Ceragon Networks Ltd (CRNT) 2007 Q2 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Ltd. second-quarter 2000 (sic) results conference call. Today's call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks and Mr. Tali Idan, CFO 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 will now turn the call over to Mr. Ira Palti, President and CEO of Ceragon. Please go ahead, sir.

Thank you for joining us today. With me on the call is Tali Idan, our CFO. We are pleased to report that Q2 is another record quarter reflecting continued strong demand for wireless network solutions. Our Q2 revenues are up almost 58% from last year's second quarter and more important, we are growing profit faster than revenues.

Based on strong bookings and record backlog in Q2, we are raising again our full-year revenue growth target from 30% to 40% growth over 2006. We had a strong second half last year 2006, so this new target represents expected outstanding performance during the remainder of the year. We plan to continue growing profit faster than revenue and this acceleration of growth will help us make additional focus towards reaching our target operating model.

We see a major trend as we are beginning to drive additional growth -- the migration to IP. We see the early impact of this transition in fixed networks and we expect it to move towards cellular networks in the future.

Our goal is to strengthen our position as the number one vendor in the IP backhaul space. We have over seven years of experience in wireless IP backhaul systems, technology leadership and general partners. This quarter, we were the first microwave backhaul provider to achieve the Metro Ethernet Forum certification for Ethernet microwave systems after extensive testing by independent labs. Currently, 26% of our total revenues are from IP. But this is mainly the enterprise private and government network area while the fixed network segment, including WiMAX is starting to grow rapidly.

The most important differentiating factor in the near term is that we are the only vendor offering native [square] technology of both native TDM and native IP in a single solution. The native square solution facilitates a smooth transition to IP backhaul in mobile networks.

You will recall that during the quarter we announced the deal with Nextlink, one of the largest holders of fixed wireless spectrums in the US. Our current strength is being driven mainly by the rapid growth of the high-capacity HPA segment of wireless backhaul. The transfer growth is coming from several sources -- network upgrade from low capacity to high capacity, rapid growth in cellular subscribers, mainly across the Asia-Pacific region. Our growth is coming through both our OEM partners and direct sales in the Asia-Pacific, and new cellular networks built out.

To be able to fully capitalize on those strong market trends, the ability to execute is a must for all aspects of the business. We are able to convert the growing number of opportunities to orders by implementing a strong OEM and strategic partner channel strategy. This means having excellent relations at all channel levels, headquarters to headquarters and accounting to accounting in the field.

In addition, our growth in direct sale is a result of having more feet on the ground and keeping satisfied customers because we can meet their needs for complete offerings. From the customers' point of view, a complete offering includes high top support all the way from the initial sales goal to project completion.

In order to maintain our cost advantage in the market, we have been reducing product cost every quarter. Some of the key elements of our continuous cost reduction program include complete outsourcing of our manufacturing. This, in addition to improving cost, enables us to ramp production quickly in response to accelerating demand, implementing design changes that reduce the number of components, improving the sourcing of components and achieving economies of scale in order to reduce relative supply chain management costs.

We also remain focused on continued strong execution in our R&D efforts. When we introduce a new product, we are already working on the next generation with a design to cost approach. Currently, one of our important initiatives here is introducing new products for the IP backhaul market.

Another area of focus is shortening delivery times. We realize that investors -- we realize the investors appreciate the visibility provided by a large backlog and our backlog is increasing. We see product delivery leadtimes as something to be managed carefully in order to gain and win delivery-based business. To summarize, we continue to be optimistic because we are benefiting from several different growth drivers across all geographic regions and we are executing well on our plan.

The scope of the opportunity has become apparent when you realize that many of our customers have only deployed in the few regions of some very large countries with a lot of expansion potential remaining. We have a comprehensive product offering ideally suited to the backhaul market requirement. We have strong channel partners, as well as the ability to serve customers directly with full turnkey capabilities.

Finally, we are poised to benefit from a new phase of growth driven by the migration to IP and we are well-positioned as the leader of this transition. The key to making the most of the favorable market trend will be our proven ability to execute. Now I would like to turn the call over to Tali.

