Good day everyone. Welcome to the Ceragon Networks Limited Fourth Quarter and Full Year 2015 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 on the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the current belief, expectations, and assumptions of Ceragon's management. For examples of forward-looking statements, please refer to the forward-looking statements paragraph in the 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 associated with a fairly decline in revenues beyond Ceragon's expectations; the risk that Ceragon's expectations regarding future profitability will now materialize; the risk that Ceragon will not achieve the benefits that it expects from its expense reduction and profit enhancement programs; the risk that Ceragon will not continue to comply with the financial or other covenants in its agreements with its lenders; risks associated with doing business in Latin America in general, and in Brazil in particular, including currency export controls and recent economic concerns; risks relating to the concentration of our business in India, Africa, and in developing nations, including political, economic, and regulatory risks from doing business in those regions; the risk of significant expenses connection with potential contingent tax liability and other risks and uncertainties detailed from time to time in Ceragon's Annual Report on Form 20-F and Ceragon's other filings with the Securities and Exchange Commission; and represent our views only as of the date they are made and should not be relied upon as representing our views as of any subsequent date. We do not assume any obligation to update any forward-looking statements. Ceragon's public filings are available from the Securities and Exchange Commission's Web site at www.sec.gov or may be obtained from Ceragon's Web site at www.ceragon.com. I'll 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 Doron Arazi, our CFO. Both our Q4 and full year result validate the effectiveness of our value-based sales strategy. Before discussing the details of Q4, I'd like to talk about the full year, which illustrates the progress we have made since we began implementing the strategy more than a year ago. In 2015, we returned to profitability and exceeded our goal of 7 million non-GAAP net income. This was achieved through a combination of continued improvement in product cost, very stringent control of operating expenses, and most important, for implementing our value-based selling strategy. This strategy focuses on pursuing the highest value deals, meaning the ones that meet our profitability and working capital criteria. This usually means deals where the operator is willing to invest their own time and resources to access backhaul vendors individually, and award the largest share of the business to the vendor they believe offers the best overall value for their particular requirement. During the course of 2015, we have been able to increase our non-GAAP gross margin by close to 700 basis points from 26.3% in Q1 to 33.2% in Q4. That is while we did not have an optimal geographic mix to help us. We are pleased that North America was up 15% in 2015. However, revenues from India was also up by the same percentage in '15, and other regions that tend to have gross margin above the corporate average declined year-over-year. Perhaps in the future we'll be fortunate enough to see the geographic mix shift towards all the highest margin regions at the same time, but any such shift is likely to be temporary. Therefore we pursue a strategy on a deal-by-deal basis, globally, despite the regional ups and down.…

Thank you, Ira. Since you have all seen in the press release, I'll just highlight some of the significant items. Our fourth quarter revenues of $75.6 million represented an 11% sequential decrease from Q3. The geographic breakdown of Q4 and full year revenue appears in the press release. There were no major shifts in geography from Q3 to Q4. APAC tends to be lumpy. This quarter it was partially due to revenue recognition timing from one of our bigger customers as was the case in North America as well. We had one above 10% customer in the quarter, a large operator in India that is a longstanding customer. Once again, we significantly exceeded the gross margin target we set to ourselves a year ago. In Q4, our gross margin improved sequentially, to 33.2% on a non-GAAP basis. We believe we can sustain gross margin levels above 30% in 2016, with some fluctuations from quarter-to-quarter based on the exact mix of revenues we will recognize during a particular period. Non-GAAP results in Q4 excluded the net income of $3.2 million of the usual items, non-cash tax adjustments partially offset by stock-based compensation and amortization of intangible assets. In Q4, we continued to maintain tight control of our operating expenses, which were $20.2 million. We expect to keep this level during the current year. We reported a non-GAAP operating profit of $5 million. Our non-GAAP operating margin of 6.6% exceeds our original goal of reaching a mid single-digit non-GAAP operating margin by the end of the year. Non-GAAP financial expenses were down from Q3, to $2.3 million. Our non-GAAP net income was $2.1 million, or $0.3 per diluted share. Turning to the balance sheet, receivables were $120 million with DSOs of 126 days, in line with our expectations at the beginning of…

Thank you. [Operator Instructions] And first from the line of James Kisner with Jefferies, please go ahead.

