Good day, everyone, and welcome to the Ceragon Networks Limited First Quarter 2017 Results Conference Call. Today's call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks. Today's call will include statements concerning Ceragon's future prospects that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the current beliefs, expectations, and assumptions of Ceragon's management. For examples of forward-looking statements, please refer to the forward-looking statements paragraph in our Press Release that was published earlier today. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including the risks associated with the decline in revenue; the risk of the decrease in the amount of business coming from a certain geographic region from which is significant portion of Ceragon's business is generated; the risk associated with the change in Ceragon's growth margin as a result of changes in the geographic mix of revenues; the risk associated with the loss of a single customer, or customer group which represents a significant portion of Ceragon's revenue; the risk associated with Ceragon's failure to effectively compete with other wireless equipment providers; the risk relating to a concentration of Ceragon's business in India, Latin America, Africa and in developing nations and the political, economic and regulatory risks from doing business in those regions, including potential currency restrictions 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 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 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 Doron Arazi, our CFO. The results we reported for Q1 today are in line with the expectations. These results reflected the typical seasonal pattern for sequential decline in the revenue from Q4, which was mitigated a bit by the aggressive delivery request of our major Indian customer. Revenue for multiple customers in India was slightly higher on an absolute basis than Q4; another percentage basis, it represented a much higher proportion in Q1 accounting for 36% of total revenue. In terms of bookings, our book-to-bill was substantially above 1 and came close to an all-time record. This is not a typical pattern for Q1, which tends to be the low-booking quarter as operators finalize the budgets for the year. This high level of booking was a result of the large orders from our major customer in India, which we announced early in the quarter. Non-GAAP growth margin for the quarter was 30% as expected, a very good level considering the high proportion of equipment versus license revenues we recognized from India, related to large orders in Q1. We expect to recognize more equipment in a higher proportion of license revenue from India in Q2 with the revenue from services mainly in Q3 and some in Q4. Overall, based on the expected geographic mix and other factors, we expect both margins to improve in the current quarter and return to levels above 32% in the second half. The 1 we'll discuss the near-term outlook in more detail. Meanwhile, I want to remind everyone that our primary goal continues to be to improve net income as much as possible and continue to target a substantial increase in that income on a constant currency basis in 2017. Now I'd like to…

Thank you, Ira. I think you have all seen the press release. I'll just highlight some of the significant items. Our first quarter revenue of $76 million represented a 10% sequential decrease from Q4, reflecting the typical seasonal pattern in most regions. Meanwhile, Q1 revenue was up 27% from the Q1 of 2016. As expected, our book-to-bill ratio was a potentially above 1 due to the large orders we received form our major customer in India [indiscernible] Q1. Typically, Q1 is a relatively weak booking quarter, but the seasonality was offset by the large orders from India we announced during Q1. As shown into this press release, the geographic breakdown shifted somewhat in Q1 compared to the past few quarters. As expected, India accounted for a higher percentage of revenues. Asia Pacific which tends to be lumpy was also higher in Q1 and after several very strong quarters, revenue from Latin America was lower, mainly due to a temporary budget-free at one large customer. We had one above 10% customer in the quarter, our largest customer in India. Non-GAAP growth margin was 30% in Q1 as expected, primarily due to the regional mix and the timing differences of recognizing various types of revenues such as equipment, software and services. When we negotiate the deal, we look at the contribution to the gross profit from the entire deal and make sure that the deal meets our expected gross margin. However, when the accounting rules are applied, the timing of recognizing the various types of revenue may not be proportionate in each quarter, which can cause gross margin to fluctuate from quarter-to-quarter on top of fluctuations caused by geographic mix. In Q1, we recognized revenue for a higher proportion of equipment versus software related to the large orders in India. Conversely, in…

Thank you. [Operator Instructions] Our first question will come from James Kisner with Jefferies. Go ahead please.

Hi. Thanks, guys. Congrats on a good quarter and thanks for a very detailed information on the outlook. But I want to drill a little bit in the Q2 comments for a minute. I believe before you thought you're going to get maybe 23-25 million orders from India hitting in Q2 - and I guess you're now saying it's going to be below 75 X those orders. I want to verify that first point, that you're still looking for another 23-25 million incremental [ph]. I want to make sure none of that really fell in Q1, maybe lower and also we're talking about a few million dollars here. It sounds like you can [indiscernible] $75 million, but for the underlying business to be something like $70 million, just help us out so we can model future revenue. Thanks.

Yes. This is Doron, let me elaborate. We are feeling the view that a Q2 is going to be significantly higher than the range of $75 million to $80 million we were discussing the last couple of quarters due to these orders that came from India. However, it's not they're going to be as higher because of the relative changes and deferral of some of the projects we discussed on the call.