Thank you, Ira. Q2 was another excellent quarter. Revenues grew 58% to $37.3 million compared to $23.6 million in Q2 of 2006. We continued to grow profits faster than revenues and non-GAAP net income grew 200% to a new record of $3.3 million or $0.11 per share on an 8% higher sharecount.

Turning to the revenue breakdown, cellular operators accounted for 53% of total revenues. Six operators accounted for 26%, and private networks accounted for 21%. There were no major shifts in the geographical mix during the quarter. Asia-Pacific continued to be the strongest region accounting for 44% of total revenues. EMEA accounted for 34%, North America with 20% and Latin America with 2% of total revenues this quarter. We had two 10% customers in Q2, which were OEM partners. OEM business increased to 28% of total revenues in Q2 compared to 25% in Q1 -- 25% in Q1.

Gross margin in Q2 was 36.3%, about the same as Q1. The sequential increase in operating expenses was due to increasing sales and marketing costs related to direct sale and account management. Operating margin reached a new high of 8.7% even after the increase in operating expenses and net margin was 8.8%.

On a GAAP basis, our net income increased to $2.9 million or $0.09 a share. This included stock-based compensation of $432,000. Our GAAP net income in Q2 2006 was $800,000 or $0.08 per share, including $260,000 in stock-based compensation. Operational cash flow was breakeven due to working capital needs to fund accelerating growth. Now that we are expecting further acceleration of growth, we will also have larger working capital requirements.

Turning to the balance sheet, cash increased to $32.8 million, owing mainly to the exercise of stock options. Accounts receivable declined and our DSO improved to 69 days. The increase in inventory reflects higher inventory support accelerating growth mainly because of finished goods at customer sites waiting to be recognized and as the Company awaiting shipments.

Finished goods inventory was again about 70% of total inventory in Q2. With our strong backlog and book to bill well above one, we are now expecting about 40% growth in 2007 over 2006. This implies revenues of about $80 million in the second half of 2007 with $38 million to $40 million expected in Q3. Now we will be happy to take your questions.

(OPERATOR INSTRUCTIONS). Blaine Carroll.

Yes, good morning and good afternoon, everybody. Congratulations on a great quarter.

Thank you.

Thank you.

Ira, if we could look at the overall market in general, you are saying that market conditions are very strong, but could you talk about how booked you are for the current quarter and maybe what you are quoting on leadtimes and how much turns business you would need during the quarters?

Our business is split between two things. Some of it is turns business. I would say about 50% of the business is turns business and 50% is things that we -- have been recognized from (inaudible) on the prior quarters -- unrecognized revenues from prior quarters.

Okay. And then following onto that, maybe for Tali, you talked about the inventory being up, finished goods being 70% of that inventory, but deferred revenue was down a little bit. Could you talk about the dynamic that's going on within the deferred revenue, as well as the inventory?

(technical difficulty)

Tali, I'm -- Tali, I'm sorry. We can't hear you.

I'm sorry. I'll repeat it. Deferred revenues, as you can see in the balance sheet, is related to cash received. So for example if we received cash on account off a certain sale and we didn't recognize this sale yet, we would (inaudible) in deferred revenues. So in that sense, there was a certain decline as we have recognized revenues that we have been paid before. It is only to a small extent related to inventory, which may stay at the inventory site and at the customer site until it is recognized because sometimes they pay partially for this and sometimes they don't pay yet until they give us the acceptance.

Okay. Great. I will pass it on to others. Nice quarter.

Thank you very much.

Richard Church.

Thanks. Great quarter, guys. Ira, could you talk about the market growth overall? Are you changing your estimate for the market growth? I think you have said 25% over the next three to five years. Is that going up as well or are you just taking more share of that growth?

I will say it this way. If we look at the long-range term, we still see a 25 or maybe a little bit above that, but we see a 25. Indicators would say this is accelerating. If you look at the shorter term, I think the market is growing at least this year faster than 25%.

I think that from a marketshare perspective, although the statistics are very hard to get, we are probably gaining marketshare, but probably very little. It is not as significant. Most of it is we are growing with the market and with opportunities in different places and we do gain probably a small number of points in marketshare, but not a significant point.

Okay, great. And could you tell us what the headcount was and what are the plans for hiring going forward?