Great, thanks very much. So just want to understand your comment on seasonality a little more for Q1. I look at the last couple of years; it was down 60% sequentially in March of '15 and 21% in March of '14, I'm wondering if that's what you consider normal seasonality down 15%-20% and maybe it help us out understand like how much more exaggerated that could be in Q1?

I don't think it could be more exaggerated than what you have indicated. However, this is pending [ph] some revenue recognition issues that we have with one of our project, but generally speaking, at this point we do not expect something that is more, I would say, deeper than what you have just mentioned.

Okay, and so relatedly [ph] on the revenue recognition issue, so I think you mentioned in North America and APAC, it sounds like North America issue was bigger, but you had rev wreck issues for both regions. Is your guidance for Q1 assuming that some of that revenue is scored, or that revenue recognition issues that you're citing are affecting Q1 or is it the same that are affecting Q4, and I guess I'm wondering when you expect to recognize that revenue that you're missing in Q4 and perhaps even how big that is.

So first of all, referring to North America, the issue there is much smaller. And yes, we do expect this to rebound in Q1, and we are working on that, but it's still work in process. Regarding the other business, it's much bigger. It could be up to $5 million, even $6 million impact on a specific quarter. In both cases, North America and APAC, we do believe that we will be able to recognize these revenues over the rest of the year.

Okay. And so just to be clear, that the rev wreck issue that's potentially [ph] affecting Q1, that's the same issue that was affecting Q4, or those are separate in terms of APAC and the others, or they're separate issues?

In APAC it's basically the same issue. It's a big project, where the acceptance process that is defined in the contract is not exactly what's going on in the field, and a customer may have other priorities. And eventually all of us know that the customer is the customer, and we are working closely with the customer to satisfy his need, as well as figuring out what can be done.

Okay. So I guess just relatively here on the revenue levels, so Q1 is going to be down, I mean this is -- Q4 is that -- I guess fourth quarter down -- in a row that's down, and I'm just wondering like the absolute revenue level is -- is this Q4 level kind of roughly we should expect this year? Should we expect the average to the year is lower than that? And I know there's a lot of uncertainty out there, but from a modeling perspective, just looking at the trajectory, any kind of help you could offer on revenues, even if it's vague would be helpful. Thanks.

Yes, with the caveat of the headwinds in the macro economy that we have started seeing, I think that you need to think on 2016 as the average level of the last quarter, meaning Q4 of 2015. This should be the annual average number for each and every quarter in 2016.

Okay. And last one, what's the status of the credit facilities? My notes here have it due in June. Is that still the case? And I assume you'd be extending if it's due in June?

We're on the last milestone of extending it. Basically everything is agreed upon, and it's just a matter of just signing the papers. We believe that this will be behind us within two or three weeks max.

All right, thank you very much.

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

Yes, so it was a good line of questioning, I thought I'd just make sure that I punctuate what we heard. It sounds like your revenues for the March quarter are down in around the $60 million revenue level, but for the full year you're suggesting a number that's close to 300 million, which would suggest you have growth starting to rebound in the back half of the year. Is that the right way to think about what you said?

Yes. We do believe that if what we see in the macro is relatively short-term, that's going to be the behavior of our revenue and our business throughout 2016.

You also said in the comments that you expected to be profitable across the year, but it doesn't sound like the first quarter achieves that goal, given that $60 million level, even at 32%-33% gross margin it looks like that would be a loss. Is that also accurate?

Basically as you said, if you assume very low top line all the way through '16, we could be in a situation in which we'll have relatively small non-GAAP loss, but we believe that the rest of the year is going to be profitable, and hopefully if we can recognize the revenue that we cannot recognize in Q1 throughout the rest of the year, we will compensate for that. At the same token, if we are able to come to a higher revenue as part of accelerated acceptances or negotiation with the customer, then numbers can still be -- in terms of bottom line for Q1, still be positive.

