Ceragon Networks Ltd (CRNT) 2007 Q3 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Ltd. third-quarter 2007 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 report 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. Q3 results continue to reflect growing demand for high-capacity wireless backhaul solutions. Our Q3 revenues are up 46% from a very strong third quarter in 2006 and we continue to increase profits faster than revenues. We expect full-year revenue growth in 2007, this year, to be approximately 47 to 50% compared to 2006.

We continue to enjoy strong demand for high-capacity SDH solutions from wireless service providers which are mainly cellular operators. Our consistently strong performance in this market resulted from our technology leadership, our broad product offering, extensive worldwide customer base and expanding global sales channels. In addition, we continue to successfully exploit our extensive experience with wireless IP systems.

In Q3 38% of our revenues came from IP solutions. These revenues are still predominantly from private networks, but IP solutions sales to service providers are beginning to accelerate due to the deployment of WiMAX and the beginning of cellular immigration to IP.

Our largest customer this quarter was a leading integrator that is deploying our IP-MAX solution with (inaudible) Ethernet radio technology for the backhaul portion of a public safety network in a major U.S. city. The network will provide critical information to first respondents in the field and improve interagency communications. It is a large sophisticated deployment of stringent requirements and this significant win shows the maturity of our IP solutions.

In Q3 we had two 10% customers -- the integrator I just mentioned and our OEM partner, Nokia Siemens network. To provide some additional perspective on the breadth of our customers, in Q3 we recognized revenue of large deals of $500,000 or more from 23 customers.

In order to sustain our performance in this high-growth environment we will continue to focus on execution. Our outsource manufacturing enables us to ramp production quickly and we continue to work on achieving economies of scale and improving supply chain management. Last quarter we mentioned our objective of shortening lead-time and we are proud to report that we are approaching a target of being able to produce and ship in close to 30 days.

As you are aware, we recently filed for a follow on offering of 6 million shares. Tali will explain the financial impact assuming that the offering is successfully completed. From a strategic point of view, further strengthening our balance sheet will help ensure that we can serve very large customers, grow as rapidly as possible and selectively pursue acquisitions.

To summarize, we expect the growth drivers we have been discussing for the last several quarters to remain in place and we'll continue to focus on continuous innovation, adding channel partners and maintaining superior execution capabilities with operational excellence. Now I would like to turn the call over to Tali.

Thank you, Ira. Q3 was another record quarter; revenues grew 46% to $44.5 million compared to $30.5 million in Q3 of 2006 which was also a very strong quarter. We continue to grow profits faster than revenues and GAAP net income grew 138% to a new record of $3.7 million or $0.11 per share and a 16% higher share count. Excluding stock based compensation of $456,000 non-GAAP net income in Q3 grew 119% to $4.1 million or $0.13 per share.

Turning to the revenue breakdown, we have simplified our categories and split our revenues into just two major categories -- service providers and private networks. The service provider category, which accounted for 72% of total revenues in Q3, includes cellular operators, fixed wireless operators and ILECs. Private networks represented the remaining 28%. This category continues to be comprised of enterprise and government customers.

Asia-Pacific again is our strongest region accounting for 34% split of total revenues. North America increased this quarter and also accounted for a third of revenues primarily due to the large public safety project. EMEA accounted for 30% of revenues and Latin America for the remaining 3%. We had two 10% customers in the quarter -- the large integrator for the public safety project in North America and Nokia Siemens Networks which is one of our OEM partners. OEMs accounted for 18% of total revenue in Q3.

Gross margin in Q3 remained around 36%, in line with our expectations. The absolute increase in operating expenses was primarily due to R&D expenses for additional subcontractors working on our next generation product, higher sales and marketing costs related to direct sales and account management, and additional G&A expenses for professional services such as Sarbanes-Oxley, auditing and legal work.

As a percentage of revenues operating expenses continued to decline and operating margin reached a new high of 9.1%. Our objective is to reach 10% operating margin in the second half of 2008. Our net margin in Q3 was 9.3% compared with 6.2% in the third quarter of 2006. We are happy to report that we generated $2 million of positive cash flow from operations during the quarter.

Turning to the balance sheet, cash increased to $37.1 million, DSOs remained stable at 69 days -- the increase in inventory reflects the growth in our business; however inventory days declined to 124 in Q3 compared to 136 days in Q2.

To address the potential impact of the proposed follow-on offering we believe it will be essentially neutral for 2008 results. This is based on several assumptions including a 6 million share offering, using the current First Call consensus of $0.61 per share for 2008, Friday's closing price of $16.25, a 5% interest income assumption on total proceeds for the full year, plus tax and interest income only at the corporate rate of 27% beginning in Q2 of 2008.

