Good day, everyone. Welcome to Ceragon Networks Ltd. Fourth Quarter and Full Year 2011 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 projections 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 the forward-looking statements in this include the risk of significant expenses in connection with the potential contingent tax liability associated with Nera's prior operations and facilities, the risk that the combined Ceragon and Nera business may not perform as expected 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 or 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 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. We are joining you from Mobile World Congress in Barcelona. With me on the call is Aviram Steinhart, our CFO, who joined us in December from Lumenis, where he had been Chief Financial Officer since 2007. I'm pleased to officially welcome him today. Aviram has already made an important contribution to the company by leading the process to accelerate the development of new infrastructure systems to support larger, more complex business as it evolves. He has managed to do this while also handling the first full audit of the combined company since the Nera acquisition. In addition to being a highly experienced financial and administrative executive, he has a great deal of relevant wireless industry experience. You'll hear his report in a moment. Turning to the results we reported earlier today, we continue to be pleased with our execution as reflected in the fourth quarter results. As planned, we reported sequential improvements in revenue, gross margin and operating profit. Book-to-bill was under 1, which was not a surprise. We took the booking total into account when we discussed the outlook for 2012 on our last call. Still we're entering the year with about 2 quarters of backlog, which is typical. We see tangible reasons to expect bookings to improve and we continue to believe the indication that we gave last quarter, 10% to 12% top line growth, 8% to 9% operating margin by year end, as the right level to think about. I want to focus for a moment on the major milestones we have reached. We have completed the integration of the Nera business. We integrated key customers from the Evolution short-haul product for the FibeAir product line, customers continue to buy the Evolution long-haul product, we're operating as a single company, we…

Thank you, Ira. I'm pleased to participate in my first quarterly call as CFO, and I look forward to getting to know all of you. As Ira mentioned, it has been a very busy few months since I joined. Major acquisitions always bring their own set of challenges in terms of information, reporting and the decisions supporting them. And I'm pleased to say that we are meeting those challenges. We are also completing our first full audit of the combined company. With all this behind us, we have strong confidence level. You all have seen the results announced this morning, so I'll just take a minute to elaborate on a few items. I want to spend a lot of time on the full year result, as historical comparisons are not relevant because of the acquisitions. Geographically, Latin America and Africa increased the most, with those acquisitions. Increases in other regions more than offset the decline in India and total revenue reached a record $445.3 million, both long-haul and short-haul product lines contributed. As expected, with the addition of Nera, gross margin declined temporarily. Our GAAP gross margin of 27.4% in 2011 is less approximately $22 million of acquisition-related items in cost of goods sold, primarily a $15.4 million in total step up related to the acquisition. On a non-GAAP basis, gross margin for 2011 were 32.4% compared with 35.9% in 2010. Gross margin improved during the year as we migrated short-haul Evolution customers to the FibeAir product and we expect further improvement during 2012. GAAP operating expenses of $171.4 million included approximately $32 million of acquisition-related expenses, restructuring and other related cost to the integration plan, as well as amortization of purchased intangible and stock-based compensation expenses. The acquisition-related expenses resulted in a GAAP operating loss of $49.4 million. Non-GAAP…

Thank you, Aviram. To sum up, our position to excel in the areas most important to customers, advanced product features for high-capacity solutions, lower total cost of ownership through reuse of equipment, less power requirement, higher modulation, software-based upgrades, et cetera, and direct contact with strong local service capabilities. By taking a long-term view, and as we approach the $500 million in revenues, we are positioning the company for the next growth milestone. Exponential growth in mobile data is driving demand for our products, we are well-positioned to gain market share. Even so, from a much larger revenue base than we had a year ago. We think we can grow at an average of 10% to 15% per year, depending on macro factors. We expect to reach and maintain gross margin in the mid-30s, while targeting 10% non-GAAP operating margin with a cyclical level longer-term. This is our target financial model and the rest is about continuing to execute, while the other players struggle with business models. Now we would be happy to take your questions. Operator?

[Operator Instructions] And our first question will come from the line of George Iwanyc of Oppenheimer.

Ira, when you look at growth expectations for Latin America and Africa, can you give us a sense of the visibility you have there and the number of large contracts that you still need to start contributing to get that growth?

We had, in those regions, reasonable to very good visibility with some of the customers. I think I mentioned in Latin America, those that we've got contract and we're getting contact with a large operator in both South Com and other regions there, and I think I mentioned Telefónica. We have good visibility. Let's remember that the growth comes, though, from expansion within those operators and into additional regions. I think the win in Telefónica will allow us to grow and expand within the region. Similarly in Africa, I think, I have good visibility. Not like all businesses, I don't think I have all the orders in hand for the end of the year. We mentioned we have about 2 quarters of backlog and its ongoing execution, which we believe, based on the relationship with the customer, the products that being on the ground and the teams, we can see the growth coming.

