Ceragon Networks Ltd (CRNT) 2006 Q4 法說會逐字稿

Good day, everyone. And welcome to the Ceragon Networks limited fourth 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 risks and uncertainties that could cause Ceragon's actual results to be materially different from those expressed 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'll now turn the meeting over to Mr. 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. We are very pleased with our fourth quarter performance. A strong finish to an excellent year. We reported record revenues of of $32.9 million. We also reported record net income excluding the impact of one-time charge. For the year, revenue grew 47%, and we crossed the 100 million revenue mark for the first time. As an interesting note, also our three year compound annual growth rate has been 47% as well. Our objective was to grow profits at the present rate of revenue and we were successful. Our non-GAAP net income grew 76% year-over-year and our objective is to continue the trend with a high level of top line growth and with net income continuing to grow faster than revenue. Moving us toward our growth of 10% net profit margin.

Our excellent results related directly to the achievement of several strategic objectives we set for ourselves for the year. Our first objective, a smooth transition to a new product family. In Q4 2005, we began a program to accelerate the transition of our new P family of products with enhanced capabilities and lower cost. We've completed the transition and by year-end, virtually all of our bookings came from the new product. During 2006, [inaudible - heavy accent] the FibeAir 1500P family gained one acceptance in more operators such as Digitell in the Philippines, Belgacom in Europe, and Bharti in India. Our FibeAir 1500HP, which is optimized along all applications benefits from being the only solution suitable for retrofitting our networks to increase capacity.

Our second objective, enhance our leadership in IT backhaul. We are leading the way in the migration to IP backhaul with our native E-connect solution. Our IP Max product, the IP Max, offers the fastest data rate in the market, is gaining traction and holds tremendous promise for the future. We have been selected by two of the leading incumbent Operators in New York and we have assessed license lead in operation in the U.S., A full throughput 800 megabits.

Our third objective, a program of continuous cost reduction, including a move to 100% outsourcing of manufacturing. The combination of new products and cost reduction measures more than offsets the normal annual decline in prices, improving our growth margin in the second half as we planned. The full impact of the gross margin improvements was met by a shift in business mix, both geographical and more towards the use of the OEM channel. We have also completed 100% outsourcing of manufacturing, increasing significantly our production capabilities and flexibility. As a matter of fact, the cost reduction that outsourcing measures were essential for another reason. They enabled us to take a substantial OEM business with acceptable profitability and very high quantities.

Our last major objective for the year was to build our OEM channels. The beginning of the year, we formalized our relationship with Nokia and stated our intention to diversify our go to market strategy and building our OEM relationships. We were extremely successful and increased our revenue for OEMs from around $1.5 million a quarter to around $10 million per quarter during 2006. Finally, as a result of success and developing the OEM business, our book-to-bill improved in 2006 and we ended the year with a substantial backlog. We also ramped up production significantly during the year to lead the demand for OEM customers. The increasing OEM business didn't impact gross margin and delivery time but significantly enhanced our bottom line. The net effect of achieving our strategic objective in 2006 was that we achieved our original growth target for both revenue and profit, we enhanced our position in the market and we are well positioned to continue with strong performance in 2007.

Going forward, we will continue to benefit from the same major trends, growth in fibers, accelerating demand for bandwidth and a shift towards all IP network. As we mentioned on the last call, carriers are becoming more focused on selling higher output services to subscribers. The large equipment vendors are also trying to move up the value chain by offering complete solutions and engaging in managed services contacts, therefore,, consolidation and conversion will continue to be the main thing in our industry. We will continue to build our OEM relationships in order to improve scale and reach in order to compete effectively in this environment. We will also maintain our focus on continuous technical innovation and by costs down and antenna differentiation and best-in-class suppliers. One sign of our technological maturity is the fact that we decided to end our participation from the Israeli Office of the Chief Scientist program. The economic benefit of this program has diminished significantly and repaying the cumulative grant will have a net positive impact on our results going forward. Tali will explain this in more detail.

In looking specifically at Q4, OEMs accounted for a third of revenue, the same as in Q3. Bookings were a little weaker in Q4 because like some other vendors in the [inaudible - heavy accent], we had lower bookings for them due to the disruption of the integration process. This has nothing to do with the strategic OEM decision, only the mechanics of this migration process which will continue, the merger timeline has been pushed out. We have no further indication about a strategic decision at this point and we continue the relationship forward. In addition to the two OEMs, General Dynamics was our third 10% customer in Q4, representing a portion of of the $7 million contract we won for FibeAir 1500P was Phipps certified and [inaudible - heavy accent] for the U.S. Air Force. I expect to fulfill balance of the contract year-end Q2.

