Good day, everyone. Welcome to the Ceragon Networks Limited First Quarter 2020 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 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 published earlier today. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially including the risks of disruption to our and our customers’ business related to the outbreak of the novel coronavirus COVID-19 pandemic, “Coronavirus”; the risk of macro-economic downturn and slowdown of development and significant decline of business that can harm our and our customers’ ability to conduct or further develop our/their business, including, cancellation, suspension or reduction in the investment in new equipment purchase, postponement or cancellation of rollout of wireless networks, postponement in the transition to 5G technologies and in the introduction of new products and capabilities, inability to deliver and perform under our contracts, disruption to our supply chain and production capacity, adverse effect on our and our customers’ financial performance, cash flow, revenue and financial results, available cash and financing, and our ability to bill and collect amounts due from our customers; the risks relating to the concentration of a significant portion of Ceragon's expected business in certain countries and particularly in India, where a small number of customers are expected to represent a significant portion of our revenues, including the risks of deviations from our expectations of timing and size of orders from these customers; the…

Thank you. Good morning and good afternoon to everyone joining us on the call today. With me on the call today are Ran Vered, our Chief Financial Officer, and Osi Sessler, Head of Investor Relations. I hope you and your family are staying healthy during these unprecedented times. During this period, our top priority is ensuring the health and safety of all our employees around the globe as we continue to serve our customers. As you are well aware, COVID-19 has turned the world upside down since our last conference call. It has changed the way we work, shop, learn, and stay entertained literally overnight. For telecom, the impact has been dramatic. Operators are experiencing unprecedented demand for bandwidth. According to the New York Times, operators like Comcast, Vodafone, and Telefonica and many ISPs have never seen such a steep and sudden surge in demand. T-Mobile’s US President of Technology, Neville Ray, says its mobile hotspot usage is up 60%, meaning that people frustrated by poor home broadband are moving to the cellphone as a hotspot device. Use of collaboration tools like Zoom, Teams, and Webex is up 87% and use of online educational tools is up 135%. The change in telecom usage that we expected to see over the period of a few years has accelerated into just weeks. Although no one knows what the long-term outcome will be, one thing is clear: broadband connectivity with high capacity has become widely recognized as an essential utility like electricity or water. Consumers and businesses both expect a new level of speed to support the connectivity needed for HD-quality streaming, better online gaming, remote office, and virtual meeting experiences. As a result, operators throughout the world now understand the need to ramp up their capabilities and we believe that they will…

Thank you, Ira. Since you have all seen the press release, I’ll focus on the highlights. As we indicated in the updated we provided in April 6, our revenues for the quarter were lower than originally expected, approximately $56 million in line with what we shared. This reflects the normal seasonality of the first quarter, compounded by delays in the pace of network rollouts and shipments, as lockdowns and other COVID-19-related measures caused a slowdown in the ability of our customers to execute on their network expansion plans. Regionally, India was our strongest market, accounting for about 25% of our revenues. This, together with strong bookings, demonstrates that India has returned as an important focus market, despite the fact that hundreds of installations became impossible to carry out due to the lock-down. India was followed by APAC, which continued with a normal level of revenues despite COVID-19. The U.S., Europe, Latin America and Africa all had weak revenues compared with previous quarters due to delays in our ongoing projects compounded by normal Q1 seasonality. We had three above 10% customers in the first quarter. Our bookings for the quarter were very strong, with a book-to-bill ratio well above 1. This demonstrates the strong positive momentum that has been developing since the beginning of the year, including the return of India as a major source of business; continued strong activities in Latin America, Europe and Asia Pacific; and the steady quarter that we had in the U.S., countered somewhat by a weak quarter in Africa. In general, many of our customers have accelerated the pace of existing projects to address the sudden increase in demand for capacity. Our non-GAAP gross profit for the quarter was $14 million, giving us a gross margin of 25.1%. This is the lowest it has been…

Thank you. [Operator Instructions] Our first question comes from Alex Henderson from Needham. Please go ahead.

Hi, guys. So obviously, I have lots of questions to run through here. The first one, obviously, is on the revenues for the second quarter. Clearly, $70 million to $75 million is -- nobody is expecting you to come anywhere near that. But do you expect a moderate recovery off of the $56 million you did in 1Q, or should we be thinking something in the $60 million to $65 million range? Can you give us any more granularity on that? And relative to that same question, to what extent do you think your book-to-bill will be above 1? In other words, continuing supply constraints resulting in those lower numbers, or do you think the demand will stabilize a little bit?