If India was to return to normal, would that be in addition to the growth profile that you're currently looking at for 2012?

Probably, yes, but not significant in the revenues. I think we'll see that mostly in the bookings revenues, like always, takes -- there's a delay of 6 to 9 months until we sit back into the revenue numbers.

Okay, and just one last question. Can you give us a sense of how the OEM business looks right now with the competitive changes in the market?

I think, we mentioned that overall OEM share of our business is now slow. It's about -- it was, last quarter, 3%. A little bit higher on a yearly basis, on the mix. I don't think there is a significant change in the way it looks like now. If you refer to NSN planning on diversifying or divesting their business as OEM, that's their business doing.

And next one, Jefferies & Company in the line of Peter Misek.

A couple of questions for you. Firstly, on the geographic split sequentially. Obviously, we saw some reasonably big shifts here in Europe, 17 to 24, Africa 17 to 21, North America 13 to 8. Now that the Nera acquisition is complete, should we expect any more fluctuation here? Any other kind of big changes? That's my first question. And then second question, I'd love an update and more color on how Ceragon products are selling in to the former Nera markets and how that cross-selling process is working.

[indiscernible] refer a little bit to the geographic split numbers, but I'll say again and I think that's important on a lot of the numbers. Quarter-over-quarter shift, usually insignificant. It's usually -- if we see trends across the year and usually you have to look at the average over a year because quarter-over-quarter, because of large deals going in and out of certain geographies, there might be shifts internally, revenue recognitions and others, and the lower small numbers placed there into variability. I would not read anything into those shifts. I think as we said very clearly, we see growth -- ongoing growth in Latin America, in Africa. Europe about flat or growing slightly and the other regions lower the revenues and moving forward. We can discuss a little bit the shift into this quarter. You asked about “external customers”. I think I said on the call, very clearly from our perspective, that the business integration of Nera is complete. And that means, very basic, we do not see dividing line at this point. If I want to go back and look at some of those, almost all of those customers are currently buying for short-haul, the FibeAir product line which comes from Tel Aviv, and all our customer base worldwide is buying the Evolution IP long-haul product line which comes from Logan [ph]. And you can see my language in the, it's Tel Aviv, it's Logan [ph], it's product solution groups, which push products, we have realigned the product line and I don’t see dividing line at this point. And I think I mentioned -- the point I mentioned in the call, I think we did lose almost none of the customers. That's very, very few.

And next, from the line of Alex Henderson of Miller Tabak.

First up, just a minor issue. Can you explain to me again what the interest line did, why did that jumped so much, and do you expect that to go back into a more normalized level in 1Q?

Yes, what happened this quarter is we had a one-time of current exchange rate differences in one of the locations in Latin America. I gave, going forward, I gave on the discussion an indication which would be, going forward, our finance expenses associated to tax and you should speak to those guidance going forward.

I'm sorry you're breaking up a little bit. Your expenses are expected to do what again?

Again, we have this $1 million in the finance expenses that's associated with exchange rate differences.

Drop $1 million out of that, is that the ongoing rate?

And going forward, I gave an indication of tax and finance expenses together to be $5.5 million, annually with the break that I gave in the call.

Okay. Second question, given what you've done -- first off, congratulations on being able to offset that much of a decline in India. Obviously, going from 35% to 10% is pretty impressive and the fall off in the non-direct channel. So given that, if you were to look out to 2013, do you think, given what you know about traffic growth in India and the profitability of companies in India, or the lack thereof, that there'll be forced, at some juncture, to go back into the market? I mean, it seems unlikely that they can continue to grow traffic without backhaul? So when do you think the bottleneck finally breaks on that?

I think, I indicated on the call that we see positive movement in there. Although it's very, very, I would say, hurting and ugly for some of the operators, the cancellation of 122 licenses there. From all discussions we have, it's really, at the end of the day, it's a good move. It will open up the bottleneck of people really sitting on their hands and not doing anything because now, the 2G spectrum will be reallocated, a new telecom policy. But working in India for many years, telling you, be -- tomorrow morning, that's not there. I think the expectation now is within the next few months the bottlenecks will open up, it moves in the right direction, and I guess it will be moved to more normal levels later. Just to mention on that, as you can see, we have not lost market share, although -- and I think we gained market share in India along the way, on a smaller market basis. And we are working with the operators that are the leading ones, the larger ones, which are profitable. We continue to work with a very strong basis and expanding within their territories.

So last time you and I talked about this issue, the biggest concern you had was lack of profitability, most of suppliers or most of the service providers. And the inability to buy or consolidate the market because of the laws that you can't buy and sell companies that have licenses. If you have a license you can't buy a company that has a license, that's...

The big operators -- I think you're 100% right. The big operators do make money. Those are the ones that continue to run the bases. The new telecom policy in place will allow for mergers and acquisition of licenses, and will allow the market to continue and develop. Probably, like in all markets, consolidations comes from the most successful players taking in some of the less successful ones and growing base on that.