The headcount was over 300 -- 303 employees and as far as hiring, yes, we do have plans to hire gradually additional employees.

Okay. And Tali, do you expect to pay taxes in '08 or what is the timeframe for that given the profitability?

I would say the answer is substantially no because we have net operating loss carryforwards of more than $70 million. So first, we will have to make the $70 million. I absolutely hope to make it very fast, but it is still going to take several years.

Okay. Great. And just one more. Ira, could you talk about any new OEM partnerships? Are you continuing to work on them or are --?

As I am getting this call -- question, it is a continued discussion with -- we are working as part of the strategy. We indicated all along that our strategy in the long term is to reach a much higher percentage via OEM and strategic partners. It is something we continue working on and when we'll have results, we will announce them.

Great. Thanks, guys. Nice job.

James Faucette.

Thank you. Just a few follow-up questions in terms of the last quarter. Last quarter -- on last quarter's call, you gave a split between IP-based solution sales and SDH-based solution sales. Do you have an update on what that mix looked like in the June quarter?

Yes, I think I indicated on my part that in June, 26% of our sales were IP.

Great. Thanks. Yes, I noted there were a lot of numbers in there. Still trying to keep up.

It's okay. 26% of our sales were IP.

Okay. Very good. And then on the tax question, as we get passed the loss carryforwards and like many, we're hoping that they come quickly, what though should we think about the effective tax rate likely to be for Ceragon given its international mix, etc.?

Okay. The real answer is the rate will be somewhere between 15% to 25% because the rate will be determined at that time based on a little bit complicated laws. So I would say to be conservative you can use 25%. Hopefully in actuality, it will be less than that.

Okay. And then as far as expenses in the quarter, selling expenses seem to have been up pretty meaningfully during the quarter even excluding stock-based compensation. Obviously that is going to happen as your revenues increase. But how quickly should we anticipate those growing over the next few quarters and into next year?

Selling expenses will continue to grow in dollar terms. As far as percentagewise, I would expect a slow decline in the percentage of expenses. I think that such a jump as we saw from Q1 to Q2 will not repeat itself. However, they will continue to grow gradually in dollar terms.

Great. And then my last question is more on the market and the strategic. Have you seen much change in the competitive landscape? Obviously backhaul, and particularly microwave backhaul has seen very good growth, especially versus the rest of the market and I am wondering if that affecting at all the behavior of the competitors that you traditionally have seen in the market and if you have seen new ones?

From that perspective, I think the competitive landscape in general stayed about the same. The big players, which are NEC and Ericsson and Nokia (inaudible) would be the big players. We are part of the Nokia team in providing the solutions. I didn't see new players and I didn't see moves -- major moves from the other players lately.

On the IP space, it is still mostly us leading the market with some competition from DragonWave and some from Stratix [Aries] on that. I do expect, by the way, that, over the long range, we will see competition from the big players as well.

Great. Thank you very much.

Thank you.

Matthew Robison.

Congratulations on another good quarter. Did you second-largest OEM keep up with your largest OEM in terms of percentage of sales?

Yes.

So it is basically two-thirds/one-third still?

No, it was last quarter I think almost even. It was almost -- yes, almost even this time as well.

Okay. And do you have a percentage of sales from new customers?

I would say the vast majority of our revenues are from repeat sales to existing customers.

Okay.

Very typical that you gain a new customer and then you keep on selling for new areas, new [rings] and so forth. The vast majority -- now we do have new customers every time, but still if you split the revenues, the vast majority is from existing customers.

Are you seeing any change in the margins you are getting on the OEM business?

No, we don't see a change in that respect.

And did you say 300 employees?

Yes.

Okay. And last conference call you talked -- you gave some specifics on the WiMAX. It seemed like in the first quarter it was a pretty meaningful driver of your business and you had a certain amount that was domestic versus overseas and a certain amount that was fixed. Can you give us some similar flavor this quarter or was it not as big of a driver as it was in the March quarter?

We continue to see WiMAX business. It is part of the drivers that is pushing for growth. One of the things for example we did announce this quarter is Nextlink in the US around the fixed wireless solution and we see still see that as a major driver. Most of the WiMAX deployments are usually small right now. So we see them as not major deployments yet.

