CRNT

Ceragon Networks Ltd. (CRNT)

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Ceragon Networks Inc. (CRNT)

Q3 2012 Earnings Call

October 29, 2012 9:00 am ET

Executives

Ira Palti – President, Chief Executive Officer

Aviram Steinhart – Chief Financial Officer

Analysts

Joseph Wolf – Barclays

Mike Walkley – Canaccord Genuity

Ittai Kidron – Oppenheimer

Daniel Meron – RBC Capital Markets

Peter Misek – Jefferies

Presentation

Operator

Good day everyone. Welcome to the Ceragon Networks Limited Third 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 projects 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 forward-looking statements include the risk of significant expenses in connection with potential contingent tax liability associated with Nera’s prior operations or facilities, the risk the combined Ceragon and Nera business may not perform as expected, risks associated with increased working capital needs, 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 statement in order to reflect events and circumstances after the date any such statement is made. Ceragon’s public filings are available from the Securities and Exchange Commission’s website at www.sec.gov or may be obtained on Ceragon’s website at www.ceragon.com.

I would now like to turn the call over to Mr. Ira Palti, President and CEO of Ceragon. Please go ahead, sir.

Ira Palti

Thank you for joining us today and double thanks for those on the east coast which probably are at home today bracing for Hurricane Sandy, and for you who are joining us this morning. With me on the call is Aviram, our CFO.

Our revenues in Q3 were consistent with our guidance. More important, we increased our gross margin to nearly our target level and we reported sequential improvement in operating margins to 4%. As expected, our cash used in operations was less than 1 million and we are on track to generate significant cash flow in Q4 as we indicated on our last call.

We are pleased with this performance in light of the challenging macro environment. We remain optimistic about the business because we are well positioned in an attractive sector that is likely to enjoy numerous growth drivers for years to come. We’re a strong company with an excellent technology and product cost position in our market space. We are taking share and expect to continue to outperform the overall industry.

Exploiting this strength, our primary financial focus is on reaching our goal of 10% operating margin and generating sustainable free cash flow. But at the same time, we are not immune to the macro economy and to the factors that are causing the second half of the year to be slower than everyone originally expected. We see that same picture in the trend of our bookings.

As you know, reports from the communication equipment sector so far have mostly contained downward revisions to the outlook. We also expect revenues in Q4 to decline sequentially. With growing concern over the risk for serious global slowdown, operators are becoming more cautious, negotiations are taking longer, budgets for next year are receiving extra scrutiny, and spending will be deferred as long as possible. Further consolidation among wireless operators will create disruption and delays in network deployments. At the same time, some regions have their own issues. Europe shows signs of further slowing and India continues to be subject to persistent regulatory uncertainty.

As you might remember from our last call, we were encouraged during Q2 by a strong pick-up in bookings that began in April and continued throughout the second quarter. Unfortunately, this pattern did not continue during Q3 and as an example, we had three large orders that we expected to close during Q3 and the operators are taking their time. We are not losing any business. We remain generally confident, but we also believe we have to be proactive in ensuring we stay on track with our profitability goals regardless of the near-term environment. Therefore, we are accelerating the implementation of some efficiency increasing organizational alignment to ensure that we continue to improve our profitability and grow our earnings, even under the assumption that the revenues for the next several quarters will be flat off a base of 104 to 110 million in Q4.

Specifically, we are taking these three actions: we are streamlining India and APAC into a single regional management structure. This will improve efficiency with no effect on customer-facing positions. We are also combining two solution groups into one. I’ referring to the teams in Bergen and Tel Aviv comprised mainly of R&D people. In addition to improving efficiency, it reflects the fact that we are working toward our long-term goal of having both long-haul and short-haul runs on a similar platform. With excellent progress towards state-of-the-art company-wide ERP system, we are accelerating the integration of the administrative or back-office functions between former Nera and Ceragon.

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