Ceragon Networks Ltd (CRNT) 2006 Q1 法說會逐字稿

Good day, everyone, welcome to the Ceragon Networks Ltd. first-quarter 2006 quarterly results conference call. Today's call is being recorded and will be hosted by Mr. Ira Palti, President and Chief Executive Officer of Ceragon Networks and Mr. Tali Idan, Chief Financial Officer of Ceragon Networks. Today's presentation will include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are subject to risk and uncertainties that could cause Ceragon's actual results to be materially different from those exposed or implied by such statements. For additional information regarding the risks associated with Ceragon's business please refer to Ceragon's annual report on form 20-F and Ceragon's reports filed with the SEC. Web users can visit Ceragon at www.Ceragon.com to read the complete forward-looking statement language. I will now turn the meeting over to Ira Palti, President and Chief Executive Officer of Ceragon. Please go ahead, sir.

Thank you for joining us today. With me on the call is Tali Idan, our CFO. For those of you who may be new participants, we will briefly describe how the major industry trends continue to benefit Ceragon and give you some specific examples from Q1 which was another record quarter. We also want to update you on our new product development activities and other initiatives that will improve our margins and operating leverage in the second half of the year and beyond.

Q1 revenue was up 27% from the first quarter of last year. Bookings continue to be strong with a book-to-bill ratio of better than one which means we are off to a very good start in achieving our target growth for 2006 of around 25%. All of the major industry trends continue to work in our favor. We are seeing continued network expansion in the developing parts of the world. I personally just came back from India where I met with several customers. I can tell you they are all [expender] the subscriber base and the networks at a very rapid pace. As a matter of fact, we had a deal of over $1 million for Hutchison in India this quarter. This deal came through Nokia, an important OEM partner of ours.

We also won a $6 million turnkey project for Digitel to expand its network in the Philippines. Our FibeAir 1500P solution with [Xpeak] will be used to meet Digitel's transmission needs, by providing a complete end-to-end solution including planning and implementation. As you know we began shipping our advanced high-power solution for long haul applications last quarter. This is a FibeAir 1500HP. We're very pleased with the ramp up in orders so far. During Q1 we received orders from about ten different customers and several of them were seven figure deals. Mostly from developing parts of the world.

As expected we recognized revenue from the FibeAir 1500HP customer for the first time in Q1. This was a major sale for operating [Africa] for backhaul of the GSM network expansion. The benefit of our high-powered solution is that it provides enough power so that the operator can increase its capacity using the same power and antennas used for low capacity network using PDH. Not needing to add more power or larger antennas. This is a major savings in CapEx to the operator, simplifies and shortens the project and is the reason we are getting such a positive response to this product.

In the developed world demand is increasing for various types of traditional service providers and advances in wireless technologies are also spawning new types of service providers. On the last call we discussed FiberTower, one of our largest U.S. customers. They are one of the first wholesale providers of high-capacity backhaul services for cellular operators. FiberTower was a 10% customer again this quarter and is a good example of this new breed of next generation operators. We expect to have orders from other similar customers in the coming quarters. The trend toward using wireless backhaul is a cost-effective alternative to expensive leaseline, continues to be one of our strongest current growth drivers.

Outside the cellular world we are seeing another group of operators implementing a managing metro area network such as the much publicized one in San Francisco and Philadelphia. As we have noted before hundreds of cities around the world plan to deploy municipal broadband networks that will require IT backhaul solutions. We also expect strong demand from the private network segment with new data reach applications in areas by public safety, and Homeland Security coming on-stream. Evidence of this trend is noticeable in increased revenue for this segment, this quarter reflecting higher orders from our channels to this private networks. We are the leaders in providing high-capacity IP products, and we are maintaining this lead by continuing to introduce new innovations to the market.

We have been moving forward on an aggressive development effort and IP products. Our new software configurable fast Ethernet radio with 50 to 400 Mb capabilities has enjoyed an excellent reception from customers. Next we will be launching our gigabit radio offering the highest capacity and highest throughput on the market based on native IP in the air. This breakthrough in technology is ideally suited for next generation networks offering all IP based services including triple play, converged voice, data and video. That is the picture in terms of market demand and how we are moving to capitalize on it. Now let's talk about some of the other factors such as pricing, product mix, margins and expenses.

