Good day, everyone. Welcome to the Ceragon Networks Ltd. First Quarter 2012 Results Conference Call. Today's call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks; and Mr. Aviram Steinhart, CFO of Ceragon. Today's call will include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and projections that involve a number of risks and uncertainties. There can be no assurance that future results will be achieved, and actual results could differ materially from forecasts and estimates. These are important factors that could cause actual results to differ materially from forecasts and estimates. Some of the factors that could significantly impact the forward-looking statements in this result -- in this include the risk of significant expenses in the connection with potential tax liberties associated with Nera's prior operations of facilities and risk that combine Ceragon and Nera business may not perform as expected and other risks and uncertainties, which are discussed in greater detail in Ceragon's annual report on Form 20-F and Ceragon's other filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made, and Ceragon undertakes no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made. Ceragon's public filings are available from -- form the Securities and Exchange Commission's website at www.sec.gov or may be obtained on Ceragon's website at www.ceragon.com. I will now like to 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 Aviram Steinhart, our CFO. We began 2012 on a strong footing. Revenues were within the range we expected. Gross margin continue to improve sequentially. We kept tight control of our operating expenses, and we generated positive cash flow from operations. Both the short- and the long-haul business are performing according to our expectations, and we continue to be pleased with our execution. Here in Q1, we began to see signs that bookings were improving but the real pickup in orders came in April. So our book-to-bill for Q1 was below 1, although we consumed some of it during the quarter, we ended Q1 with more than 1.5 quarters worth of backlog. With the current pace of orders, we expect our book-to-bill for Q2 to be above 1. Geographically, our experience was consistent in what we've been hearing from others in the industry. Europe and APAC were a little bit soft, while Latin America, Africa and the U.S. grew. Africa and Latin America deserve a few more words because our success there illustrates the strong benefit we have gained from the Nera acquisition a year ago. Let's talk about Africa first. We are seeing good traction with our long-haul solutions as carriers continue to expand the network's coverage, and we sold more short-haul products in Africa during Q1 than we sold there during the entire year in 2010 before we acquired Nera. Today, we are active throughout the continent particularly in Nigeria, which is the largest mobile market on the continent. As you know, we recently announced the follow-on deal with the Globacom for building out their backhaul infrastructure in Lagos. Globacom is an important win because in addition to being the second-largest mobile operator in Nigeria, it is…

Thank you, Ira. Our first quarter revenue was $117.8 million, slightly above the midpoint of our guidance. Our GAAP gross margin of 31.4% reflected about $2.2 million of cost related to the acquisition. Excluding those acquisition-related costs in $100,000 of stock-based compensation, non-GAAP gross margin improved to 33.3% from 33% in Q4. First quarter GAAP operating expenses were $39.2 million, excluding $1.3 million of acquisition-related expenses and $1.6 million of stock-based compensation, our non-GAAP operating expenses were $36.3 million compared with $35.7 million in Q4. As indicated in our last call, we are holding quarterly non-GAAP operating expenses at the $36 million to $37 million range and expect to maintain this level for the balance of the year. On a non-GAAP basis, we reported an operating loss of $2.3 million. Our non-GAAP operating profit for the first quarter was $2.9 million or 2.5% operating margin. We expect to improve our operating margin during 2012 as gross margin improves and we hold operating expenses steady. Finance expenses in Q1 were about $900,000 and tax expenses was $290,000. On a GAAP basis, we reported a net loss of $3.5 million or $0.10 per share. On a non-GAAP basis, we reported a net profit in Q1 of $1.7 million or $0.05 per share. The geographical breakdown of revenue appears in the press release. Europe and Asia were softer in Q1, while Africa and Latin America continue to show strong growth. North America also grew sequentially. It was too soon for India to show improvements. On a combined basis, our OEM accounted for 6.3% of total revenue. This was up compared to with some quarters reflecting an operator we work with directly requesting that we sell to them our product through an OEM that was providing a full-managed network. We have no single 10%…

Thank you, Aviram. I'll close by saying that it's really gratifying to see the rational from the Nera acquisition playing out in one account after another. In addition to successfully integrating acquired customer to our short-haul products, we have been able to increase overall sales into several of those customers. The feedback from the field is growing more positive. We are winning the deals we expect to win, and we are seeing customers specify our solution to OEM partners. All of these developments increase our confidence in our long-term future. Now we would be happy to take your questions. Operator?