I will answer the demand side and I will let, Ran talk about the numbers. I think the big issue right now, and I think we emphasize it's very hard to predict right now, Q2, even as we sit right now. I’m just trying to elaborate a little bit, but internally in the company, I've seen scenarios with a very large range, a much larger range than usual because of the constraints on the table. I think that's from a demand perspective, might be our look right now is that in between the higher demand and some constraints, which are starting to emerge on uncertainties, or for example, that I mentioned people investing early and lesser budget, the fluctuations in currencies and others probably will be a normal quarter. Ran, do you want to handle -- talk a little bit about revenue forecast?

So, what do you mean by normal quarter? I'm not sure I understand the term.

More in the range of probably book-to-bill around 1.

I see. Thanks.

Just to add on that, Alex, when we’re running the scenarios that you’re seeing, they -- we have very strong backlog, as Ira mentioned. And this is one item in the equation that is very clear. I think the issue with the scenarios is mainly around supply chain deliveries and installations and things are changing like in a day. So, it's really, really hard to predict. The positive side of that is because of this healthy backlog, if we cannot convert some of this backlog in Q2, we'll see the upside in Q3. But at this point, the ranges of revenues are really, really wide, and it's really hard for us to predict that.

Is it reasonable to think that it could be at least up sequentially?

Yes, we -- and we hope that it will be up versus the first quarter.

I see. If I could, the gross margins were probably the most surprising piece of the puzzle in the quarter. We haven’t seen a 25% gross margin in a long time. Obviously, that reflects the strength in India as well as all the other issues that you outlined. To the extent that we're looking forward into the second quarter, can you talk a little bit about whether you think that mix will stay that way, whether you'll start to see some improvements in that, can we get back some of that gross margin, or should we still be thinking something in that vicinity?

Hi, Alex. It's Ran. So, the main reason of this low gross margin is the low revenue that we had compared to our fixed cost components. We have some fixed costs in our cost of revenues to maintain our production lines, the cost of the people to operate. These are fixed cost items that when the revenue are low are -- causing the gross margin to be lower than normal. While we return to our average quarterly run rate of $70 million to $75 million, we are planning to get back to our regular gross margin. This is our expectation.

All right. So, if it's consistent revenue with the same amount of revenue in the March quarter, then we should think the gross margins are going to have that same level of pressure. If it rebounds modestly, a little less pressure, if it rebounds fully, obviously it goes back to normal. That's basically the slant [ph] then.

That’s basically it, yes.

No change in the mix? I mean, wouldn't you be slanting towards higher margin product if you're constrained?

The change of the mix depends on the customers and the geographies where we serve the customers. To be totally fair to the game, almost on a first come first serve basis under constrained type of locations, we do not see a significant, or any change in pricing pressures within the market except the normal ones. On every bit of the year, there's pressure, but it's not something which is not normal. And we try for business as usual to try to serve best all our customers worldwide with varying needs.

Certainly, India has shutdown more aggressively than it was in the first quarter. In other countries, particularly in APAC, have seen improvements. My sense is that, North America and Europe are more normalized in 2Q. Wouldn't that suggest a shift away from India to other geographies, hence even at the similar level of revenue, some improvement?

Somewhat, but although remember that lockdown is a very complex regulatory in different places. Take India, for example, we still can deliver equipment. Yes, it goes to the warehouse. We do expect at some point during the quarter for our ability to resume installation services. Depending on the geographies, sometimes it becomes an issue of supply, sometimes it's an issue of the ability to do installations locally. So it's -- one of the things. To give an example, one of the quarters we had in one of the regions of antennas, for example, we supply locally, almost locally in different places around the world because it's very heavy shipment. Depending on where the antenna manufacturers are open or closed and moving them around the world makes total -- totally unreasonable sense because you pay more for shipping costs, especially now the shipping costs are up than the antenna cost itself. So, we have those dynamics on the table.

All right. I get the [multiple speakers].

But in general, going back to your overall assumptions, as the revenue starts to climb back into the normal range, gross margins will climb together with it.

Okay. I will cede the floor. Thanks.

Thank you, Alex.

Our next question comes from George Iwanyc from Oppenheimer. Please go ahead.

Thank you for taking my question. Ran, can you give us a sense of how much flexibility you have from a OpEx level? When you look at the June quarter and then adjusting in the second half of the year?

Hi, George. So when we look on the OpEx, and I said it also in my prepared remarks, in Q2 we do expect to be on the same range that we had in the first quarter, roughly the range of $20 million. Going to Q3 and Q4, we do expect it to go to its normal level of $20 million to $22 million for a few reasons. First, we are continuing to invest in our R&D, and for us it's a major key factor for success and we do not expect to lower it down. The thing that is probably going to go up is our sales and marketing. There was some major reductions due to some travel restrictions. And we do think that in Q3 and Q4, we're probably going to see that up. Keep in mind that we do -- on the OpEx side, we do have some slowing down on the hiring and investment in CapEx, IT and travel. But on the other hand, we do operate normally. The company is fully function. So at this point, we do think that we will resume the OpEx to be at normal level in Q3, in Q4.