All right, so it's there right around the area. So the other question is around the interest expense line. You've obviously done a great job of bringing down that debt position too and now and that cash position. I assume that as you're renegotiating, your rates are coming down as well. So can you give us some direction on what the trajectory of that interest expense net other line is going to do? Is it going to still be in the 1.6, 1.8, 1.9 range in the first half? And does it go below that in the back half? And when is the inflection point when they actually -- your rates change?

So first of all, you need to bear in mind that our financial expenses are not including just the interest. The big piece that we have suffered from, in both 2015 and also in 2014 is the foreign exchange rate, especially in the developing markets. You probably know that during 2015 the dollar went very strong, oil prices went down, and this had a lot of adverse impact on this line. So I think that we need to think in terms of what we can influence and what we can't. And I would say, generally speaking, that if we are at the run rate of $2.3 million, approximately half of it -- maybe slightly less than that is foreign exchange rate. If currency rebounds we will probably see much better results in this line. The rest of the piece, which is interest, and I think you should talk about between $50,000 to $100,000 decline from quarter-to-quarter.

Okay. So if I assume the dollar is flat versus the shekel, then that would be 1.6ish kind of number?

Yes, and I can tell you that the shekel is the least of our problems. We have a very good hedging methodology, and hedged shekel is not our problem. Our problem is exotic currencies such as the Indian rupee, such as the Nigerian currency, to some extent the Brazilian and the Argentinean currency, is that either you cannot hedge them or the cost of hedging is so huge that you have no choice but just take the risk and try to do some, what I would call, natural hedge. But generally speaking, 1.6 could be a very good target for us, assuming the currency effect is much lower than what it was last year.

I see. Okay, I get it. And then just going back to this revenue recognition issue that you're highlighting for 1Q, is it likely that that's going to cause a lump-in quarter as the March quarter is a lump-out quarter where you get a spike in, say, the June or September quarter, or is it likely to be spread over the course of the remaining three quarters of the year?

Yes. At this point, I think that what we will see is that this, up to $5 million or $6 million are going to spread over the year. And only if we can either do some significant change in the engagement this would actually be something that is happening in one quarter, and we see some lumpiness there. I think that the assumption should be that this will probably spread over the year.

Okay, let's see the floor. Thanks.

Our next question is from George Iwanyc with Oppenheimer. Please go ahead.

Thank you for taking my questions. Going back to the quarterly transfer 2016, what gives you the confidence that you can get revenue back above 75 million at some point, which regions do you have good visibility into from either a deal flow standpoint or individual customers that already have given you discussions on order flow?

I think that's -- I think you mentioned exactly where we are. (A) We will look at our backlog at this point and see what's the inflow of deals that we had over the last two or three quarters coming in and what rate they will sustain. And then looking at the rest of the year across the regions, we still see a strong demand in India. We see demand in the U.S. market, in some of the Latin American markets. I think I mentioned over the call both Latin America excluding Brazil and Mexico, coming in. We see stable demand in Europe. That's why we think we can sustain those rates.

Okay. And that's assuming the uncertain core macro environment that we have right now? So if it would have to get worse do not provide some growth in later quarters.

Yes.

Okay. Shifting a little bit, the IP-20 platform has given you a lot of flexibility in incorporating new technologies, but with the small decreases you've seen on the R&D front from quarter-to-quarter, how long do you feel you can sustain the flexibility in the leadership with that platform without having to start ramping up spending on R&D again?

Okay. You have to remember that at this point, we are spending both on the platform and its flexibility and continuing driving the platform forward and already spending on future pieces which will come out later. We believe that the current rate of R&D is something that we can maintain and do not need at this point or in the foreseeable future to ramp it up. Just look at the announcement, and yes, it's vision and some of it is technologies that we have already, but not productized yet and some are the stuff that we are working that we announced before Mobile World Congress, as the 5G discussion starts now over three or four or five years down the road from now. So we believe we are well-positioned within the technology cycle, both now and moving into the future.

Okay. And just final question on the competitive side, you mentioned that NEC seems to be doing fairly well in the value -- higher value segment. Do you see the vendors continuing to stay in the market but at different segments, or do you see actual consolidation at some point?