The General Dynamics business deals with the Israeli Air Force and municipal deals such as Paradise Valley in the City of Houston, caused the Private Government Network segment to show a nice increase during Q4, along with continued strength in the cellular segment. Looking ahead, we expect more of the same with Q1 expected to be similar to Q4. Now I'd like to turn the call over to Tali to discuss the financial aspects of the quarter. Tali?

Thank you, Ira. 2006 was an excellent year by all measures. Revenue grew 47% to to $108.4 million, and non-GAAP net income grew 76% to $6.7 million or $0.24 per share, compared to $3.8 million or $0.14 per share in 2005. Q4 revenue growth exceeded our expectation and increased 54% to to $32.9 million, compared to $20.1 million in Q4 of 2005. Non-GAAP net income grew more than revenues,reaching a new record of $2.7 million, or $0.09 per share, up 160% from $1 million or $0.04 per share in the fourth quarter 2005 , and up 43% sequentially, from $1.9 million or $0.07 per share in Q3.

Turning to the Q4 revenue break down, revenue from selling our Operators accounted for 42% of total revenue in Q4 and declined from Q3 due to the large contribution from Private Network, which was 36% in Q4. Six Operators accounted for 22%, about the same as the previous quarter. For the year as a whole, cellular grew as a percent of the total once again reaching 49% of total revenue in 2006. Six Operators accounted for 23% and Private Networks accounted for 29% of 2006 revenues. The geographic mix in Q4 was very similar to the mix for the entire year. EMEA accounted for 41% in Q4 and in 38% for the full year. North America accounted for 26% of revenue for both Q4 and the full year. Asia-Pacific was 28% in Q4 and 29% of the year, and Latin America was 5% in in Q4 and 7% of the entire year.

In Q4, our non-GAAP gross margin increased to 36.3%. One factor was the positive impact of concluding our participation in the grant program sponsored by the Israeli Office of the Chief Scientist; however, if we adjust for this factor, our gross margin still increased 180 basis points to 31.5 in Q3, With a proportion of OEM business remaining the same. Those of you who aren't familiar with the grant issue, our business has matured, the economic benefits of participating in the grant program has diminished; therefore we have chosen to repay the total outstanding grants under the Chief Scientist program in semiannual installments over the next three years. This resulted in a one-time charge of $10.4 million in Q4. It also reduced the Q4 cost of goods sold by approximately $1 million, because we do not longer pay royalties, partially offset by an increase in R&D expenses of about $500,000 because we no longer receive the grants. This resulted in the positive net impact on earning in Q4 of about $500,000, excluding the one-time charge.

Aside from the impact of discontinuing the Chief Scientist program, Q4 operating expenses increased, primarily reflecting additional headcount in Sales and Marketing. Yet, we continued to improve our operating leverage, increasing our non-GAAP net margin to 8.1%. In Q4, we had an equity based compensation of $370,000 or $0.01 per share. On a GAAP basis, we reported a net loss of $8.1 million or $0.30 per share -- $0.30 net loss per share. During the quarter we were cash flow positive, generating $800,000 in cash, bringing our cash balance at the end of the year to $29.5 million. DSO were 75 days.

We ended the year with a strong backlog, although book-to-bill in Q4 was below one, therefore, we expect Q1 revenues to be about the same as Q4, somewhere between 31 and $33 million. Our target growth for all of 2007 is still 25% and we expect to be cash flow positive. Longer term, our goal is to sustain 25% growth per year, to reach 50% of total revenues coming from OEM customers and to reach 10% net profit margin. Now we will be happy to take your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. We'll turn first today to Matt Robison with Ferris, Baker, Watts.

Good morning and congratulations on all that Private Network revenue you got in the quarter. Last time you talked a little bit about what your margins were for your direct business versus the OEM business and maybe if you could comment on that a little bit? Also, give us your headcount and maybe Tali talk a little bit why deferred revenue was down, and you also talked about on the last call that your kind of worse case scenario, depending on if Siemens took over, if that product line kind of replaced you guys longer term, Nokia, you'd see 10% growth this year. Are you retracting that worst case scenario and just planning on 25% growth now? So, if you can kind of touch on those points?