Okay. And without the travel that you're seeing and the type of sales engagement you have right now, are decisions that the carriers taking longer, even though there is an increased need for demand or bandwidth?

So, as we said, we are fully operational. And I think the big challenge, one of the challenges is as we walk from home, there's less travel. We need to do the business via a lot of videoconferencing. And we walked very extensively with our sales teams to both train them to this mode, build the methodologies for that to work with the customers. In some places I do see a slowdown, in some places I see even acceleration because people need at least the ongoing projects. The process has become sometimes even shorter. It's obvious where it takes is longer. I'll give an example when some of the things takes a little bit shorter. Sometimes because we are a global company, to schedule a meeting with an operator takes time because they need to bring four people from four different locations. We are different and scheduling those four people and we need to fly in four people from other locations and takes time and then the meetings start to spread out. When you do things, we are videoconferencing, much easier to schedule. Everyone gets on the table. Sometimes the meetings duration and things become much quicker for achieving the results. But I see both sides of the coin on that. My belief is that, by the way, as part of the habits, social change that COVID brought on all of us, I'm starting to hear. But for my salespeople and a little bit from the customers, they might even prefer longer term to have some of the meetings also non face-to-face and move them forward because of the rapidly things happening. I think that's part of the things that you're seeing on some, and I said both sides of the coin is some of the -- it's less of the interaction. It's less the internal decision processes than some of the customers.

Okay. And Ira, when you talk about …

And at least up to this point this has been, in the first quarter, has been on the positive side. I think in the second quarter will return to a normal level from that perspective.

So, Ira, when you talked about the new normal for the second half of the year, is that primarily related to -- like your manufacturing ability in the supply chain? Or do you believe that also is a deployment in the spending environment?

Both. Both the supply chain activities, shipping supply chain which we will have to adjust for that and also on the demand environment. One other thing that we need to keep in mind, that's on the demand on the revenue side, walking in with a big backlog with some point during -- if the supply chain constraints start lifting up both installation stuff, we'll have to deliver that backlog as quickly as possible.

And just from a kind of technology perspective are you seeing a lift in market share currently because of the IP-50 and the ability to kind of be prepared for 5G? And how do you feel from a competitive basis as we get to that new normal?

Very strong. First I see a significant lift on the IP-20. The ability to deploy non-complex, all of those solutions which are quick and easy, both from a connectivity, high capacity in some cases, if then it's not used for the first day, almost double capacity by click, meaning activating the second carrier gives us a huge advantage. And I see a lot of demand for those solutions and I see it mostly in the labs at this point around the IP-50, but also some of the [indiscernible] and IP-50 products which are out already also a very interesting discussion and dialogues with operators. And quite a few operators, which we haven't walked in the past, are willing to discuss with us. We've been brought up capabilities like doing demos remotely. We set up a whole set of cameras in the lab. So if people want to do demos with us and testing, we can do that remotely with them within our labs. To push that and it's opening doors. And it's opening doors -- a lot of those which we haven't been there before.

Thank you.

Thank you, George.

We have a follow-up question from Alex Henderson from Needham. Please go ahead.

Going on …

Alex?

Yes, can you hear me?

Yes.

Yes. Couple of questions, if I could. Can you give us an update on what's going on with NEC? I've heard mixed signals on whether they're committed to your chipset or whether they are still working with MaxLinear on a next generation product. What -- what's your thoughts there?

Daily video call with them, not me, the technical teams working on details on the joint development. That gives you -- that doesn't give you an answer then, okay.

So any sense of whether they are still working in tandem with MaxLinear, or whether they have down …

I don't know. I don't know. At least from what we hear in the market. I don't think MaxLinear is on the verge of developing anything which is close to the next level chipset. And let's remember, we're doing something which is wider with NEC, which is a joint development activity.

Any other OEM relationships brewing in the background that we should be anticipating benefit from?

There's things brewing in the background, I'm not sure anticipating at this point, because those are 01 deals, and I feel they happen, they don't happen. So at this point, there's a lot of hard work. If we'll be getting close to something. I'll probably give a heads up. At this point, it's not closed.

I see. Okay. Going back to the exchange rate, the shekel has been all over the map over the last couple of months. It plummeted to surprisingly low levels, but then not surprisingly, it rebounded quite sharply. Can you talk a little bit about whether you were able to take advantage of that, particularly low level when it got down to it, or whether it just happened too fast to benefit from it? And to what extent you were expecting some benefit from the current level?