On the top end market which is non-value based more commodity based, the big players are mainly the big vendors, which is a Sony Ericsson and some light of the LU Nokia business at this point, which has mainly bundled the deal. There I think -- that's my personal opinion, we are probably seeing the consolidation happening with three big players. In the value-based where we play and where we are the largest together with NEC, yes, there are different shifts and moves in there, mainly from the smaller vendors. We do expect this market to have shifts, consolidations, and other plays within it over the next couple of quarters.

All right. Thank you.

Our next question is from Gunther Karger with Discovery Group. Please go ahead.

Yes, good morning, two questions; number one, what percentage of the total revenue is represented by vertical market? And is it fair to make any comment on the vertical market?

The percentage of revenue for vertical market is not high, probably, the level of 30%-40% and even lower than that depends how you quantify the vertical market. If I sell to a distributor to Tier II operator and I have a negotiation with this Tier II operator directly, is it vertical, or is it our main market? So it's hard to really quantify it, but it's probably around the numbers again slightly lower than that. I think that we've seen this market as being relatively steady. So, no specific color on that unless Ira, you want to add on top.

I will add on top of that that, yes, we do put a focus on some of the vertical markets. They still stay a small percentage of our overall market, probably a bit of a larger share of our business come from that from the overall market in there. They do compromise a nice segment within the best of breed because those are markets where they really buy on value. We did put an offer and we are pushing very hard into the public safety market in the U.S. We introduced new products in that market end of last year, early this year. We are focusing also on the big advantage that we have in what we call moving platforms, mainly around oil and gas drilling, which we see both trends in there because of oil and gas sometimes slowing down, sometimes accelerating to save expenses using a lot more data in the market. And we do see that a very significant part of our sale on value strategy.

Thank you, Ira.

Thank you.

[Operator Instructions] We have a follow-up from Alex Henderson with Needham. Please go ahead.

Yes, I just wanted to make sure that clarified some of the comments you had made. It sounded like you expect the full year profitability to actually improve in '16. And I think you have even used the word significantly improve in '16. Yet, when I run the model out here with possibly a breakeven to slight loss in the first quarter and returning to $75 million plus type numbers in the remaining three quarters and using around 33% gross margin and again using about the same level of OpEx, I am not actually coming up an increase. I am coming up with slight decline in earnings for the year. Could you disabuse me of some of those assumptions that are allowing me to come out a result that's inconsistent with your positive comments about the trajectory?

First of all, let's make it clear. We were talking in the formal announcement about two aspects. One is profit and the other one is profitability. We say loud and clear that we believe that we can maintain the level of the gross margin, which is basically profitability at the level of gross profit strongly above 30%. So, I don't know what you put in your model, but…

33%.

Generally speaking -- it could get even to 33 although as we said, we are very cautious and there could be some lumpiness there as well. This is one thing. The other thing is, and we stated that couple of times back, we are talking in terms of constant currency. We're taking very small impact of exchange rate in our model because this is something that we cannot control. And probably, the other difference is in the numbers of the finance expense.

Again, I am using interest at 1.5 million per quarter, which is I think consistent with your interest expense line excluding currency and gross margins at 33% which stands a little large and I don't get an increase in profitability for the year if I do those -- do that math out. Am I missing something here? I mean it doesn't sound like you are forecasting an improvement in EPS for the year. Am I correct in that assumption?

This is not the model we have in front of us under constant currency. And we do expect to have a significant improvement in the bottom line. So if we did $7 million or $7.4 million in 2015, we do expect to exceed that on a constant currency basis significantly.

Okay. Let's see the floor, thanks.

And Mr. Palti, we have no further questions in queue.

I would like to thank you all for joining us for today, like always, you're welcome and to follow on discussions on a one-to-one basis. I will be glad to entertain further on questions. I am also inviting all of you, we will be next week in Barcelona to join us and come and meet us face to face in our booth at the Mobile World Congress. We will be having and exhibiting some our products and some of our vision and technology towards the 5G world. Thank you very much everyone.