019 with most of the strength likely to come in the second half of the year.

It's too soon to have enough visibility to set specific targets, but our current assumptions for 2020 include an average quarterly run rate somewhere around $75 million with gross margin and OpEx slightly similar to 2019. These assumptions do not lead to the profit growth we have been targeting, certainly not in the short term.

In fact, with some year-end items such as expenses related to departing executives, we are probably looking at reporting a small loss in Q4 along with a positive cash flow from higher collections and strong working capital management.

As Ira said, despite recent development, we are taking the long view and continuing to invest in major programs because our future road map is an important aspect of adding new design wins that will turn into revenue next year and beyond.

We are the strongest company in wireless backhaul and we expect to maintain the position throughout the transition to 5G and beyond. Now I would like to open the call for questions.

Operator?.

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

Thanks for taking my question. So I guess there's a couple of things that jump off the page at me. The first is you've seen a delay in the timing of the India orders out into the first half, but at the same rate, you're saying that you expect the first half to be below the $75 million run rate.

Can you talk a little bit about what the positives and negatives are that are offsetting the realization of that? Is it that you're expecting a lower India in aggregate excluding that -- the timing of that large order? Or how do we think about that?.

If you look at the average run rate over the last few quarters and we planning -- plugging in a little bit of seasonality in some of the other regions into Q1, we do believe that the first half will look flat. You can look at that even this quarter Q3, which was in that range and we still delivered to India a large sum in Q3.

And between the seasonalities of the different regions that's why we believe that to ramp up above the $70 million to $75 million range will be at the higher ends of that range towards the next half of the year when we'll start to see additional revenue from 5G design wins we have been doing.

So the overall run rate with the regional mix fluctuation still stays at the same number. I'm not adding the order of India on top of something. It's part of the run rate business..

Okay. And with respect to the mix, it sounds like India is a little stronger in the first half and maybe a little weaker in the back half because of the timing of that.

Is that going to result in 1H gross margins a little bit below the average for the full year in 2020?.

You'll see similar behavior to this year I think where when India is a little bit stronger, the margins fall a little bit; and then when it becomes weaker and you can see that in the pattern that we had in Q1, Q2 and Q3 of this year as well..

I see. Okay. The company made a decision a number of years back to play fairly hard on gross margins and play fairly hard on the timing of receivables. The DSOs jumping back up is obviously not consistent with that strategic imperative.

Can you talk about where you expect the DSOs to go? To what extent -- how fast will those come back into a more reasonable range? Obviously, that's a pressure point..

Alex thanks for the question. So what you actually see recently is the shift with customers to more extended payment terms. It's actually also due to the fact that we see low business in India.

Our current repayment terms with India are considered to be okay, while we see some more shift to the business with Africa and APAC, we see some more shift in payment terms and I would say that this is probably most of the issues with customers when dealing with contracts.

Specifically in Q3 and in the beginning of the year, we're going to see this trend stable. But in terms of cash flow in Q4, we hope to see the cash flow a little bit more positive in Q4 because of some delays with some customers that we expect to catch up in Q4..

Okay. And relative to the cash flow, the company sounds like they're seeing some key executives leave.

Is there some cash costs associated with the severance costs or things of that sort that we should be aware of?.

Well, this is why I've put in my remarks that some of these costs are going to impact our Q4. It's not going to be a significant amount, but because of the revenue focus in Q4 coupled with some year-end items, we do still think that Q4 is probably going to be with a small loss.

But it's not going to be -- the departure cost of the executives is not going to be something that is basically significant..

And one last question and then I'll cease the floor. Can you just remind me what you think the range of revenues for Q4 is? I'm not sure I caught that..

We say it's going to be between $70 million to $75 million..

$70 million to $75 million, okay. Great. Thank you very much..

Thanks, Alex..

Next question will be from the line of George of Oppenheimer. Please go ahead..

Thank you for taking my question.

So just digging into the cadence of revenue, when you talk about seasonality in the first quarter of next year, is that a likely double-digit quarter-over-quarter decline? Or are we looking at even potentially higher than that?.

Hi George, it's Ran. Well, it's a little bit premature to say how much, but we did say that the quarterly run rate will be $75 million while we do expect that the first half of 2020 will be lower. At this point, this is our visibility but I don't want to provide any specific percentage because it's a little bit too early at this stage..

Okay.

When you look at next year and I think you said you're targeting gross margins to be relatively flat with this year, how much leverage do you have to adjust OpEx if things do not improve in the second half? Is there an ability to continue to invest in R&D, not compromise the technology and innovation but pull back a little bit on OpEx?.

