CRNT

Ceragon Networks Ltd. (CRNT)

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Ceragon Networks Limited (CRNT)

Q1 2014 Earnings Conference Call

May 8, 2014 9:00 AM ET

Executives

Ira Palti - President and CEO

Aviram Steinhart - CFO and EVP

Analysts

Alex Henderson - Needham & Company

George Iwanyc - Oppenheimer & Company

Sid Sinha - Canaccord Genuity

Presentation

Operator

Good day, everyone. Welcome to the Ceragon Networks Limited First Quarter 2014 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 statements concerning Ceragon's future prospects that are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including risks associated with increased working capital needs, the risks that sales of Ceragon’s new IP-20 products will not meet expectations, risks associated with doing business in Latin America, including currency export controls and recent economic concerns, the risks relating to the concentration of our business in developing nations, the risk of significant expenses in connection with potential contingent tax liability associated with Nera's prior operations or facilities, 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 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 on Ceragon's Web site at www.ceragon.com.

I will now 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. With me on the call is Aviram Steinhart our CFO.

The major highlights over the first quarter was clearly the improvement in bookings, which were up more than 25% sequentially and represented book-to-bill well above the one based on our original expectations of 83 million to 93 million for Q1. This is particularly significant since Q1 is usually relatively weak quarter for bookings. In addition, we saw strong initial demand for our new IP-20 products with much higher proportion in Q1 orders than we anticipated. New products accounted for over 40% of our Q1 bookings compared with only 15% in Q4. This helped support our expectation that we’ll see a pickup in revenues during the second half of the year.

As you’ll recall we were expecting revenues to remain generally stable around 90 million per quarter for the first half of this year. The decline in Q1 revenues do not suggest an overall trend in demand since booking picked up and we think we’ll be back on-track in Q2 and beyond. Now I’ll update you on the development that affected revenues in Q1. Final revenues were within the range of our updated guidance. As we indicated on the call a few weeks ago, there were two main issues; first, we decided not to ship and install an order we received in Q4 from a longstanding customer in Africa and to renegotiate payment terms. We’ve reached an understanding with this customer with respect to payment terms for new orders and the schedule of payments on existing balances that will significantly lower our exposure. The relationship is strong and we are confident that they will continue to order from us. But the new arrangement will cause orders to be spread over a longer period and we will probably only ship small quantities during the balance of the year to this customer.

The second factor affecting Q1 related to the fact that we’ve been in the initial ramp-up of manufacturing for our new product, and we’re not expecting such strong demand for the IP-20 products this quickly. This was combined with the fact the large part of the orders came late in the quarter. We’ve been working through the normal issues and efficiency holdbacks to the process of ramping up the production line and working with a relevant supply chain. And we are seeing an improvement in efficiency and rates in Q2. We will continue to ramp-up as quickly as possible to accommodate the expected demand for IP-20 products.

Geographically, revenues from Latin America were sequentially lower after a very strong Q4 as expected. We’ve already discussed part of the reason for the weakness in Africa and this is the region that tends to be lumpy. On the positive side, we saw a major pickup from India, and also improvement in North America consistent with the major deals we announced in the fourth quarter. These two regions also look like they will be continue to be strong as bookings were higher than expected in Q1.

As expected all the operators in India are looking forward again in response to their aggressive build-out of a new LTE network by one operator. Although some expected us to lose share as the Indian market began to pick up, we’ve retained our share with the existing customers haven taking more than we expected with new customers. Our success in Indian will affect our blended gross margin until we win more large projects in other regions and as they have time to impact our results. The important point is that we are the vendor of choice amongst specialist for product and performance in India and we have the cost structure to make money at lower margins. At the same time, we have certain requirements for payment terms but we are not willing to compromise. In the currently highly competitive environment where there is always a chance that another vendor will be willing to give terms that we consider unacceptable.

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