Hi, Matt. Thanks. I tried writing down all of the questions and I'll split them between myself and Tali.

Okay.

As far as to the first question which was gross margins, and between the different deals, like always, the gross margin for the private sector and government sector is much higher than OEM business, but they all at the end mix up based on geography, channel, type of deal and type of product, and this is partially reflected in the results of this quarter, has been reflected, we had Private segments at similar levels, a little bit lower levels in prior quarters and this was factored in there as well. Regarding the target for the year, we believe we'll grow 25% this year. We still stand on the worst case scenario of 10% if there will be major changes on Siemens coming out of the Nokia-Siemens merger and as I've said, prior to even today, we do not have additional information at this point and we continue business as usual with the slowdowns in bookings because of the mechanism of the merge in between the two companies which is being a little bit delayed.

Do you see that Private Network business as strong in the current quarter as it was in the fourth quarter?

The Private business in third quarter was I think lower in percentage than fourth quarter.

No, not current quarter. The March quarter as opposed to the December quarter.

Oh, first quarter.

Yes.

The coming up quarter.

Yes.

My expectation will be more towards the yearly average than as strong as in this quarter.

Did you see some --

Business this time was coming mainly from government business and we have spoken in the past about the fact that government business tends to be lumpy.

Okay.

So you may see fluctuations on a quarterly basis, even though on an annual basis we are quite stable.

Sure. How about the deferred revenue and the headcount, Tali?

Headcount was 285 employees and deferred revenue went down somewhat as we recognized revenues, it was unrecognized before.

Right. So just so it's just within the normal range, is that what you mean to imply?

I think that we will, in the future, we'll continue to see the normal range, yes. I don't think it will be substantially more than the normal range this time, 3.7 was about the average during this year.

Fair enough. I'll circle back with you off line on that number. Thanks.

And we'll turn now to Rich Church with Unterberg.

Thanks. Nice quarter, guys. You said that Q1 would look similar in terms of revenue but I'm curious on the margins and earnings per file, will Q1 look the same given the Private may be a little bit lumpy and I guess that's higher margin business?

I think that Q1 will look quite the same as Q4 on most of the measures, maybe on all of the measures.

Okay, and for the full year outlook of 25%, you've posted 47% compound annual growth for the last three years, as you've said earlier in the call. I'm just curious, why do you think 25%? That's what you said last year and you've wound up growing 47. Why are you conservative for '07?

I'm not conservative. I think that 47% year-over-year has to be built from an inherent market flow. The market has not been growing this fast, and I think a lot of it has been having to do with the machinations of growing through our mark-to-market strategy. If you remember over the year, we made the change and we were predicting much higher growth rate for 2006 and once the OEM channels started kicking in and we reached a new level, a very new revenue level. Based on that new level, we assume that we'll be at about 25% growth rate for this year.

Okay, so for '07, do you expect to add more new OEM partners? Could you give us any idea of how many you might be targeting?

We are targeting more than one and working very hard on that, whether it will mature into view, I do not know.

Okay, and then do you have any new products that can you give any timing in when we might expect to see them?

As you've seen, our R&D pipeline has not gone down. That means we are still very very active and developing those products, we'll continue the trend that we did in 2006. We'll grow to drive innovation and new products and continuing our leadership and best of breed products that we have, mainly in the IP space where that is happening very specifically today and we'll continue to drive cost reduction with new models at the much lower cost point during the year.

Can you say what percentage of your revenue is the IP Max product in the quarter?

I did not say and I don't have the exact number but it's around 30% and generally, if you look at our numbers, it's very easy to calculate almost all of the private -- government segments is IP, and take about half of the six Operators, they are still the cellular business is [inaudible - heavy accent].

Okay, all right thanks a lot. Good quarter, guys.

And we'll take our next question from Frank Marsala with First Albany.

Good morning, gentlemen. Good solid quarter. You said you added heads in Sales and Marketing. Could you talk about how many people you did add there and what were the regions where you added those people?

We added about ten people in the Sales and Marketing, worldwide, mostly having to do with increased, I would say over the geographies where both U.S. increased, Asia Pacific increased and some of the headquarters to support our OEM relationship.