Pricing is competitive particularly in large deals and in certain regions such as parts of Asia. For example in India the large volumes combined with low average subscriber revenue to the operator translates into a very competitive situation. As we have discussed before, we have been moving aggressively to lower our costs in a variety of ways. First we remain on track to complete a transition from 1500 to the 1500P Family by mid year. As revenues from our new higher margin products continues to ramp in the second half, this will also help our gross margin.

We are also pursuing our continued cost reduction program. We are still looking at one more quarter at the low end of the range for gross margins before these margins begin to reverse this trend during the second half. As you heard on the last call we gave a 36% to 40% non-GAAP range for gross margin in 2006. We expect a combination of improving gross margin and better operating leverage to lead significant profit (indiscernible) improvements in the second half of the year. Our target is 40% gross margin and 10% operating profit based on a $13 million per quarter revenue run rate.

Now I would like to turn the call over to Tali to discuss our Q1 results in more detail.

Thank you, Ira. Quarterly revenues again reached a new record of $21.3 million representing an increase of 27% compared to $16.8 million in Q1 last year. And a 6% sequential increase. Revenues from cellular operators accounted for 41% of total revenues in Q1, a bit lower than the previous quarter. Six operators accounted for 33% of revenues, about the same as in Q4 and private networks accounted for the remaining 26%. Once again we had one 10% customer in the cellular network segment in Q1.

Europe, Middle East and Africa accounted for 38% of revenues. North America continued to show major increases in both absolute and percentage terms reaching 34% in Q1. Asia-Pacific was 18%, Latin America accounted for the remaining 10%. As Ira mentioned our quarterly bookings were strong in Q1 with book-to-bill again over 1. We are adopting the new accounting standard 123(R) this quarter. The aggregate impact on net income was $747,000. As you know, this amount actually shows up in several different line items on the P&L. For the purpose of having comparable numbers to prior quarters we will refer to non-GAAP numbers that exclude stock option expense during the rest of the discussion. Please refer to the table at the end of the press release for a complete reconciliation by line items.

This quarter gross margin declined slightly to 37.5% which was within the range we expected. It also reflected the level of price decline that we anticipated. As Ira mentioned as our new product gained traction and we benefit from our continued cost reduction activities we expect in the second half of 2006 to move towards the higher end of the gross margin range. As planned, operating expenses and mainly R&D expenses increased, both in dollar and as a percentage of revenue. Although we expect operating expenses to continue to increase gradually from current level we expect them to decline as a percentage of revenue for the remainder of the year. This will also help us move closer to our target operating model.

On a GAAP basis we reported net income of $288,000 or $0.01 per share which included stock option expenses of $747,000 or $0.03 per share. Pro forma non-GAAP net income was $1,035,000 or $0.04 per share compared with pro forma non-GAAP net income of $865,000 or $0.03 per share in Q1 of 2005. In the previous quarter our non-GAAP net income was $1,023,000 or $0.04 per share.

Moving onto the balance sheet, our cash balance at the end of the first quarter was $30 million, and DSOs were 74 days. In Q1 we had negative cash flow of $3 million as expected which related to inventory and receivables. The growth in inventory is related mainly to the Digitel project in the Philippines where we shipped equipment to be installed during the first half of the year with revenues and collection to appear over a five-year period. In addition, our receivables went up as shipments were skewed toward the end of the quarter because of difficulty in obtaining critical components that delayed shipments. We project a decline in the growth rate of these items and accordingly we anticipate to break even cash next quarter and expect to generate positive cash flow in the second half of the year.

For Q2 we expect revenues in the range of $21 to $23 million. And for all 2006 we continue to expect strong growth of about 25%. Now we will be happy to take your questions.

(OPERATOR INSTRUCTIONS) Rich Church, C.E. Unterberg.

Nice quarter, guys, and just wanted to see Ira, can you talk about Nokia, the relationship there, how much did they contribute in the quarter and you have mentioned the Hutchison deal. Can you talk about how many deals you are competing for through them as well?