So does that -- is that a 12- to 18-month where that really accelerates and then the market really takes off and you get back to 30%-plus of business from India?

A, I don't expect to get to a 30% growth of business from India because we are doing it on a much larger basis. But remember that we have integration we did, we increased, significantly, our market share in Latin America and Africa, in places we were not there, so I don’t expect India to come back to those numbers. But if you look on absolute numbers, my expectation is see India at 2 to 2.5x the levels that it is right now.

And next we'll move to the line of Larry Harris of CL King.

Right now you're at 33% gross margin, and you mentioned that the integration, the business integration is complete, and it appears as if most of the customers have migrated to the new platforms or in the process of doing so. So what will take you from 33% to say another 200 basis points or more that would get you to the mid-30s. Is it additional volume? What is going to drive you to a higher gross margin level?

Okay. Let's go back to the basics. We have 2 quarters or almost 2 quarters of backlog in our pipeline. That backlog represents a mixture of both the FibeAir and all Evolution short-haul within it still. While we recognize it and bring the FibeAir online, there's the shift in the cost of goods sold within that. Its number is delayed, there's a business delay in the revenue recognition, which has nothing to do with business integration. More so, we said we are on track into significantly doing cost reduction on the Evolution long-haul platform. This will take time, assuming that we did that and the first products were out the door today. By the time we recognize them, it's Q3 and Q4 of this year. So the integration is -- business integration is complete. Show up on the gross margin will take time as we continue the shift in the product mix and the revenue, and we bring in cost reduced products in line and other things within the real end that we do the work with. Does that help, Larry?

Yes, it does. And in terms of the various adjustments, say, from GAAP to non-GAAP, in terms of various adjustments related to the Nera transaction, are those going to be winding down now or should we expect those for a few more quarters?

There are several different items that comprised the GAAP/non-GAAP adjustments. I would say that the integration plan related cost for this quarter were about $4.1 million. We expect them to be the last time in Q1 at a much, much lesser extent. Relating to all the rest noncash amortization of purchased intangible inventory step up and the stock-based compensation, those will stay with us for -- the amortization first of all will stay with us, the amortization of purchased intangible will stay for us for long. The step up inventory probably will be cleaned by the end of this year with major portion in the first half.

And we'll go to a follow-up from Alex Henderson of Miller Tabak.

So one other subject that we haven't heard or breached at all in this call is your chipset designs. And it's been a while since the last chipset design and by my calculation, 2012 ought to be a new chip deployment window. Can you talk a little bit about where you are on the technology development around your next generation of chips?

Alex, you're putting me in a tough spot. You know I don't talk about future products until we put them on the table.

How about just the general timing on when you expect next gen...

I'll refer some of it to that. Like, we introduced the 2024 product 2 days ago, we announced the product when it's up in the air, it's already shipping. Some of our -- both competitors, both large and small, sometimes have a tendency to announce very early in the product cycles and stuff. We usually do that, on announcing, when we have shipping products. I think you're building right assumptions into your statement, which I will not refer to a specific date. But as we do, and we believe that being totally vertically integrated from chipsets all the way to systems and all the way to the field of installing and providing working solutions in the field, is very important for a specialist. Both from the service point to the customer and from the point of view of cost, yes, we are working. I have -- we have quite a few R&D guys which work on a lot of stuff and you can assume also chipset. So I think...

Just conceptually, it's been 2, 2.5 years since you really revolutionized the chipset design with your last major change. If that is the major event that gives you a huge competitive advantage by shrinking radio sizes and the like, when that happens, you get an advantage that's particularly pronounced for -- initially, but then gradually, the other guys try to catch up and narrow the difference over time. So is it conceptually reasonable to think that at the point when you launch your next generation chip, that the period 6 to 12 months after that is when the window of maximum benefit from that competitive advantage would kick in? Is that the right way to think through the -- without going into specifics of what you're doing?

I know what you're looking for, okay. The business is -- yes, I think you are right, but the business is a little bit more complex. Because, for example, we still, today, maintain competitive advantage versus competitors on chipsets. We've done 3.5 to 4 years ago. Because if you look at the business cycles, yes they have to do with technology, but they also have to do with relationship, installation cycles and others. And being a specialist, I think the important piece for us is that we always have to be a small step, not a large step, ahead of our mainly large competitors. And that's where the gain's come in from.

So conceptually, I'm in the general ballpark but there are some complexities around the timeline.

Yes.

[Operator Instructions] There are no further questioners in the queue. Please continue.

Okay. I would like to thank everyone that is on the call today. I know some of you are here in Barcelona, this is the big show in our industry worldwide. And I hope to see, with Aviram, all of you face-to-face over -- between now and the end of the quarter for further questions and further discussions. Thank you for being with us this morning. Thank you, Aviram, and have a good day.

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