[Operator Instructions] And our first question comes from the line of George Iwanyc with Oppenheimer.

Following up on your comments on margins, can you give us a sense of how much the very high-capacity radios in your new products would help the gross margin line relative to your, let's say, your average products that's shipping right now?

Overall, we do believe that our running rate and moving forward will reach the mid-30s of gross margins. They do help, and if the capacity goes up, the margins go up. It's a few points between the low -- I would say the mid-capacities to the very high capacities which have to do with licensing of capacity and software mainly.

Okay. And can you give us a sense of what the margin difference looks like from a regional standpoint, from Africa and Latin America versus Europe and North America?

It probably can play depends on the deals, and the margin is always a tough question because it has to do with the deal size, the geographies, the product mix, long-haul, short-haul. And this at this the end is -- will range from probably the low-20s to the 40s as the range overall. And depending -- and then you can take the geographies across so you can take deal sizes across, so you can take long-haul versus short-haul, so it's a complex mixture.

Okay. And one last question, on the OEM percentage, with the uptick you've seen this quarter, is that a level that you think is sustainable or the 3% seen last quarter more normal level?

My assumption is that it's sustainable for the next few quarters.

If you should look at the last, George, at the last 4 quarters, the OEM is running between 3% to 10%. We believe that it's again dependent on a specific deals that are coming. But in general, we believe that the range -- this is the range between the 3% to 10% going forward is the range we should look at.

Our next question comes from the line of Daniel Meron with RBC Capital Markets.

So first of all, Ira, can you provide us with a little bit more sense on those bookings increase, which regions was it coming from or specific customers? And while you're at it, if you can provide a little bit more color on the regional perspective. You did mention Latin America and Africa, but will it see some pickup in North America and maybe in India as well? So just can you provide a little bit more on the dynamics there?

I think we saw pickup in most of the regions. I think that where we saw the pickup is Latin America, Africa. We started, as I said on the call, we started seeing India coming back and picking up. And that's including what we discussed as a pickup in April of the orders. We still see a little bit of weakness in Europe mainly having to do with deals which go into non-mobile operators and networks, which are sometimes government-funded, U-funded, where those things are a little bit slowing down at this point. And APAC is also flat at this point.

Okay. And when it comes to -- on the operating cash generation, you had positive cash flow this quarter of $5 million, pretty encouraging. What do you think would be the trajectory for the balance of the year?

We said that the trajectory, as we said last year at the conference call, we said that we are going -- we're focusing for now to generate around $10 million over the year. We started with the $5 million operating and net of $1.5 million include everything except the loan repayment that we did. So over the year, we should look at it like this, we have $10 million for the year. Again, with fluctuations there could be quarters that we'll have negative and quarters that we have positive. But in general, this is the trajectory, no change from the guidance that we gave last quarter.

Okay. And then circling back, I think you touched upon it in your latter parts of the commentary on reaching the 10% operating margin, you did mention that India is coming back and the macro does seem to be improving a little bit. So where do you think we stand now as we look into, I don't know, beyond the fourth quarter on that. Is that within reach in your view?

It's probably within reach sometime next year.

And our next question comes from the line of Joseph Wolf with Barclays.

I guess, 2 questions. The first is if you talk about, I guess, pickup in the business and I guess, economically-driven hesitation of your customers to deploy, is the pickup that you're seeing, do you think it's going to be as gradual and kind -- or do you think that there will be a time perhaps later on in the year where we'll see some sort of a wave of pent-up demand that could actually surprise you to the upside just in terms of customer behavior? And then my second question, just in terms I want to reduce the noise here is for Aviram, you've been with the company for a quarter now, and I'm just was wondering as you look at the cost that you found internally for your own organization, are you comfortable with where you are on the cost side, or there's a program that you think you should implement that align in the company before and where are we going in terms of financial controls across the company given the new distribution geographically?