Okay, I'll start with overall. As you know, we have an ongoing relationship with Nokia for almost two years before we signed the OEM contract early in Q1. Once we signed the contract it allowed us and opened a lot of doors in Nokia, and we are working with them on multiple deals around the world. The first one that matured in that terms out of the contract was the Hutchison deal. They were not a 10% customer in the first quarter. So the number was still small. As we mentioned, it was around $1 million. But as we talked when we did the press release on Nokia, we do expect them to become closer around the 10% customer for the year with a significant number of deals coming over between now and the end of the year.

Okay, great. And the 1500HP, it sounds like you are getting a lot of good traction there. Can you talk about over time what would your goal be for that product as a percent of overall revenue?

We expected to have part of the revenue. It is coming into application where some of them are new applications for us and some of them are replacement for the FibeAir 1500 applications we did in the past. I do expect it to be as part of the transition to the whole P Family, and it will have a few at the low-end of percentage points from our overall revenues.

Okay, and you have talked about the gigabit radio. When do you expect that to be available?

We will be announcing it when we are ready, but it is already in trials with a few customers.

Okay, great.

(multiple speakers) product yet but it is already in trial with two customers.

Okay, and Tali where did the headcount end this quarter?

It is about the same as in December, around 275 employees.

Okay. Thanks a lot.

James Cappello, Kern Capital.

Can you talk about where you see gross margins in the second quarter and then how are they going to rebound from there?

As we explained on the gross margin we were expecting gross margin to improve during the second half of the year, as we start benefiting from the cost reduction measures and from the full transition into production of the P line by subcontractors. And therefore as we mentioned during the first half of the year, Q1 and Q2, we expected to be more towards the lower end of the 36% to 40% range that we said. And then during the second half to start going towards the higher end of this range.

(multiple speakers) sequentially will gross margins be down or up? Or flat?

Well, again, in the second half -- in the first half we are still expecting in the lower range; whether it is going to be up or down next quarter I cannot tell you for sure, but it may go down as well. And then expecting the second half to go up.

Okay. Thanks.

Matthew Robison, Ferris Baker Watts.

This is actually Mark Donohue for Matt. First question is what drove the higher operating income? I'm sorry the higher other income, sorry about that.

The finance income, I suppose you're referring to.

Yes.

It was mainly foreign currency exchanges. This time the quarter was different than previous quarters. You may have known that the euro was fluctuating against the dollar during the quarter, also the Sheqel was fluctuating. We were taking some measures from hedging, and those measures have improved the impact of it. And plus some, let's put it, luck where the fluctuations benefited us.

Next question, turns business next quarter, and maybe if you can compare that to the prior quarter, as well.

Meaning turns business in what sense?

How much of your current backlog is going to turn into revenue right now, what percentage?

We do have a backlog which is higher than the current, than the next quarter. And the first part of it in the range we are expecting will turn into revenues. We don't give specific number for the backlog but we do describe in such as one quarter has more than one quarter ahead, and currently we do have a backlog which is more than one quarter ahead.

Okay, and then I don't think you guys spoke to anything specific for next quarter guidance wise. I don't know if you have any more commentary; do you think revenue will increase or be flat?

As far as revenues, we're projecting revenues in the range of $21 to $23 million.

Okay.

And we described our expectations regarding gross margin, and we also described our expectation regarding expenses. We did say that operating expenses are expected to grow in dollar terms. But to decline somewhat in percentage terms.

Okay. That's all I had.

And then finance income, finance income is not expected to be in the range of Q1; its expected more to be in the range of Q4 or Q3 in the previous year.

All right, look, okay, it's (indiscernible) okay. That's all I have. Thank you.

Kevin Dede, Merriman.

Congrats on the quarter, gentlemen. Tali, you noted maybe a component issue; would you mind giving us a little more insight on what you're seeing and where and how much of your mix it might affect?

We think two things that are happening. One is an overall trend which we had to go back and push some of the components of ours which lead-times in certain components increased significantly in the whole market. And its not just us; we see it all around us. Having to do with some of the moves between components which are rough competitive and non-competitive and we've seen that increase. And then we saw an issue with two or three specific components where we had problems with specific suppliers which were not on time in delivering and with different switches around there in between suppliers to mitigate the issues.