To elaborate on the tax aspect, according to a relatively new tax law in Israel we are required to pay tax on interest income. This cannot be offset by NOLs. However, we have certain tax credits which will continue to offset tax expense through Q1; therefore starting in Q2 2008 we expect to show tax expense on our interest income on our income statement.

Looking forward our backlog is at a record level and we continue to enjoy a book to bill above 1. We expect Q4 revenues to be in the range of $44 million to $47 million. According to independent research our addressable market is likely to grow around 25% annually during the next three years. We believe that in 2008 we can grow slightly faster than the market and we are targeting 25 to 30% revenue growth for 2008 on top of a very strong 2007. This growth would put us above $200 million in revenues next year. Now we are happy to take your questions.

(OPERATOR INSTRUCTIONS). Blaine Carroll, FTN.

Good morning, everybody. A couple questions if I can. Ira, first of all as you look out towards 2008 what are the seasonality trends that you would see on a quarterly basis?

Up to now we have not seen revenue seasonalities, although we do have fluctuating bookings that are not exactly as straight as the revenues, but in general we do not -- usually I would say first quarter is usually a little bit weaker on the bookings and in general it's almost flat or growing in that sense over time.

Okay. And then you had strong growth in the IP-based radios, could you talk geographically where you're seeing that split?

If you're looking at IP radios, most of our revenues from IP radios come from private networks. Although we start seeing also IP radios are going for WiMAX deployment and we start seeing interest and very early on sales into the cellular networks as well.

Okay. Is most of activity outside the U.S.?

Private networks activity is mostly in the U.S., WiMAX and cellular is outside of the U.S.

Okay. And then last one for Tali. Tali, could you talk about the OpEx and whether the increase in the absolute numbers, if there are any one-time items in there and how you see that trending going forward?

I would say I don't think it's a trend. I do see that a few items went a little bit more than the trend that we had before, but sometimes you have higher expenses than the previous quarter. But once again, I don't think it's a trend. So for example, in R&D we had higher than usual expenses for subcontractors which I don't think should happen again. In G&A, as I mentioned, we had higher than usual professional services which are related to Sarbanes-Oxley and so forth. I think the bottom line is really that as a percentage of revenues operating expenses are being reduced gradually over time and I believe that this is the trend that we will continue to see.

Beautiful. Nice quarter. Thanks.

Ittai Kidron, CIBC.

Thank you very much and, guys, congratulations on a good quarter. I just wanted to drill down a little bit further on the operating expenses. Tali, then based on your commentary is there a reason to believe why you should not hit the 10% operating margin already in the December quarter? Why is it only 10%? What will grow if G&A has some sort of one time related transaction, or call it even the transaction, the follow-on that you're doing, costs embedded in there, those costs will be reduced in December and move into the first half. I would assume the same goes to the subcontractor costs. Why is it only 10%? Why can't it be higher and why can't we already see the 10% in the December quarter?

I think if you go backwards and you look let's say throughout 2006 and 2007 you do see that there is a gradual improvement in the operating margin each and every quarter but it's a small improvement. And more or less our guidance for the future is also expecting to see additional small improvements. I should say that if we talk about operating margin, and that's where we are targeting the 10%, it not only takes into account the operating expenses, it also takes into account the gross profit. And in the gross profit we already said in the past several that we think our gross profit will be in the range of 35 to 36. So when we give the guidance of the 10% operating margin we also take into account that also the gross margin may [flux] within the range that we have modeled and believe.

And is that more related to competition or is there something in the transition to IP that is inherently lower margin to you?

It really relates to a very large number of factors, and those that you mentioned are just a few of the many factors.

Very good. Lastly, with regards to the top line, that big project, the public safety project, can you tell us what is going to be the length of the deployment? How much of it is embedded into your December quarter?

We cannot reveal too many details, but I would say that most of it is included in Q3 and a small portion is expected to be included in Q4.

Very good. Congratulations. Good luck, guys.

Matt Robison, Ferris Baker Watts.

Congratulations on the great numbers. Can you give a headcount? And also for Tali, where do you sit now with your obligation to the chief scientists and is the NEC reserve in accrued liabilities at this point? Just some housekeeping there.

The headcount as at the end of September was 313. The liability to the chief scientist is comprised -- it's 4.2 that we show as long-term other payables and there is another 4.2 approximately which is in the short-term Accounts Payable. So altogether right now the liability is $8.4 million, $8.5 million.

Did you pay them anything in the September quarter?

As far as I remember it's a fourth-quarter payment.

And the -- go ahead.

And NEC, you asked about NEC, we made a provision of $450,000 related to a claim from NEC in the Q2 numbers. So you don't see them in the third-quarter results but you do see them in the year-to-date results.