Hi, Alex. It's Ran. So just to remind you that we are hedged on the shekel on an annual basis. So actually when we set up the budget at December 2019, the shekel is fixed. This year that's fixed at a rate of 345. So actually, we're not benefiting or we're not moving on the devaluation. One thing, I would like to mention is that we did utilize the benefit of the low shekel to pay some of our vendors here locally. So we benefited part of it on the cash flow. But from a P&L perspective we are almost 100% hedged on the shekel.

If I can go back to your comment around interest income and expense, 758 in the quarter, it averaged a little over $2 million -- actually $1.5 million per quarter. When you said it was going to rebound to normal, did you mean that $1.5 million range or what do you think …?

Yes. $1.5 million, yes. So we should think about $1.5 million, $1.6 million, $1.7 million. It's going to rebound in second quarter.

Okay. That's helpful. Thanks. And then, just talking through the geographic stuff for a second, I mean, it really sounds like your higher end countries are really seeing strength. Your U.S. commentary, I think, is the most robust I've heard in as long as I can remember, EMEA being extremely strong and APAC, being strong. So, it sounds like you're seeing a pretty good mix shift to some higher area products, and particularly given the turn up of the soft [indiscernible] capacity. That also sounds like it's a positive for margins as we go back. If we in fact get back to more normalized revenue levels in the back half of the year or for that matter '21, given those dynamics, should we be expecting some positive trajectory to margins, even with India being a little stronger? or is India the bigger factor here?

I don't think India is the bigger factor. And I think that all the trends that you indicated are right from the point. But again, as you know, a little bit is shifting on the mix, a little bit with a new supply chain, new normal, costing a little bit more, shipments costing a little bit more. It's too early for me to predict that. We'll see an uplift on the numbers, but probably be in what we call the normal range of the -- somewhere where it was averaging like last year around the numbers.

I see. Okay.

And it's -- and I think that the trends you’re mentioning are right on the point, but some other things in the background, which I'm not sure exactly what will be the effects. To give an example, shipment costs just in the air went up 150%. So some of it we move to customers, some of it is that we have to bear this. It's causing issues on the table.

Ran, I don't mean to put you on the spot, but what's the fully diluted share count if you're profitable for valuation purposes.

Good question. Yes, it's a good question. Probably I will say roughly $1.5 million to $2 million more shares than we have right now.

So you were at 82 to 50 in the June quarter, …

Yes.

… which was the last kind of meaningful promise.

Yes. Something like that, yes. We probably go -- we'll go back to this share count.

I see. Okay. Got going back to your comment on Japan for a second, if I could. Rakuten, I believe is your primary customer there at this point and obviously they've launched now. What kind of experience are you seeing at that particular customer? It's a rather unique situation relative to your customer base. Can you give us any insight into what we should be thinking there?

In point to Rakuten, we are working with a customer in Japan on 5G, which might be, I didn’t put on purpose a name next to it. Remember that Japan in general is a very intensive fiber country. And wireless holding is a second step on top of the networks, both, by the way, for classical architectures and for open one architectures like Rakuten is using.

Okay, I got it. And one last question on the 5G. Should we be thinking of you as not just a back haul company, but also a front haul company, and to what extent do you think front haul starts to become a meaningful contribution to …?

Holding, you should be thinking for us -- of us as a holding company. Front haul, mid haul, back haul und we have all the -- all those solutions. My expectation that front hauling will take a larger and larger place as open one 5G types of architecture and remote radio heads take place. We do assume that sometime it will become a significant part of the business.

Right.

And that's part, by the way, of the new chip design and some of the things that we do. Because if you look at, for example, 40 and 100 gig in there are more targeted to front hauling versus back hauling applications.

All right, I understand. Great. Thank you very much.

Thank you very much, Alex.

Our next question comes from Gunther Karger from Discovery Group. Please go ahead.

On the virus problem, has there been any increase in interest or possibilities in the M&A area?

As we said in the past, we keep on looking all the time, but usually in situations of this kind most companies hunker down for one to give out where they are. Probably when things emerge, the pandemic will probably see increased interest out there.

Thank you and good luck going forward.

Thank you very much, Gunther. So as a closing remarks, as we don't have additional questions. So we believe that we are well-positioned to weather this challenging period, that industry trends will support long-term growth for our company. And one final note. I'd like to draw your attention to our newly designed website, Blog and LinkedIn page. We have tried to make them as informative as possible, relevant to the trends we mentioned. So I encourage all of you and invite you to have a look at them and to check back in frequently. Thank you and have a good day.

That does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.