It seemed like there was some Latin American and some Asian business for WiMAX that was meaningful in the March quarter. Did that just continue this quarter -- the June quarter?

Mainly some Asian business, yes.

And Tali, I missed what you said about the breakdown in revenue from third quarter and fourth quarter. I think you said something real quick about that at the end of your comments.

I said that it will be for -- for the second half of the year, it will be $80 million in revenues and we expect that Q3 will be in the range of $38 million to $40 million.

All right. Thanks a lot.

Thank you very much.

Oh, one --.

Yes, Matt. Hello?

Hello. Can you here me?

Yes, I can hear you.

I forgot to ask you when your next payment to a chief scientist was.

In Q3.

Current quarter?

Yes.

Another $2 million?

Even $2.3 million.

Okay. Thank you.

Thank you.

Irit Jakoby.

Hi, thank you. Congratulations on the quarter. I wanted to ask again about the direct sales. You were up almost $1 million over Q1 despite the fact that OEM as a percentage of revenue actually increased. I wanted to understand why sales and marketing was up so sharply.

Sales and marketing was up because of increased capacity related to all kinds of revenues, whether it is direct sales or channel. We added people. A lot of people traveled much more to support our people and the OEM people. We had more shows than before. So it is really a split over many types of expenses, which are typical to sales and marketing.

Okay. And with respect to gross margins, do you expect gross margins to be consistent in the second half?

I think gross margin, as we said before, we expect it to be in the range of 35% to 36% and this is what we continue to see.

I am asking because in the first half of the year you were slightly above 36%.

I understand that. We are always happy to be a little bit above, but from all our calculations, we think the ranges we are quoting is the range that is expected.

Okay. And last question. You raised your guidance for the top line, but this still implies significantly lower growth in the back half of the year compared to the first two quarters. Is that to be conservative? Is that because the second half of last year was strong?

It's mainly because the second half of last year was very strong, but we expect to continue growing and if you compare it year over year, yes, it is a little bit lower percentages in that time, but we do expect to continue growing.

Okay. Great. Thank you.

Daniel Meron.

Thank you and congrats on a very strong performance here. A couple of questions from me. First of all, what drives the guidance upgrade here? I mean is any particular OEM channel? Is it a bunch of contracts coming together, just general industry trends? Or for example, Nokia had several major wins recently. Is this part of the picture here for you?

As we always say, there is very little concentration in our customer-specific booking and revenues. If you look back over the last few quarters, most of the time, it was the OEM business, which was about 10%, but then again, each one of them was spread over a large number of customers.

So to answer your questions, it is a mixture of a lot of small and medium things, which add up into having strong bookings in Q2 well above one, which (inaudible). Some of it and other things translate into a very strong backlog and the visibility into Q3 and Q4 into more deals in the market that allows us to see the guidance coming up.

Thanks. And then can you talk about the ASP trends here? Where do you see that and also about the deal size, do you see it increasing?

We see the ASPs over the last few years continuing to decline, but slower than we -- slower than we saw in the previous years and the ASP is highly dependent usually on the typical three factors. You take deal size, you take channel and you take geography and then you have -- when you take all three, you have a large variance on the deals.

Okay. And Tali, can you talk about the financial income? It came down materially over the previous quarter and that is even more surprising since the financial -- the net cash has been pretty stable to actually a bit up.

Yes, financial income is consistent mostly of interest income under cash that we have minus fees that we pay to the bank and this is the stable portion. And then there is another portion which fluctuates and this is the portion which relates to exchange rate differences. And that is the one that maybe over or maybe under. In this quarter, we had about $150,000 net negative exchange rate I would say. The exchange rate is expensive. Normally on our financial income, it should be about $200,000 per quarter. If they go over or under, it's mostly from exchange rate differences.

Okay. And then last one from me, Tali or Ira, as far as the operating margins, they are almost just below 9% here and historically, you have stated that you can achieve a 10% operating margin. We are pretty close there. Looking further out in the future and the next few quarters, do you think that this is achievable in this timeframe and longer term, do you think that there is upside of this 10% operating margin target that you indicated in the past?