Can you give us an update on the switch to the contract manufacturing and whether or not you think your contract manufacturers will have a little bit more clout in the supply line?

First of all we are moving very rapidly for the contract manufacturers and we are as we said on the call, on the script itself, we are on target by the end of the first half or very soon after that to move all our production to contract manufacturing. Contract manufacturers just to give you a feeling they have a clout in the supply line on standard components. Usually when it comes to very specific components, those are more -- we have to work ourselves on that issue to make sure the supply line is in place. So it is a mixture of us working and then being having a lot of clout with specific components which are usually radio specific versus general manufacturing components which then the contract manufacturers of the clout are to push on them.

Can you give us more detail on which specific radio components you're finding shortages in?

Not specifically.

Is that for competitive reasons?

No, it is not for competitive reasons. It is not -- this type of oscillator, that type of oscillator, this type of a (inaudible)the power supply which is specific to which I don't think will give you any general terms for which is something I can say, okay, it is an industry trend.

Oh, I see. So what you are saying is you're not thinking its an industry trend?

There is an issue, and I said in the beginning, there is an issue with an industry trend around longer lead-times for components in general, everything. Standard to nonstandards in the market. And this is something that we mitigated through both process manufacturing and now (indiscernible) a process build with all the suppliers. The issues we had in Q1 were specific to one or two suppliers which then didn't have to do anything with industry trends, more with their performance.

Oh, okay, and do you think that will be rectified?

With switch suppliers I hope it is rectified by now.

Can you give this an insight -- I know that you have increased the capacity ranges in your radios to go down to 45 megabits. Can you give us sort of an insight on to what your mix was that included that additional capacity range and what you're seeing going forward? And maybe if you could look at your mix overall and give us how many or how much of your sales mix included PDH from outside suppliers?

As far as the PDH and other components that we from time to time use, it was about 5% of total revenues, so it is a small portion. As far as the 45 megabits, I will tell Ira to explain it better.

Let's start with, just elaborate on the PDH. We use it in places where we do large projects, complete projects where it accelerated our equipment where we need to fill in the network with some PDH things; it is not something we do in general. When we talk about lower capacities, the 45 megabit range, we see some demand although it is very, very low numbers right now for that type of a range in the PBM world. In the IP world we have a strong pool for the 50 to the 400 Mb radio where we see a lot of our customers starting with the 50 Mb and then planning on licensing it up to 100 and 200 and some with the 400 Mb. As percentage point again, because the whole IP is still a small portion of the whole sales, most of it is still SDH it is still few percentage points.

Okay. Can you give us a little more insight on the Digitel deal? Now that is 6 million over five years; is that what you said? How do you expect to see that play out?

First of all, it is not the first and probably not the last deal with Digitel. As we said, I think, on the press release this was the third deal with them in total of a part of $11 million total deals with them we have seen over the last year and beginning of this year. They are expanding their network quite rapidly. They are the third operator in the Philippines and trying to gain market share versus the other two.

This deal was specific in that we took on ourselves four turnkey projects, giving them the keys for network including planning implementation and everything that had to do with it until they have a network running. And that deal came with terms which means that we will be up and running with a network sometime in the first half of this year, and the financial and revenue recognition terms will spread over a five-year period. Now we specifically noted that the press release because, on the one hand it is a large deal, and the second hand it's almost a one-of-a-kind (indiscernible) deal for us.

Okay I'll hop off. Thanks for taking my questions, and congratulations.

Ehud Eisenstein, Oscar Gruss & Son.

Hi guys, and congratulations on a nice quarter. Can you just give us some more details on the S. market? It seems like you had a very strong, very strong quarter there. What are the trends that drive the growth in the U.S. market?

We have a strong quarter in the U.S. We see the whole wireless backhaul activity in the U.S. growing. Now it is growing in I would say two or three different areas. First of all, and you can see also from analyst reports and others, the cellular operators which have used for many years leaseline for E1 because of capacity the growth in EVDO implementation and other need higher capacities and competitive landscapes force them to start using a lot of high-capacity wireless backhauling to their towers. Now we sell to them sometimes direct, but mostly through new operators like FiberTower which are coming up and providing the service for them by allowing them to share very high capacities on a single tower with a few operators. This is one trend. More wireless backhaul for cellular operators.