Okay. Again, on the underlying business that's below $75 million that we verified not going to be $5 million lower on that, your base business X that order from India?

Can you repeat the question, please?

Well, you're saying that you're going to be below $75 million to $80 million on sort of that based business excluding the large order. I'm just trying to verify that we're talking about a couple of million dollars below $75 million, not $7 million or $8 million. Just trying to really understand what that underlying business looks like in Q2 more specifically from your perspective?

We expect it to be if we carve out the additional revenue that we are getting or gaining on these large orders that we received from India. We expect that numbers to be at the lower end of the $75 million to $80 million and even slightly below the lower end. If we add up the extra revenue, we will be generating from the large orders from India the total revenue is expected to be significantly higher than the $75 million to $80 million range.

And those incremental orders are still in that $20 million range from India? Or are they going to be a bit lower?

Hello? We lost you. Operator? Now I can hear you. We lost you for a second.

Okay. Again, the incremental orders from India, they're still not that $20 million to $25 million range in Q2?

Yes. We expect an addition of approximately $20 million to $25 million range as a result of the orders coming from India to Q2.

Great. Thanks for clarifying all of that. Just tell me, Latin American customers and the internal issues. What's the underlying cause? There's an obvious underlying cause. Is it leveled turmoil? Financial stress? What's causing that? Do you have any idea?

We don't have a clear idea, but my guess is that having to do somewhat with currency fluctuation, some of it is reshifting some of the plans and sometimes typical because they are a little bit reshifting some of the plans. They woke from the budget longer than I expected. I don't think that's significant change in the way they are thinking order deployment plans. It's how they allocate the budget, the CapEx and it took longer than even the team, they're expected.

This is a sort of similar question on the U.S. customer that's pushing out. Are they reconsidering your strategy? Or they again just trying to get to all the budget in Indian sites there?

No. The U.S. customer is mainly - not as quick as they expected to ramp up their deployment scenarios. They are on track and they're moving nicely forward, but it's a little bit slower than they expected which usually affects orders as well. By the way, not on typical. Most large deployments we see around the world. Plans are sometimes a little bit more - I would say more aggressive upfront and sometimes you have ramp up issues. Usually people do catch up a little bit later and now on target.

Okay. Just the last one and I'll pass. Like your comment to the multi-core, can you just briefly tell us the [indiscernible] customers' multi-core? I'm just kind of wondering if you start to see any incremental interest with new customer with the...

I'll give you one advantage. Okay? This is the obvious one, which is the capacity and simpler deployment and the capability to do my most [indiscernible] with the outdoor. But I'll give one which they have been talking with customers lately as what we call technically advanced frequency reuse. But from a customer, I'll say this, you are in a dense urban area where you ran out of frequencies. You ran out of the capability to put in more length and because you really need not to densify the network and add more base stations because you have a lot of traffic, you have a lot of limitations on what you can do. Standard thinking is that if you reuse a frequency, you'll need about 90 degrees difference between two base stations if you look from the tower where you are connected to. So we have very limited capability of where you complete the base stations with multicore and because we doing very special processing on the multicore, we can narrow that Gap with instead of 90 degrees to 15 which in a customer term of the mean they put their base stations where ever they want and reuse the frequency again and again and again. This is a significant advantage with the deployment capabilities of the customer which simplifies planning, allows a lot more flexibility from their perspective and allows them to much more rapidly deploy a dense congested urban area. That's one example, I probably can go on for another 15 of those, which in different conditions with different customer and that's what we were referring to as working with the customer and their challenges, cause the different in different environments those things around the deployment scenario, the inventories, a lot of stuff that the multicore simplifies.

Thanks I will pass it.

Our next question will come from Alex Henderson with Needham & Company. Go ahead, please.

Hey guys, so said very clear and concise here just make sure I have the comments correct you're saying that the June quarter revenue will be slightly below the $75 million target band on average for the year that, is that correct.

No. What we're saying is that we still expect the June quarter to be significantly higher than the $75 million to $80 million we were discussing as our ballpark numbers for 2017, still because of the large order we have received. The only [indiscernible] is because the $75 million to $80 million they are regular stuff, is coming shorter because of the delay in some of the project. The overall amount that was anticipated originally when we got the orders from India, is now going down likely, that what we think.

So to paraphrase the revenue should be above the $75 million to $80 million range with the baseline product sales down a little bit because of some softness in Latin America and some delays and timing of U.S stuff but it's above the $75 million to $80 million range, is that correct.

Yes, it was significantly above.

Okay great I guess it wasn't clear when you gave your presentation, and then all the gross margin side because of the shift to India, despite the better revenues, the gross margins are only improving a little bit in the June quarter. So in the 30 to 31 range sound like the kind of ballpark you're talking about. And then I was a little bit confused about the comment about 32%. Was that -- You saying that you expect to be at 32% range for the year or you're saying that you expect to be about 32% range in the back half of it wasn't clear what you meant.