We believe that the 10% target operating model that we have will be achievable towards the end of next year and that is what we are trying to shoot for our numbers. If there is an upside, I believe there is an upside for the longer term, but this will -- a lot depends on market trends and how much we can push them. I think we can generate -- start growing above that, but that is much further down the road.

Okay. Thanks, Ira and Tali. Congrats on going forward as well.

Thanks, Daniel.

Larry Harris.

Yes, thank you and if I could add my congratulations for the quarter. Any additional details with respect to the sales in the Asia-Pacific region? Are they concentrated in India and the Philippines or are there other countries that showed up this quarter?

We have been selling in the Asia-Pacific region all over India, Indochina, Southeast Asia, Philippines. That is where all the economies are growing very rapidly right now and deploying -- have a very strong push around the subscriber base and expanding existing and building unit growth and we have seen the same this quarter. It is not concentrated in any one of the countries specifically.

Understood.

And let me add to that. I'm sorry, Larry. Let me add to that. Not only is it not concentrating in countries, but when we started growing Asia rapidly, it was mostly based on OEM and today, it is split quite evenly between OEM and direct. I would say even direct even a little bit bigger than the OEM portion. So we are able to really diversify channels in countries in the Asia region.

So therefore in India you are selling both through the OEMs and directly to the carriers?

Yes.

That's great. Okay. And I guess that is an area that can continue to grow going forward?

APAC will continue to grow forward as by the way all the other regions as well because we see demand in all regions, but APAC will grow.

Great. Thank you.

Thank you very much.

Ehud Eisenstein.

Yes, hi. Excellent execution, guys. You had a nice growth of the cellular segment. Is that a trend that you predict in the second half of the year?

Well, again, I am trying not to pinpoint a certain percentage in a specific quarter. I think that if you look at the year to date, cellular was about 49% of our revenues, which is the same percentage of last year, better than the year before, better than the one before. So I think that overall, the trend in the cellular continues, but I wouldn't pick up on one specific quarter.

Okay. And nice sequential growth in the US. Any color on that or again it is just a specific quarter?

In the US, again, as compared to Q1, there was a nice growth. We definitely hope that or plan that the US will continue to grow. Percentagewise, it is tough when Asia is growing so fast and taking the pie from others, but I believe that US will continue. The plan is to continue to grow in dollar terms and they will do it.

Okay. And in terms of the 10% account, have you -- or actually 10% customer, have you had any 10% account this quarter?

As we said, we had two of our OEMs have been about 10%.

Right.

None of the specific accounts, neither direct nor via the OEM, was 10%.

And do you expect such account in the second half?

Such account -- might be depending on -- again, it is -- a lot depends on revenue recognition as it moves along and repeat orders from the customers, do they fall within the same quarter, in between quarters.

So you do expect 10% account in the next four quarters obviously?

Yes, yes, sometimes we do have 10% accounts.

Okay.

I'm hoping that we have 10% accounts once in a while and we do expect some of those in the future as well.

Okay. Just going back to the OpEx, I am a little bit confused on the shift mix between the sellers and operator and general administrative. What should we expect looking forward?

I think that selling was a little bit above what would be considered as normal and G&A was a little bit lower than what we consider as normal. So if you look at the overall trends over the longer period, let's say four or six quarters, these are trends that usually continue.

Any specific reason for the decline in the G&A in the quarter?

No, not specific.

Excellent. Thank you so much.

Thank you.

Kevin Dede.

It's Kevin Dede. Congratulation, guys, on another great quarter.

Thanks, Kevin.

Ira, can you give us a little more insight on visibility? I know you talked a little bit about OEMs versus your cellular customers. But can you just give us a little bit more insight into what leaves you feeling strong about the 40% growth you see this year?

Okay. Visibility forward is a mixture of two things. One is eggs, I would say, almost in the basket, things we have -- and we have in hand, which is our backlog and backlog is built from two parts. One part is things we already shipped to the customers and I think Tali discussed that before as having a lot of outside inventory, things we shipped and we are working with the customers to get acceptance and other terms with them, but we will be able to recognize the revenue and backlog also is part of things that we have orders in hand that we need to ship and that is usually very short delivery times.