The second trend we see is with private networks that need high-capacity connectivity. And there we see demand for IP products which pull in a lot of our -- which are some of our customers and we see a pull through the channel for those types of products increasing. And we see also some more government around home security and other applications also pulling IP links. For connectivity just to give you an example some of the requirements right now are government buildings connected to a network needs at least two outings. In many cases they use a wireless outing as a second one; one is fiber which is the main one and then wireless comes in as a backup. And that gives you a little bit more detail on where we see the pull from.

Sure, and then just a couple of more questions. The 1500P, what was the breakdown in the quarter; what was from sort of revenues?

Revenues from the P series were about 50% of the revenues.

And what was it last quarter?

Last quarter it was over 40%, 42, 3% of total revenues.

Okay. And it seems like you had strong booking. Can you just remind us what are the seasonality guidance usually in the March quarter?

Usually the first quarter or the March quarter of the year is more difficult for us. In prior years we experienced lower bookings or bookings which were lower than book-to-bill ratio of 1. This quarter we had book-to-bill ratio of more than one and this is why we mentioned that we did have, that we did enjoy strong booking during the first quarter.

Which leads us to believe we are on a good track for the 25% increase this year for the revenues.

All right. And then just last question from my side, just an update on the long haul product.

The long haul product I think I mentioned a few times on the call that the 1500HP and this trend variance of the long haul product; some of them are split mounted, which I mentioned as some of the applications where we use it as both long haul and the replacement for high-capacity, long haul storage. For low capacity PDH long haul increasing that coming in. The high power allows us to go one, longer distances for in standard distances to do higher capacity for the same antennas and same towers which is a major benefit. And as I mentioned, we had 10 customer orders for this quarter for this product, several of them over $1 million.

Okay. Thank you very much.

[Bob Sells] (indiscernible) Capital Management.

Couple questions. One, could you just run through the geographical breakdown for this quarter and last quarter one more time?

Of course. For this quarter from North America we had 34%; from the EMEA, Europe, Middle East and Africa, 38%. Asia-Pacific, 18%, 1 8, and Latin America 10%.

What was it in Q4?

In Q4 North America were 29%, EMEA 43%, Asia-Pacific 17% and Latin America 11%.

Okay and you said cellular was what percentage of revenue for the quarter?

Cellular was 41% for the quarter.

Okay. Can you describe one more time the inventory at Digitel? You said the inventory bump up was attributable to that project. Can you just give a little more detail on what the inventory is? Is it equipment that has been installed but not accepted? Equipment that has been shipped but not installed?

Well, its equipment that was shipped. It is in the process of being installed because the installation itself, the project itself is planned for the first half of the year. It has to be accepted as well, you are right. The point is that also after acceptance it will still stay on our inventory on our balance sheet, because we will recognize the revenue during the period of five years because we are getting paid over five years. So therefore this equipment, although installed and accepted by the customer eventually, will remain and will be gradually decreased as we recognize the revenue over this period.

Can you quantify how much equipment that is of the current inventory?

It is roughly 2.5 million.

Do you expect the amount of inventory attributable to that particular customer to grow in Q2?

No, no.

I don't mean to nit pick take this. I am just curious as to your thinking. Why would that not go into kind of a longer-term receivable and deferred revenue once the equipment is shipped but not accepted?

Long-term receivables really means that you recognize the revenues and you put it as long-term receivables. Now accounting does not let any longer recognize revenue when payment terms are longer than the normal payment terms.

Okay. That's fine.

And therefore they are not recognize it immediately.

Understood. On the gross margin front can you just be, help me one more time. The one component of the gross margin expansion will come from contract manufacturing as I understand it? And then another component of the improvement will come from migrating from the, to the P series which seems to have a lower cost structure. Do I have those right and are there any other contributors to the gross margin improvement that you expect in the second half of the year?

I think you mentioned the two major activities that are contributing to the gross margin. One is moving to contract manufacturer. The second is moving more towards the P family of products, which have a much lower cost structure. And then you do in the third component in there within the P family and that is some of the other activities that we're doing what is a continual cost reduction into the products which also improving the margins.