Okay. The second OEM on your list, Ira, what region or is there a region that they are primarily serving for you?

They're serving worldwide but it's mainly in Asia Pacific.

Okay.

But it's mainly coming out of Asia.

Okay, and then as I look again, Fiber Tower, from what I heard, was not a 10% customer again in the quarter. Do you think that has the potential --

Fiber Tower was not a 10% customer but they are a very good customer but we raised the bar with raising our total revenues on the top to be a 10% customer, they have to be a very big one.

And then just the last comment, last question, you just said your growth is growing faster than the market. What do you think, how fast do you think the market is growing in 2007 or will grow in 2007?

We believe, well it depends on the report that you read out there numbers anywhere between [inaudible - heavy accent].

I'm sorry, say that again?

5 to 25% depending on the report, you'll see all the numbers out there. Very hard to read from the outside. We believe it will be a little bit below 25%.

Okay, thanks very much. I appreciate it. Good quarter again.

Thank you very much.

Next up is Scott Barry with Sanders, Morris, Harris.

Good morning or rather good afternoon, gentlemen. Great quarter.

Thank you.

Just a couple quick questions, most of the good ones have been asked already. I notice you seem to be freeing up some cash. Is that just generally because the business has been growing? And then what was your cash flow for the quarter and the year?

Well, we are generating cash flow. We started generating cash as the profitability goes up. Until now, it was more difficult to generate cash because of the high need of working capital as the growth was really dramatic. Right now, the growth has a little bit more back to normal between Q1 and Q4 and we are able to generate cash and we think we will continue and generate cash next year, but I would say, again, the difficulty is the growth and the need to finance the growth but what is helping us is of course the growing profitability.

Okay, well one more quick one, kind of going back to an earlier topic on next year's growth. I just want to nail it down and put some perspective on it. You had said 25% growth and last quarter, you also said that the second half of 06 is a baseline, so in fundamentally what you're saying is you expect to grow 25% over an annualized revenue based on the second half of 06; is that correct?

It's 25% over year-over-year.

Okay.

Okay? Where we expect that if you take annualized second half, it's about 10%.

Okay thanks a lot and once again, congratulations on the quarter.

Thank you very much.

Next up is Larry Harris with Oppenheimer.

Yes, thank you. Great quarter. With respect to the geographic mix and 2007, would it be reasonable to assume that we could see maybe faster growth in the EMEA and Asia Pacific regions than say North America, and also, to what extent is 3G related backhaul affecting demand for your product?

Okay, I'll start with the 3G and then we'll go back to the geography mix. 3G, it depends. I think if we look and that has to do with exactly what your other question to geography. Driver and different geographies drive the business differently. 3G is mainly related to U.S. And Europe. For example, we see a lot of demand in the U.S. from people deploying video services are now needing much more bandwidth to the towers as this is something that is generating demand and even making the shift from using T-1 lines to wireless backhaul and high capacity wireless backhaul.

If we move to the Asia Pacific region, it's mainly more subscribers. There's very little 3G there, although we started seeing 3G in some of the countries, but it's less of a 3G, it's more fiber. If we go to the Africa region, for example, we see new networks coming up and mostly long haul backhaul in between the networks, in between cities where they don't have infrastructure, so different drivers around the world and we cannot expect those drivers to change significantly in 2007, and the same thing is about the same in 2007 which will, I think, come up with about the same geography mix.

Okay, all right well, thank you.

Thank you very much.

Ray Conley with Palo Alto Investors, please go ahead.

Good evening. Thank you for doing a great job here on the quarter. Had a question with who you're taking share from, given that you're growing faster than the market, which competitors would you cite as the ones that are most vulnerable to your solution?

I think that most of the share we are taking is being taken away from a lot of the smaller players. The big players are NEC and Ericsson, do have their share in the marketplace, but we do take and we compete with them and we do take the deals away from them as will.

Okay, and then just to reconcile on some of the numbers, can you explain the difference between the GAAP and non-GAAP fully diluted shares that are used in the EPS calculation? Why is there a difference?

Talking about quarterly or the annual numbers?

I'm referring to the 27, 105 versus the 28, 814.

I think, I'm not sure, but I think the main difference is whether you are at the loss position or an income position, because the shares are being counted differently if you are losing. I see. If there is a loss, there's a different kind of calculation of weighted average shares.