We also indicated that we had very strong backlog coming out of Q2, which leads us to believe a lot of it will be converted within the next six months.

In addition to that, if you look at the visibility, we do maintain what's in our pipeline and we see a strong pipeline for the rest of the quarter for things we will need to book the orders, continue booking stuff, continue shipping them and recognize them along the next two quarters. Those are -- those things lead us to believe, if we do the analysis, both on having a strong backlog, having a very strong backlog as a result of strong bookings in Q2 that we raise our guidance for the rest of the year.

Okay, but if you were to look at those factors, how would you split them down your customer base? I mean do you see --?

What we see and again, and I think -- I don't think we're trying to indicate -- we do not see major changes in the mix, neither in the mix, the geographical mix moving forward. That (inaudible) based thing is prior trends and also from a channel perspective OEM versus direct, again similar type of a mix moving forward.

Do you see any changes with regard to the capacity radios that your customers are looking for?

Most of the things we deliver today is high capacity. That is what we deliver. We don't deliver low capacity radios.

So is that in the 150 plus?

On the IP side, it is usually 100 megabit and above radios and on the SDH side, it is an STM 155 megabit and that is going to stay the same.

Okay.

We do see a little bit of push and questions with our position in the IP. We are starting to see a lot of customers which are already talking with us, not about the 100, but 200 megabit radios and 400 megabit radios and dual link, the 800 megabit radios in the IP space. And we see in some of the places where we see a push to upgrade the networks, which is still a small proportion, more than a single STM-1 and that (inaudible) solutions, two, three, four links in parallel.

Okay. The recent certification that you folks announced, can you give us an indication how that might help you market your IP side?

It shows that we are leading the space in understanding the requirements and where we are. The IP space is not as standardized as the SDH space and the MEF certification, the Metro Ethernet Forum, is one of the bodies that is, I would say, certifying equipment for carriers into Metro Ethernet solutions and the backhaul, the IP backhaul is part of the Metro Ethernet type of activities and that is important to be able to interoperate and provide the right equipment for the applications and solutions the carrier needs to provide to their customers.

Very good.

Because, by the way, the certification is not just technical; it is the ability and what they mainly check is the ability to provide service or the services mix across their equipment.

So when you say service mix, you mean support once the radios are deployed in the field?

No, service mix in the way the carrier sells service to the customer. There are different services that they sell through their line -- the service or the application the carrier sells to the end customer.

Got you. Okay. Last question for me for Tali is just on cash generation. What do you think happens for the second half, Tali, given the increased growth you are expecting?

Well, of course, it is going to draw on cash as we need more money to finance the production. I think my best estimate is breakeven. I don't know whether it will be a little bit better or a little bit worse, but that is my estimate.

Very good. Thank you, gentlemen. Keep up the good work.

Thank you.

Thank you.

Scott Berry.

Good morning, gentlemen. Great quarter again.

Thank you, Scott.

I have got a question on -- you have long said that you have got a long-term target of 50% OEM and I know you have never really set a date where you expect to achieve that. Do you feel like you're making progress pretty much on the track you had expected to?

We are making progress on plan. I would believe a little bit slower than I expected, but we are making progress as we move along. We have now two strong OEM partners. We have a third, which I hope will start picking up soon and as I indicated earlier, we are working to add more OEM as potential partners to the pool to increase that base.

Do you have a similar target internally in mind for IP sales in terms of a percentage of your revenue?

I will say it this way. Yes, but very long term. We believe that down the road, in about three or four years, we expect 80% of our sales to be IP, but that is a long-term target depending on the market conversion and the transition to the IP.

And then can you provide us some information on the status of the trials I believe you are doing with Sprint and Clearwire? First of all, just confirm are you undergoing trials with them and if so, can you talk about the status?

As we have indicated in the past, we are in talks with Sprint and Clearwire. We are in different technical levels of tries, labs with both and when we have something that is announceable, we will describe it.

Okay. Thanks.

Santosh Rao.

Thank you. Actually my question was on Sprint Clearwire as well. You answered that. Just now some model questions. On the R&D line, did you mention anything? Should we expect a gradual decline from here in terms of dollar terms going forward or do you expect that to go up?