The answer is yes, but nothing very large numbers, because I think that one of the things we want to do is maintain the technology leadership and the R&D and investment and follow on the 5G design wins, which we believe will materialize towards the second half or beginning of 2021 as we deploy the products and the market starts to deploy 5G.

And what we said and that's something I'm doing on a regular basis right now is watching very carefully the OpEx and where we are and that's why I think we gave an indication that indifference than what we thought before we will not be increasing the OpEx next year, but maintain the $21 million to $22 million range throughout the year..

And Ira you mentioned the NEC partnership during your commentary, is that or other partnerships contributing to your comfort that the second half of next year will start to be stronger year-over-year? Are your partnerships in consuming 5G chipset kicking in at that point?.

Some of the other partnerships are the one that are helping us feel optimistic. Let's remember that, the partnership with NEC is mainly around joint technology development that moves forward. Going to market, we are still in some ways competitors out there.

But I'm quite confident between this and other – between this as indicating our strong technology and other partnerships that going to market in the second half and beginning of 2021, we'll see the fruits of a lot of the effort that we are doing right now..

All right. And one last question for me. You mentioned diversification efforts, and you've kind of talked about that from a regional perspective.

Can you one maybe give a little bit more color about how you would like mix to shift? And then kind of pivoting where do you see your vertical diversification efforts? Are there any other market either developing that could be a little bit more significant or when you look towards 2021 new use cases that might start to kick-in as well?.

You're touching complexity of things, which I'll touch and I'll touch them in a few ways. One is, you've talked about geographical diversification and shift.

One of the things that 5G will do because of the way the big waves around the world behave around that we'll probably see more revenue in the North America region, Europe and APAC and less dependency on Africa, Lat Am, and India as those regions will probably see 5G a little bit later.

That's one area, which probably will start pushing also gross margins up and others probably towards 2021 as the numbers become more significant. The other part that you're referring to is that 5G is a catch-all word for a lot of things and different people put the emphasis in the 5G world on different things.

One of the things that 5G will do in some of the use cases is not just mobile, it's sometimes enterprise, it's sometimes public safety, it's sometimes IoT devices, which is one of the things that we are looking and working with some of the operators, because 5G design wins with them have different architectures, and different ways that they look at given an example just to give the edge is in between small cell deployments to remote radio heads, which have totally different backhauling front-hauling requirements and the way they deploy the networks at different frequencies and towards some of the architectures, which they are testing around in between classical architectures to open one technology, which requires disaggregated solutions the ones that we are starting to provide to the customers.

So it's a mixture in between geographic shifting and also shifting in between a little bit of our product mix where we believe there's also some opportunities for more software-based solutions both on the platforms and outside the platforms into the operators..

Thank you..

[Operator Instructions] Next question is from David Allen of Advisory Group. Please go ahead..

Good morning. Could you shed some light….

Good morning.

…on the – you had mentioned among the three issues we're having between Latin America, India and the U.S. the merger of two Tier 1 carriers in the U.S. When did you realize that this is going to affect business in the next few quarters? And what is the projection of the decline or increase of sales to that United carrier? Thank you..

Can you repeat? And if you're referring to United carrier, meaning the United States carrier?.

Yes..

In that sense?.

Correct..

Okay. I think it's been all over the U.S. news that sometime during Q3, one of those carriers started slowing down very, very significantly on the orders they have been putting out and deployment sometime during Q3. We did see, by the way, from our U.S. operators in Q1 and Q2 significant orders and plans for continuing into Q3 and Q4.

Sometime during Q3 we started seeing the delays in the orders and we expect that to continue until probably the resolve of the merger issues..

Great. Thank you..

And we have no further questions in queue at this time..

Okay. So I'd like to put in some recap comments on what we hear.

Just like other companies in our industry, we have found it necessary to adjust our short-term view to take into account the growing macro uncertainties such as trade, global economic, as well as specific challenges many operators are facing with the migration to 5G and how they structure their business towards that.

We believe that working in our favor is the fact that we offer solutions that address effectively many of our customer pain points and we add to that services to help them source through the complexities of that migration.

We believe also that with every phase of the migration to 5G, both near term, immediate and long term we have an excellent match with our road map on the product for that, which does increase our confidence that we'll continue to be adding new 5G design wins.

This is a great focus of ours, having the best solution and winning the business for the right reasons. And on top of that, we are keeping the company financially strong and prepared to be opportunistic where the circumstances are right, regardless of short-term macro issues, regional, dynamics, as we move into 2020 and beyond.

Thank you very much for joining us. We'll be glad to take follow-on questions. Both Ran and myself are available. Please contact us directly. And I hope to see a lot of you face-to-face over the next few weeks. Thank you..

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