Of those three components where do you expect in rank order to get to the biggest benefits in gross margin improvement?

The biggest benefit is always with moving to newer designs, the moving to the 1500 to the 1500P Family is the largest contributor because we are moving from an older design to a newer design. And always in when you work cost reduction this is the largest contributor.

And why is that transition if you went 42% in Q4 to 50% in Q1, why is that a multi quarter transition as opposed to just cutting over and shipping the P series of products right away?

It is the multiple quarter exercise because it is a family of products, and you don't do that on all of them at the same day. So you bring online different products over time, they are not exactly at the same time. And you also have an issue where you transition the customers over time. And I think all of our customers move to the PC (indiscernible) are accepting it but still it takes time as you move all of them into their new productline.

In the Nokia relationship where are the primary geographies where you expect that to significantly increase your opportunities?

I believe that over time, I'm not sure this year but in the time frame of 18 to 24 months, we will probably see same distribution as we have our sales.

And then the gigabit --

(multiple speakers) -- probably it will be a little more. Actually, it's probably with less (indiscernible) from the U.S. where Nokia is a little bit weaker in the U.S.

And then the gigabit product, what are the primary applications that will open up for you, or will it still be used as kind of closer to the core cellular back-all product?

First of all, the gigabit in the next two years will probably not go into cellular network. Cellular networks today are still TDM/ SBH-based with a max of a layer of ATM on top and 3G deployments. But we start seeing new types of deployment like some other, like (indiscernible) operators, like people deploying metro Ethernet applications as extension products.

My understanding is the gigabit products are very short haul products in general. Is that true?

No, you are talking about gigabit products and very high frequencies where we have those products like the [60] gigahertz; those are very short haul. We come out with a gigabit and it is not a full gigabit in the air, its a gigabit interface. And upgrade to 100 Mb, which are the same ranges as all standard licensing can go to 70, 80 kilometers. Can we take questions from someone else and move or --?

Yes, sir. Good work. Thank you.

Tony Tristani, Halpern Capital.

Good morning. Nice quarter. I have a few questions. Your 10% operating margin goal, I assume that excludes equity compensation. So then hypothetically if you continue your growth rate into 2007 you would be at that 30 million revenue per quarter roughly on average. So is what you are saying as far as operating margins in the second half of this year obviously that should continue and actually be reinforced by higher revenue in 2007. So what I am trying to say is if you hit a $30 million revenue per quarter on average in 2007, you should be pretty close to your 10% operating margin model?

Yes, this is what we project.

As far as free cash flow as you go into the second quarter you said some of the accounts receivable and inventory kind of jumped this quarter should reverse, and then if you combine that with expanded gross margins and operating margins in the second half, do you think that from this point on you should probably generate cash? Assuming that if you are close to a double-digit operating margin for the business that should be able to fund future working capital needs?

Yes, we predict to generate cash even before we would have double-digit operating margin. We believe that in the next quarter we will be breakeven and then later on for the second half of the year we will start generating cash.

Sure, and if you maintain these margins etc. you should be able to at that point not look back? You should be generating cash to the business?

We will use the cash that we are generating.

Right; what I am saying is, what I am trying to say is at this point going forward it looks to me that you should be a free cash flow positive company, unless of course your growth rate jumps up to 30 or 40% when you have much higher working capital needs. What I am trying to say is if you grow 25% a year with double-digit, close to double-digit operating margins at this point forward, you should be a free cash flow generating company.

That's correct. I agree with that, yes.

James Ott with Hibernia.

Thanks for the opportunity to ask a question. The last four quarters your R&D expenses have averaged right around $2.2 million per quarter, and this quarter net of the grants they jumped up to $2.674 million. Can you tell me what drove that?

The operating expenses on the R&D side went up this quarter and will stay around this level moving forward. It was a decision internally to invest in the future. We saw certain opportunities in producing both new products, next generation products and doing some more I would say stronger cost reduction measures into the future. We decided to invest where some of that will come back as new products during the 2007 time frame.

Okay. Thank you.

Rich Church, C. E. Unterberg.

The P series increased its contribution sequentially but gross margins declined slightly. Could you talk about why that?