No, no. In dollar terms, we do not expect a decline, but again percentagewise, if you look backward, you do see the decline along the way and it will continue.

Okay. And another question, just on the ability to offer full scale services as you grow and as you are getting bigger and bigger, I know your products are being well-received, but are you seeing a demand or pressure to increase your services capabilities and the ability to offer full scale services and support?

The answer is yes. As I indicated, part of what we try to offer the customer is a complete solution and that is handholding them all the way from presale all the way to project completion. We do provide services. It highly depends on the different geographies. That demand is different and different operators in different geographies. We see more services being done in the Asia-Pacific region for example. What we usually do is we work with local partners to provide most of the service while we do the supervision and project management.

Thank you. That's all I have.

[Tony Rao].

Hello. Your cellular operator business has been strong in the quarter and strong year to date. Can you give us a little bit of a feedback as to where and which geographies it is strongest and what the trends are in the different geographies and what is driving it?

Okay. Cellular business -- we have cellular business worldwide in all the geographies. I don't remember in my head the breakdown in each one of the regions, but it is strong in the major part in all the regions. If we look for example in the US and I'll walk you through around the world. In the US, we see the business as being done via carriers, people like Cyber Tower and PowerStream and others providing to the cellular operator their backhaul networks. Leasing capacity to them, but building the network based on our equipment. Cellular operators in the US have a very high demand for increasing their backhaul to support the 3G and the much more capacity needed for the devices like the iPhone and others.

We see similar trends in Europe. We see a major push in the Asia-Pacific region around subscriber growth being more subscribers where the number -- people talk for example in India about -- above two million subscribers a month being added totally to the networks and a major push there. We see that in southeast Asia. We see that in Philippines. It's all over the region.

And if we look for example at the Africa region, we see similar things, but at a much earlier stage where people are building initial networks, new rollouts, starting to get more deep coverage, intercity coverage using wireless.

Okay. With that said, can you give us a little bit of feedback on what you see are the dynamics specifically in the United States? Obviously the penetration of microwave backhaul here is much less than it is in Europe and elsewhere and is this a market that you see as one of the stronger growth drivers as we are in the second half or into next year and if you can give us some feedback as to what the status is with different carriers or in the market overall and what the drivers are there?

Okay. If I look at the US market, traditionally, it has been a low usage of microwave for backhaul. But we see -- and again, I am not talking second half; I am talking about a trend over a two or three year period. We see most of the carriers are quoting an increase of about 10% to 15% of use of microwave all the way to 30%, 40%. Because the dynamics there, the ability to increase the use of T1 lines to provide enough capacity to the base stations is low and they will use high-capacity microwave to get to the base stations.

That being coupled with the US dynamics of usually the cellular carriers do not build the networks by themselves and they will depend or work with carriers' carriers to provide that and the carriers' carriers in many cases build on the idea that there is more than one cellular operator per tower so they can share that and work nicely with us to provide very high-capacity links for the towers and I see that pressure continuing. The pressure to have more bids per tower is something that everyone is forecasting.

So are you saying then that you think your work directly with the carriers will be less in the United States and the model will be more the carriers' carrier or do you think it will be a combination that you will do sales directly to the carriers?

It will be a combination.

Okay. And if that is a combination and you've put out some strong growth potential numbers there in the US market, does that mean that you will have to increase your infrastructure in the US from a standpoint, especially based on the fact that a lot of them are using carriers' carriers now and they are not interested in going through the FCC process and so on. Do you think you will have to increase your infrastructure to support a larger potential in the US?

A little bit, but not significantly because there are partners in the US which will help us do that and they are the people who usually install and deploy with the carriers.

Two more questions I have for you on this. The Metro Ethernet Forum certification, how important is that to the carriers at this point? Do they hold that standards body in high regard and that is a stamp of approval that just basically helps you to get orders?

It depends -- like with all carriers. First of all, it is a stamp of approval. It opens the door. But like all carriers, I haven't seen a carrier which doesn't take your equipment or the larger carriers doesn't take your equipment and then test it from A to Z again with their own test and their on labs until it is certified by their own people. So it allows you to open the door, get into the lab and go through all the tests again.