I'll start with the pent-up demand question. My belief things grow gradually. With the size that we are in and with the geographical distribution and the number of the operators, almost nothing happens everything at the same time. By the way, that's a good point that always plays both, by the way, on the downside and upside, a lot of stuff. We do believe we see pickup in the orders in different geographies. But I don't believe there will be pent-up demand and we'll see a huge jump. From a revenue perspective, by the way, it's always gradual. You see bookings fluctuate a little bit more. The time that you deploy, you install, you recognize the revenue, it at the end of the day flattens things out. And that's why, we believe we'll continue growing throughout the year, gradually reaching with a little bit more growth on the second half, reaching the 130 at the end of the year. But I can see major jumps between here and there. Aviram, to the second part?

To the second part, I'll address your question on the 2 elements, on the gross margin and on the OpEx control. On the gross margin, I think when we are looking here, you asked as the newcomer on the cost structure and the planner on the gross margin. I think looking at the plans and how they materialize over the last 5 months into the company and also looking at the trend over the last 3 quarters, you see that there's gradual improvement quarter after quarter on the gross margin. And I believe that the 35 exiting the year percent gross margin is attainable and the gross and the plans around this materializing and just need to convert it over time from booking from the deferred revenue backlog into the revenue. On the OpEx side, we ended the quarter non-GAAP of $36.3 million. We also gave the guidance for the year that will be between $36 million to $37 million as well. Looking in here and the overall OpEx, I believe that this is attainable. And while we are growing the topline, I think the infrastructure that we have both on the sales side, R&D and G&A is sustainable for the business at a 113 up that we're planning for now. So I think, yes, $36 million to $37 million is -- it is the right cost structure for the company at this level of business that we are planning.

And our next question comes from the line of Mike Walkley with Canaccord Genuity.

Just, Ira, just wanted to build on your competitive environment comments. Congratulations on the 2 wins in India from a competitor. Can you maybe elaborate on the competitive environment, and then how you believe you can stay ahead of your competitors on the cost structure to drive these gross margins?

Competitive environment is highly competitive, that's nothing new. That's the same environment we have been seeing here for the last 5, 6 years. I don't think any of that has changed. It's very competitive out there, and we're winning. We win the business on all factors starting with technology, with technology investment and design-to-cost, which drive a better cost structure and the availability of local services, which are specialized for the microwave backhaul with them descending in the capabilities to do quicker deployments and a much more professional role than doing everything at the same time. That's how we win the business, one by one with advantages versus the competition in all the different geographies. That's why we stay, and that's why we gain market share versus the competition.

Okay, great. And Aviram, just a question on some of the below the line items, how should we think about tax and interest expense-type line item? Is it still around $5 million for the total year?

Again, I reiterate the guidance that we gave in the last call. You should plan it on $5.5 million for the year, and you can look at the quarterly with some fluctuation but not a major one.

Okay, great, that's helpful. Just one last question and I'll pass it on. Just in terms of U.S., it was a little stronger than what I was expecting, especially for seasonally weak Q1. Is there any macro items out there that give you a better visibility in that region this year?

I think that all the operators are enhancing their networks at this point to support the current data growth that is needed. And that's what we're doing with the operators in the U.S. both with some of those direct and with some of those via carrier's carriers to provide the capacity with our network expansions. And again, going back to one of the prior questions, I don't expect to see a spike in the U.S. You see gradual growth within the market.

And our next question comes from the line of Alex Henderson with Miller Tabak.

So it really seems like the 2 primary drivers of the investment thesis in this company is, one, the expansion of the geographic footprint, but more importantly, within that, the eventual rebound in India which has been depressing the results for so long; and 2, the substantial cost advantage of the company relative to the competition. Relative to that latter point, I understand you guys are going to be more aggressive with new products in the back half of the year. Can you update us on where you are on the development of -- or the completion of the development of the chipset that gives you that next-gen product line and to what extent that drives a competitive advantage in the field in the back half of the year? I assume that, that's more of a 2013 benefit to revenues, but can you give us some sense on what timing might be around to that?