One reason is the average price. This quarter we also have a deal from India, and India tends to have lower prices or sometimes much lower prices in other places. That is the main impact.

And is that what your -- what the risk is for the second quarter in terms of the gross margin commentary that it could possibly be down sequentially?

Yes, I mean if you put together all the pros and the cons and the good things and the bad things, then no doubt that on the cons price pressure from Asia and mainly from India is the thing that impacts average sales price negatively.

Okay, and then on the OpEx side, what level of order of magnitude should we expect in terms of an increase? I mean do you think the sequential increase we saw in Q1 would be similar into Q2?

No, No. The increase from Q4 to Q1 was quite a significant increase. This is why we also noted in the previous conference call that you should expect an increase in expenses. And from now on the additional increase will not be in the same magnitude but less than that.

Okay and we should expect financial income to come back down to normal levels after this currency flip?

Correct, yes, and once we start generating cash it should be improved.

Thanks a lot.

Matthew Robison, Ferris Baker Watts.

Do you expect the option accounting the level to stay about the same? Throughout the year?

Probably will go down gradually.

And then also just kind of a housekeeping, do you have your CapEx and what your operating cash flow actually was?

The CapEx was about $0.25 million; we usually run around $1 million a year. And the operating cash flow -- I would say that most of the cash flow was operating cash flow excepted this quarter of $1 million from capital expenses, all the rest is operating expenses.

Okay. Thank you.

Rich Valera, Needham & Co.

I think in your prepared remarks you mentioned you expected orders from -- additional orders from companies like FiberTower. I was wondering if you could comment on that a bit, just in North America? And how significant do you think these wholesale, orders from wholesale type providers could be?

First of all the trend to wholesale providers is mostly a U.S. trend. We don't see similar operators in Europe or in the Asia-Pacific regions. Wireless wholesalers; there are other wholesales but wireless wholesale plan is a U.S. one right now. And as the orders will come in will save us significant (indiscernible)working very hard to work with all the others, as well.

Okay. Thank you.

Kevin Dede, Merriman.

You talked about factors affecting gross margin but you didn't mention volume. Won't increase in volume sales help improve gross margin?

Increasing volume of sales, and that is where we target the $30 million improved gross margin because the gross margin -- and you are 100% correct on that -- I messed it up. That's what we usually call operating leverage or operating efficiency because gross margin has some it has six component, has to do with the operations and this is then divided up over a larger volume and it does increase some of the gross margin. And you are 100% correct on that.

You mentioned First Avenue Networks, perhaps contributing to your order base. And I was wondering if you might talk about where you think they are at this point.

First, I did not mention First Avenue (multiple speakers). I mentioned similar (multiple speakers).

I think that was back in the fourth quarter call.

I mentioned them as one of the people signifying that trend to wireless backhaul and as FiberTower. And they are still on the same list as we said last time, I said we do expect from some of the other wireless network operators to see revenues in the future. One of the potential ones as a few others is First Avenue Networks because (indiscernible). And each one of them is growing and each one of them have different business models and how they run; some of them are more IP inclined. Some of them are more TBM-based and they all compete on the base of what (indiscernible)similar and some government and fiber businesses interconnecting them through high capacity backhaul network.

In the mix of business and well, I guess, U.S. internationally I know over the past couple quarters you talked about WiFi MetroZone. Could you give us an indication on whether or not you think that is still trending well or what do you think it might --.

That is still trending well, although we have seen very, very few real deployments from our side. A lot of people talk about that. There are trials going on; they are usually small trials right now. Or starting to work out and we work with a lot of the vendors there for the WiFi on providing the backhaul for it.

Thanks for taking the questions, gentlemen.

There are no further questions at this time. I will turn it back over to Mr. Palti for any additional or closing comments.

Thank you very much for all of you have attended on the call. But before we end I would like to mention that on Tuesday next week, May 9th, Ceragon will be ringing the ceremonial NASDAQ opening bell. We will be hosting at an investor meeting at 10 AM at the NASDAQ site shortly after the opening bell, and we will publish specific announcement on the event. So thank you all for joining us today, and see you soon again.

Thank you. That does conclude today's conference call. We thank you for your participation. You may now disconnect at this time.