That's what I said I expect our gross margin to be above the 32% on the second half of the year.

So kind of on track to hit that 32% plus range for the year.

Yes, basically this is what we target and because of that we are not there making any change to our target of improving the net profit.

Right, and then you made a comment about the OpEx being a little lower, I'm actually very impressed of your OpEx number in the March quarter, given I think the shekel actually strengthened during the March period. Have you been more aggressive on the cost cutting side that in cost containment side in 1Q, how much of a pop up should we be looking at a little bit above the and the $20 million quarterly run rate going forward, and maybe approaching up in the 21 ranger can we keep it down below closer to the $20 million range as we go out over the next three quarters.

Let me answer you in two pieces, first of all the impact of the -- of the shekel is basically already imbedded in the our numbers. And it's primarily the impact that I would say to some extent diminished because we're doing hedging and we have a hedging policy for main expenses in shekel. So while they impact is already included it's not that major, that would make or range of OpEx change now. And going forward I think you should expect slightly higher OpEx still within the range of the 20 to 21. But it will be a slightly higher. And because of different reasons some of them are obviously different commissions to say two agents and other people that are involved in the setting for the business. And the fact that Q1 is usually a Q where when we plan our budget, we plan it to be at the lower end of the range, because we know that this Q is usually slightly weaker in terms of revenue than the others.

And then just if I could, the tax line is always difficult for us to forecast, I was a little surprised to see it a little bit lower than what we were expecting in 1Q. is that going to stay a little lower, are we going to be able to sustain tax rate that at or below the 2.4 million that they did 2016 is that kind of the rate ballpark or should I be expecting a little bit of a pop up in the back half of the year as your profitability improves sequentially.

I think that the letter assumption is more all coherent and reasonable and we do expect the level of the tax expensive to go up. And I don't think we will they had the $2.4 million you seen in 2016, I think it will start going up, it would be probably be closer to a $3 million, maybe shot of $3 million. But I think that the trend is going to be trained up.

One more question, could you tell me what your head count was at the end of the quarter.

It was slightly above 1000 employees.

Okay, and so if I would like to just shift the gear from the mechanics to what I think is the biggest question mark in front of the company and I am not sure if do you want to because I think it is critical. A 5G looming and a clearly it's going to be a different world, it's one where there's a lot of virtualization, that talk about putting that the base stations little further out and virtualizing them. They're talking identification, there's a lot of discussion about fiber to the tower in many instances. On the other hand they're talking about the putting 5G in light towers and instead of fiber into the home and using that to give you a gig in your house. A lot of variables here that significantly alter the environment for wireless. Is it a net positive for your growth rate. Or is it something that we should look at with trepidation because the capacities go up substantially. And then second, as they shift to 5G happens, doesn't that put a huge premium on your value proposition around multi core and shouldn’t that result in significant share gains as well as less price sensitivity, as a result of the fact that you're one of the few people can actually deal with that higher capacity environment. Lot of material in there but I really need to get my arms around why I should be bullish on you around 5G as opposed to nervous about it.

So I would way in ways we think 5G opportunity, I think that I alluded in my own remarks that we are looking into different opportunities. I think you touched though right are livers on 5G, a lot more capacity, a lot more densification and base stations, some of them virtualize, some of them small cells trying to do [indiscernible] access. With that said on the -- on the table I’ll touch two points on that specter room to give you some insight. One, the big question we getting okay then everything will be fiber. I heard that I think in 3G and 4G and everywhere, yes we will see more fiber, because of the big the marc base station central points will be a lot more heavily capacity constrained then we'll get there -- people will get that with fiber but at the same time you will see a lot more base station large, small, small cells location, which will not be served by fiber. So I think the net will be probably a slight increase in the usage of the microwave back wall of all sorts to reach those locations. By the way sometimes in different frequencies, sometimes in different configurations. But for example all outdoor as solution and others. So we believe that 5G in general in our core market, which is back wall is net positive. The second point about this is the cautious is it will take time. It's not something we will see next year, although I see all the hype in the U.S around 5G, but if you dig a little bit in there people talking on may be starting 2018, and anywhere where we talk with the experts, people do forecast the significant waves of 5G worldwide to happen is probably 2020 and not before that is what we hear from the Europeans, that's what we hear from of other markets and will happen like in 4G will be a catalyst for a wave, probably a little bit on the other roads on that side I am a little bit more cautious. I don't expect that to be a spike next year, although we see a lot of the hype around it is in the U.S market. In addition to that and that is what I alluded in my comments, it opens for us all sorts of opportunities which are in adjacent market to where we are, having to do with different ways of designing backhaul because of densification in some frequencies and maybe even in some places touching the total axis piece in thee especially at the very high capacities - maybe not to the home, but above that in some place. And this is part of the strategic initiatives we are looking at internally at this point and evaluating our options. Does that give you a better picture, Alex?