I'll start that products we announce when we announced products. You're hinting to us continuing on developing chipsets, and that's correct because that's part of the strategy of being vertically integrated, also in our current product with a chipsets and a very aggressive design-to-cost. We are on track with our development and development schedule moving to next-gen products. And I think you're right in saying that, that type of a contribution is mainly in 2013. The gross margin expansion this year is coming from 2 places. One is the conversion of deferred and backlog revenue, which is more and more from the new products, from the FibeAir product line which goes into the customers and design-to-cost efforts we've done around the long-haul which are showing up this year in the second half.

The other piece of this puzzle was the India rebound. Obviously, there's been some steps forward there, but there also seems to be some steps back. Can you give us an update on what you're thinking going on there if you got a crystal ball, that's that good?

I don't believe in crystal balls. I'll tell you what we are seeing. What we're seeing in India is that the established operators are continuing to deploy, okay? And the leading operator that continue to deploy, the people which were most affected by political and other issues with the regulatory issues within India were the new smaller operators. Especially if you look at the news, those are the people who got affected by having new licenses in the '09, '10 timeframes, which all step back. The big ones are still continuing to deploy. Moving forward, you see people thinking already beyond 3G and deploying also LTE into some of the regions. And I think the environment is -- it's slowly picking up. One comment on that when we are now very geographically distributed, our growth comes from different places. It comes a lot from Latin America. It comes from Africa. It comes a little bit from North America, but will come also from APAC and India. We are not dependent on any one of those regions as what you call an investment thesis. It's really the spread being the specialist in the all the regions where we can revive the growth and build the growth from the different areas.

Relative to the India market, the issue around acquisitions of -- rules around acquisitions of smaller deals of companies that need to be consolidated out, have you heard any change in context around that in India? I know that there were some impediments around that, that you couldn't buy -- a service provider couldn't buy another service provider if they have a spectrum. Has that all been resolved at this point?

No, it's not all of it has been resolved. It's still pending on the table. It's an open discussion. We, even had just as a curiosity had, the India Minister of Communication, there's other things had a visit here in Israel over the last few weeks, have even visited us here in the company. Politics is something that's very hard to gauge. It's moving forward. How quickly? The Indian papers are probably better guessing than I do.

Our next question comes from the line of Matt Thornton with Avian Securities.

Got a couple of quick questions for Aviram, and then I'll come back to one for Ira if I could. Aviram, for the fourth quarter, you got to talking about $130 million in revenue, 35% gross margin. If I do that math, I can't to an 8% operating margin. So just -- this is -- again, at the margin, should we be thinking $130 million-plus and 35%-plus? Or maybe just help me do the math there for the fourth quarter target.

$130 million, 35% gross margin, plug in around a $36 million of OpEx, you will get very close, and the rest you should take from the topline. This is a -- quite a -- I'll give you the complete simulation, okay?

Got you. That's the rest of the topline. That's helpful. And then secondly, the previous comment you made on cash, the $10 million for the year. Is that an increase to cash balance? Is that a cash flow from operations. I guess, which metric where you alluding to there?

Yes, we alluding to increasing the cash -- net cash because you need to remember that we're returning a little bit more than $8 million to the banks. So our cash reserves should be -- our cash balance should increase $2 million. So the net cash would be increased by $10 million. This is what we are targeting for the year and what we're seeing for now. Again, I would say that with some fluctuations between the quarters, a customer can pay a few days after or before, but end of the quarter it can fluctuate a little bit, but this is the target for the year and what we are seeing for now.

Sure, that's helpful, okay. And then, Ira, maybe you can just kind of walk us through and kind of bridge the gap. So obviously, to hit the $130 million-plus in the fourth quarter, it implies a fairly substantial uptick in acceleration of growth in the back half of the year. We all talked about India but that's probably more of a bookings issue this year that will impact revenue next year. So how do we bridge the gap to getting to that $130 million? What area is it going to come from? Are there particular opportunities, particular customers? And what milestones can we be watching for there to kind of bridge that gap?

In order to bridge that gap, I think when we gave all the indication. We believe a little bit of a stronger in Latin America, stronger Africa. We expect India to come up a little from the level where it is at this point. And U.S. in North America -- sorry, Europe and North America little bit up in Europe, flat. Provided a cost of regions, that's where they are. I think we gave guidance for Q2, $116 million to $123 million and then bring up the numbers in between.

Our next question comes from the line of Aalok Shah with D.A. Davidson.