Okay, thank you.

All right

[OPERATOR INSTRUCTIONS]. We'll turn now to Irit Jakoby with Susquehanna.

Hi, Ira and Tali, great quarter. I just had a follow-up question on inventory. It seemed that inventory was up this quarter, if you can comment on that.

I think inventory went up, but you count inventory days, didn't go up substantially, so it went up as part of the normal growth of the business.

Okay, and also a follow-up question, I know that Fiber Tower was not a 10% customer, but if you look at all your carrier carriers business, can you give an idea of what percentage that would have been or that was?

It was not a large percentage this quarter. Fiber Tower is definitely a very large carrier in the U.S, probably the largest, so business with them is a substantial business; however, we do do business with a few others I would say with additional three or four more carriers, on a lower scale.

Okay, thank you. That's it for me.

Thank you.

And next up is Ehud Eisenstein with Oscar Gruss.

Yes, hi, thank you. Very nice numbers. Question on the fixed networks. Would it be fair to say that half of it came from WiMAX, Wi-Fi related networks?

I would say close to half, a little bit less than half. I don't remember exactly in front of me but I think that your assumption is about the same. It also matches my overall assumption that about half of the network is IP-related which is related to WiMAX, Wi-Fi-type of deployments.

Thank you, and with 13 sequential growth in the December quarter, where do you see this part of the business going forward in '07?

Again, talking about - Ehud? Can you explain?

Yes, where do you see this element of the business going forward in '07?

The successful business? Right now, I think your question relates mostly to the issue of WiMAX, Wi-Fi deployment.

Correct.

I think that a big portion for all of us, and we see a ramp up, I would say interest discussion talks about that but I don't see a concrete demand in the sense that it's jumping up very rapidly right now. I think a lot of people are playing and testing and a lot of people are delaying decision until WiMAX3 will be available but we also see some of the classic [inaudible - heavy accent] going to IT. elevating demand in this segment.

Okay, thank you. And Ira, can you please comment on your M & A strategy?

M & A strategy. Well, there is two sides to that, and I think I commented on them awhile ago. Our strategy is first and foremost right now is to grow the business and excellent execution, [inaudible - heavy accent]. We are looking at as always opportunities outside and seeing if they make sense to the business and on both sides of the equation. So that's not saying okay, one way or another. First and foremost organic growth right now.

Okay, thank you very much.

And now we'll turn to Kevin Dede with Merriman.

Gentlemen, let me offer my congrats on a nice quarter. Ira, can you give us a little more insight on, I mean, I know you commented on Nokia and Siemens in your prepared remarks but I was just hoping you could give us a little more insight on where you think Nokia's business is going and how you can get towed along with that?

Well there is two things there, okay, and I'll start with the very short-term. The very short-term insight, one, we continue relationships as usual in working with them on their deals and being out there in the market together. We do see a little bit of a slowdown on the bookings because of the mechanism of the two companies that has been positioning themselves to stay with as little orders as possible until the merge point, so that has been seen with others as well, although it doesn't have a major effect on us because most of the things we do, well everything we do with them is not for inventory, so it's directly into the customer. On the longer term, I think that the discussion is open in working with them. I see our advantages but nothing is real yet and there's no strategic decisions on the table. It will take awhile until those forethoughts work their product portfolio and product mixes and during the delivery and I think we have a good chance of being part of that.

You also mentioned that you're seeing less of your IP-related sales going through the cellular channels. I was just wondering if you could give us a little insight on how you see network operators thinking about IP and how that involves contract negotiation and RFPs.

There are two sides there. The cellular world today is totally PBM-based, PDH and then there's IP over [inaudible - heavy accent]. We haven't seen a single cellular operator yet building IP backhaul, wireless IP backhaul, but I think every discussion that is on the table today is a major question, okay, when your equipment and another equipment, what will be the one that we find down the road and 2008, 2009, you pick on what the people believe will be migration point and we are fully ready for that. One of our main advantages of the marketplace is that equipment is billed already today in such a way that the migration to IP is very easy.

Okay, and you mentioned backlog. Now, is that, I mean down a little bit, not or do you think it's less than a quarter? I may have missed that if you try to quantify it at all.

Well, the backlog at the end of the year was more than the quarter, I would seen say substantially more than a quarter.