Okay. With that said, it seems like there is somewhat of a philosophical shift in the US I guess driven by 3G right that microwave is now being considered where it hasn't been in the past. Would you say that over this last year, you have seen a tremendous shift in the openness of the large tier 1 carriers to entertain using microwave on the backhaul or are most of those carriers up to this point working with the carriers' carriers for the service?

They work with the carriers' carriers and most of the carriers' carriers do work with microwave. So they get into the microwave business of the carriers' carriers business or the usage of, not the business, the usage of microwave to just improve the carriers' carriers.

Would you say that in your dealing with the US carriers that their comfort level with microwave as a more pervasive form of backhaul is increasing?

The answer is yes.

And one last one if I may, in the Asian market specifically, what is going on in India? Obviously the price pressures there are intense and probably more than they are in most other regions in the world. How are you handling that whether it is a direct sale or through your OEM partners? The ASP declines there are I am sure more challenging. How is that affecting your overall gross margin and are your cost reduction programs able to keep pace with the ASP declines?

We are working extensively in the India regions. We are working there like in any other region and we are making good business there like making good business in other places around the world and part of what we do internally is work on cost reduction, which are keeping up with ASP changes.

I appreciate your time.

Thank you very much.

Steve Ferranti.

Hi, guys. Great quarter. Thanks for keeping the line open. Just a quick question on Latin America, just wanted to see to what extent you might perceive an opportunity there. It seems like that's an area where WiMAX in particular at least has been taking off. I wanted to see sort of what you are seeing there and what might be the gaining factors for you to see more penetration there?

Latin America is one of the regions which is the smallest region that we have right now and as I indicated, we see potential there and we think over time we will be able to capture some of it. And as you indicated, there is a lot of cellular activities, although less than the other regions, and there is some WiMAX deployments coming up.

Do you feel that's an area you would try to penetrate directly or through a channel partner?

Both like everywhere else around the world.

Okay. Okay. Thanks for taking the question.

Thank you.

Daniel Meron.

Thanks. Just a housekeeping question. Your sharecount here jumped by one million shares. Where should we expect that in the next quarter, especially given the surge in the share price here?

Yes, I think that you are really addressing an important point. We expect the sharecount will continue because usually on sharecount, you do average for the quarter, so what you see here is just that the average of the growth in the number of shares during the Q2. My best estimate right now, it is about the same increase that you see in Q2 over Q1 will be shown in the next quarter.

So about 32 million shares?

Yes.

Okay. And as far as -- as far as going forward with say fourth quarter, what kind of increases should we see there or is it just dependent right now on the share performance or are you giving out more options right now?

No, no. The options that we are giving is much less than we used to give in the past. Mostly, in our company, I think if you compare us to other companies, employees were keeping the exercisable options for a very long time. We compare ourselves to others. We saw that you usually see the unvested and the exercisable disappear. In our Company, the vast majority of the options were vested exercisable and people were waiting. So I think that employees are likely to exercise them over time.

Okay. Thanks so much. Good luck going forward.

Thank you.

James Faucette.

Sorry, just one accounting question. Could you give us what the CapEx and depreciation were in each of the last two quarters if you have that?

Yes, CapEx was about $1 million for the first half, even less than a $1 million and the depreciation was $600,000 for the first half, probably evenly between Q1 and Q2.

Great. Thank you very much.

All right.

Ehud Eisenstein.

Yes, just to follow up on the OpEx, do you expect the same growth in the second half as we saw in the second quarter?

I think that selling expenses will level off. I think that the other expenses -- again, it will not grow at the same rate is what I am trying to say. Other expenses will grow. I think that it is mainly in various guidance that we gave in the past. We said that for example operating expenses are around 28%. That was one guidance. We were guiding regarding long-term goal of 10%. So I think still you will still see growth in dollar terms and a moderate improvement percentagewise.

Okay. And the 10% was actually my second question. At what revenue level do expect to have it?

We expect to make the leverage out of it somewhere towards the end of 2008, which brings us to above 50.

Excellent.

A quarter.

A quarter.

Yes, yes. On the run rate. Thank you very much.

At this time, there are no further questions.

I would like to thank everyone for being with us on the call and we would like to hear from you directly one to one as we go through the quarter. Thanks again for joining us.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.