Yes. The last question piece on that was the impact of the shift. Does it accelerate your advantage as a result of your multi-core capability to being the most advanced and therefore changed the market share and a lot of people take...

I think people will pay premium for the multi-core.

So was that something that happens quickly, or is that something that takes -- going to your point of time.

I said in my comments, telecom operators never make big changes quickly.

Right.

It does will allow us to slowly continue to gain I think market share.

Alright.

Thank you, Alex.

Thank you. Our next question is from George Iwanyc with Oppenheimer. Go ahead, please.

Thank you for taking my questions.

Good morning, George.

Just following up on the revenue outlook for the year. If you took India out of the picture in the second quarter, are you comfortable with a normal first half, second half seasonal pattern with the fourth quarter being the strongest part of the year?

At this point, based on what we know, the answer is positive.

Okay. So a decent lift -- do you still look at that $25 million to $80 million band for the second half, or could you be at the higher end of that at the end of the year?

Due to the delay that we have seen for the first half of the year which we discussed as part of our comments, we tend to believe that there will be some catch up and this is why we tend to believe that the numbers would be toward the higher end of the range.

Okay. And as you look at the spending patterns, flat to down this year on the dollar basis, do you see either early 5G or some other impact next year that could potentially start to lift carrier spending on backhaul overall?

I think that's what I indicated in the prior question on that. No, not next year. We believe next year will be very - from a spending perspective - probably either flat to slightly down. Slightly down means lower single digits probably. Our target is to try and mitigate that by gaining market share within the market of the markets that we are in and target slight increase for Ceragon as a whole. But very slight increase so we can continue our trend of improving the net profitability on the bottom line. But at this point, it's still I would say a little bit on the far away. This is our target, this is our thinking as we look into the market. 5G will start accelerating and increasing and significant number, probably somewhere at the back half of 2019, probably not before 2020. Because when you talk at a lot of operators worldwide, they say in some ways 5G WAP. Yes, they're looking at evaluating technology, let's remember like any of the big waves we are in the - specially for mobile in the hype space. I think we'll see pockets with 5G fixed wireless axis coming a little bit earlier. But again, we know markets worldwide.

When you look at the market share opportunities, are you looking at mainly gaining in the public safety, the oil and gas and maritime type of opportunities such you mention? Do you feel the competitive fun has eased up a little bit because the product leadership that you have? Can you add a little bit of color there?

We're targeting two things -- one is market share in the mobile space using the multi-core everywhere. Now again as I said, gaining new customers within the mobile space is a slow progress. You need the geographical spread, the relationship with the customers and it's a slow process. The other is yes, we are targeting the vertical markets there a little bit more aggressively -- a little bit deals there, also long term there because we can provide in the oil and gas and maritime very unique products and in the public safety, also taking the multi-core everywhere and mainly the multi-core all-outdoor and making it built specifically for that market. We think we can gain market share. This is more short-term, probably back half of this year and early next year. But again, if I look at those markets, this is about in general 20% of our business. So I've been gaining a little bit market share there within all the verticals we are. We'll have a small impact on the total numbers. Although it's important for us because those markets are usually a little bit more profitable than the mobile space.

Okay, thank you.

Thank you. [Operator Instructions] And we do have a follow-up from Alex Henderson with Needham & Company. Go ahead, please.

Yes, thanks. I wanted to go back to the discussion about the U.S. environment. There's obviously a lot of press around potential M&A, both Sprint and T-Mobile if there was an event there. Does that alter your thinking about the outlook for the year and would that negatively impact the trajectory of business at those accounts?

I'll say it this way, both are very good customer of ours. So it gives us a very good position if - and a big if - because I've seen all the rumors, they merge. There is always the question prior to the merge, how aggressive each one of them is joking for a position, gaining market share and customers in between them. That might have an acceleration effect before. If they do merge to be realistic and we've seen it worldwide, there's usually the period of probably six months, sometimes less, sometimes goes all the way to nine months where people now are trying to evaluate where is their share versus building the network and then when they found their share, how does the merged network look like? And then they go back into spending more than growing the network type of mode. At that point, if something happens there and it's a big if, then I think we're at an excellent position.

Okay. That's what I needed to ask. Thanks.

Thank you. We have no further questions in queue. So, please go ahead with any closing remarks.

I'd like to thank you all for joining us on this call today. We're open to any further follow-on questions on one-on-ones. Please feel free to call us and contact us and schedule one-on-one discussions where we can give a little bit more color on the topics that we discussed, both the midterm and our strategic goals to keep on driving and improving our profitability and growing the company. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and choosing AT&T Executive Teleconference. You may now disconnect.