Okay. Can you talk about the benefits that you've seen in outsourcing and the I guess the quantity of business that you're doing versus some of the smaller competitors that you think you're displacing? I guess what I'm wondering is, given the Harris Stratex combination, I'm wondering how much scale manufacturing will be a factor in the competitiveness and the contract negotiation or do you think that enough of the market is still fragmented?

I'll talk a little bit on your question and then in terms of your last comment some details, in general, manufacturing is a major piece of the business that we do today, and in the SBH phase, quantities, ability to produce quantity at low cost, design to cost are factors that play a major role today in the cellular market. What we did this year, we did two things in which we continue to do. One is we continue the design to cost which means new products and new designs for the same product reduced to cost and outsourced the manufacturing which gave us flexibility and much easier ability to ramp up the manufacturing and the quantities and gain addition of cost reduction for lower quantities.

Okay, are you seeing component issues on the sourcing side , tightness in the supply chain?

Nothing -- like always, there's always ups and downs and one supplier here and one supplier there, but nothing which is significant.

Okay and then last question for me, a nice rebound on the gross margin. Could you just give us a little bit more as to what drove that?

What drove that in general is that we moved on growth of cost of goods -[indiscernible] program we have been doing, and somewhat of the mix of the product.

Okay, very good. Thanks for taking all my questions, gentlemen, and congrats again.

Thanks, Kevin.

And Rich Valera with Needham & Company, please go ahead. Please go ahead.

Thank you.

Hello, Rich.

Hello. I was wondering if you could give any thoughts on the position of the current Ceragon product line versus Siemens's portfolio and if you think there are any sort of holes in the Siemens portfolio, particularly with respect to IP capabilities that you guys have such that even if strategically they wanted to replace you they would have a really tough time doing it because they just sort of lack the capability. Any comments or thoughts on that?

I'll put two comments on that which is the major one. I think you mentioned one of those [inaudible - heavy accent] DH portfolio, and Siemens has been focused on the rest of the world and totally missing the U.S. portfolio.

Okay. That's helpful.

And I can drill down on another 50 items were the differences, but I don't think, for now, auto it think those were the two major ones.

Great. And on the gross margin --

I'll put one more item out there. I think, and this is we don't have the numbers so it's much harder to compare, but I think our cost basis for the cost reduction that we have done this year is much lower than Siemens.

Okay, that's helpful as well. Moving on to gross margin, you did have a big bounce back in the fourth quarter, but how should we think of that both in terms of '07 and then in terms of your longer term model where you eventually want OEM to become 50% of the portfolio? I would assume that means gross margin trends down over time, because the OEMs a lower percentage but I just wanted to hear your thoughts on how we should think about modeling gross margin going forward?

Well, again, gross margin depends on the mix of the product. The OEM versus direct, and of course, the geography, so trying to take all of those factors into the mix, we would say that about the same as we experienced in Q4. It's much more easier for us to predict more than that. We think that we had a lot of business in India which drove the gross margin down, and it's not necessarily that it will be the same mix, and that we are taking additional cost reduction, so altogether we believe that we can stay with about the same range in gross margin.

Okay, that's helpful. Thank you, gentlemen.

Thank you, Rich.

And we'll turn to Matt Robinson with Ferris, Baker, Watts.

Yes, so did your direct business grow between 23, 25% year-over-year? Is that the right kind of number to impute?

Your estimate 25% of what?

Direct business as opposed to the non-OEM business.

The direct business versus the OEM year-over-year?

Yes, for the quarter.

Tali is checking. Just a second.

And you have not begun to pay back the Chief Scientist obligation? You're just reserved for it; right?

Right. We will start paying next year, the first payment being in March.

Okay. Next year, in 2008?

Oh, no, I'm sorry, 2007.

Okay.

I'm still in 2006.

Understood.

I think the growth in varying business was about 20% from what I was trying to calculate.

Okay, and that payment in March will be how much?

About $2 million.

About $2 million?

Yes.

Thank you.

Gentlemen at this time there are no further questions. I'll go ahead and turn the conference back to you for any additional or closing remarks. Mr. Palti, there are no further questions in the queue.

Okay for all of the people who joined us for the conference call, thank you for joining us and looking forward to meeting you in person over the next few weeks. Thank you very much.

And with that we'll conclude today's conference. Thank you, everyone, for joining us today.