I've got a couple of follow-up questions. A couple of quick follow-ups. In terms of the geographic distribution, especially if we start to see India pickup as a percentage of the mix in total revenue, does that influence your gross margin as it did in the past? And how should we think about just the mix of business overall going forward in terms of the margin perspective?

Yes, it influences the gross margin. No, it does not influence the gross margin. I think we gave guidance to what we think it will come up at the end of the year, which is an increase versus where we are right now. We took into account, the mix, a little bit of a change in the mix. Within that, as I said, deal size, geography, product mix, all effect the gross margins and so it's somewhere in there. And again, we talk a lot about India because we have interest but let's remember that right now we have 6 regions, all of them about equal where Latin America and Africa are the bigger regions at this point. And India will come back to be a little bit more significant than it is right now. We do not expect it to come to historical level before the acquisition but stay at conflicts of the business.

Just a quick follow-up, again in terms of margins. You talked about at the time of the acquisition there that there's more room to expand the gross margins and you've done a good job of that so far. I'm curious, is there more room to be had still in the gross margin front beyond 35% contact gross margin?. Can we start to see...

Long-term, we are targeting the mid-high 30s, above the 35, yes. I think we will return, if you look at Q4 2010 or around those numbers, I think we can attain those levels back, okay? Because a little bit -- a little while longer, but I think we can get back to those levels.

The next question comes from the line of James Faucette with Pacific Crest.

Just a couple of quick questions from me. Most of my other questions have been answered, but I did want to ask you quickly about Latin America and Africa. Latin America seems like it has been pretty persistent in terms of it being a reasonably good market. Can you talk little bit about what's driving all these technology upgrades that the carriers are embarking on or driving the need for throughput or kind of what the macro drivers are there. And obviously, you're expecting that to persist, at least for the rest of this year, but how should we think about Latin America as a market long-term? And then in Africa, is the improvement there primarily related to the Nera acquisition, or is there something else going on there that is also improving the fundamentals on the ground?

Okay. Let's talk first about fundamentals. I think the number one issue around fundamentals or the driver is what so far bigger system vendors call modernization. All networks will want to go through a modernization phase where we excel with that modernization by really upgrading the microwave backhaul network and really replacing old equipment with higher equipment which drives capacity and in some places, also geographical expansion. While you do that modernization, you reach the town and now instead of single base station, you'll have 3 or 4 across the town to give both better capacity and better coverage all over the world. Depending where you are, if you're in Europe, it's mainly modernization. If you are in Latin America, rather you'll see a mixture of modernization and geographical expansion. If you're in Africa, you'll see more of geographical expansion across that. All of that having to do with providing higher high-capacity of data. Right now, in most places around the world, it's still 3G plus-plus, HSDPA and other types of technologies, which drive the requirement for the backhaul and in other places we already see LTE networks or LTE initial deployments which drive the network expansions. If you look both a classical or over time perspective in the business, it's really what we did is we expanded our geographical reach and we have today a lot more feet on the street, a lot more people which do local services, a lot of people which really can sell the complete solution, which is not the box but the working link for the customer across the geographies, including Africa, and that's what drives the expansion of the business, and we're gaining from that.

And our next question comes from the line of Alex Henderson with Miller Tabak.

So the deal with DragonWave and NSN just closed, how do you think that transaction is going to impact you guys? Is that creating an opportunity because it seems to me that's a lot weaker hands and a lot less incentive to sell that product going forward?

First, I think the deal did not close. If you read carefully, they signed an amendment deal and they expect to close in the future. I think they even gave a date somewhere in early June. And if I read correctly some of the press releases, the deal is not closed yet. I want to be fair to the deal as much, but I think from a market perspective at this point there's confusion, and I think we are taking advantage of it.

On the 10% side, is there -- can you remind me was there 10% customers in the quarter?

No 10% customers in the quarter.

And currently, there are no further questions. Please continue.

I'd like to thank everyone for being with us on the call, and we will be glad to take further on question on one-on-one discussion, which we'll be having with all of you over the next few hours and few days. We're going to go a little bit more into the details. Thank you again, and see you soon both on the phone and face-to-face. Thank you.

Thank you.

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