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…

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…

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.