You just put that in current accrued liabilities?

Yes.

And the spike in G&A, you mentioned Sarb-Ox as a foreign issue or is this -- is there a reason why it's a bigger deal this year than last year? Is there a timing issue there?

Yes, this year for the first time our external auditors will audit the S-Ox. So we are right now employing a consultant that is helping us (inaudible). As a matter of fact, we implemented it last year, but last year it was not audited by the external auditors. This year we really have two sets of consultants, one internal consultant and the other one now the auditors that are already doing the audit.

And so was that a big lump in the September quarter or should we expect it to continue at similar levels for the current quarter?

Yes, most of the work is being done in Q3 and Q4.

Okay. And then the R&D, why did you have to invest in contractors so much? Should we expect a new product pipeline as a result or was it more --?

As we stated a few times, we are always innovating the productline and we are pushing and releasing new products. We just released this quarter the IP-MAX [square] product and we will be releasing new products as we go along during the course of next year and this is part of the process for pushing for the new product.

Okay. With the strong direct revenue you had, it looks like about a 20% sequential decline in OEM sales, would that be just because you focused on getting the direct business out the door or should we expect that OEM to bounce back in the fourth quarter to the more typical run rate, 25 to 30%?

I would expect the OEMs to stay in about the same range as they are today -- it's based on our expectations with them. We have been growing our direct business in parallel with working with the OEMs and (inaudible) with the OEMs with our customers -- their spread of the customers.

Okay. So that $8 million kind of level is what you expect to continue?

Over the long-range our target as a company is to increase that number by bills increasing the penetration with the current OEMs. For example when Nokia Siemens network restarted selling IP systems, which we have not done before, and we expect to bring online more significant revenue from additional OEMs and partners. In different ways it's not necessarily just direct OEMs, but different kinds of partnerships which are strong sales channels for us.

I guess what I'm kind of trying to get to is that decline, is that execution related or is it demand related, that decline from like 10.5 down to 8 in the September quarter?

It's demand related.

Okay. I'll let somebody else ask a question. Thanks.

Daniel Meron, RBC Capital Markets.

Congrats on the quarter. Can you give us a sense on how sustainable you think -- are you growing ahead of the market right now? And also in 2008 it sounds like you guys are gaining incremental market share rights here. And who do you think -- do you see less of or at least losing market share right now?

You hear me hesitating on the answer with you. The reason I'm hesitating is we do have statistics on market share and we think we are gaining some market share, but the statistics that we have are not highly reliable. What we do know is that the segment that we are in, both on the IP sales and the high-capacity sales segment that is growing fast, we think we are growing a little bit faster. I believe we're gaining most of the market share from the smaller players in the market, not necessarily from the big players in the market.

Okay, very well. And then when it comes to your OEMs that you have right now, you mentioned that you're going to expand that. Are we seeing most of the impact from OEMs already or should we expect a bit more of that heading into 2008? Or asked differently, how should we think about the 25, 30% growth that you're planning on next year. And also, which geographies do you think are going to lead the growth there?

Our expectation for 2008 is about even. It won't stay exactly the same from quarter to quarter. And I think that we'll see similar behavior to this year, probably a little bit faster growth in the A-Pac region than the other region, but not a significant one. The mix overall between them will stay the same and then percentage wise I do expect the OEMs to take about the same percentage.

And then last one for me and then I'll hop back into the queue. Can you give us a sense on how should we think about the first quarter and then how should we think about the rest of 2008? Is it going to be similar to this year or any difference, stronger second half maybe?

We don't know yet. Our methodology is we usually forecast the whole year forward, we would budget around it, and then on a quarter-by-quarter basis we usually give guidance for the next quarter as we have a much closer visibility into that quarter. As our visibility is comprised of different lengths at this time, from a full year forward which is based on outwards forecast, a bottom up focused for six to nine period and then a much closer focus for the next quarter based on backlog and a very detailed (inaudible).

Thank you, Ira and Tali again and good luck going forward.

Amir Rozwadowski, Lehman Brothers.

Good morning, Ira and Tali. Just to quickly follow up on some of the OEM commentary. Nokia had highlighted that with NSN they had found some additional rationalization opportunities potentially among some of their partners and suppliers. Just as a quick verification, you have no change in terms of your relationship with that OEM, correct?

That's correct.

Okay, okay. And then in --

As I stated, just to put it clear, what we have stated a few times in the past, we are in a situation which is both internal and external competition in which time we can fill in with them competing with some of their internal products.

Fantastic. And once again, we sort of see your gross margins coming in probably slightly above your longer-term targets, at least at the very high end of your longer-term targets. What particular impacts or particular different moving pieces took place this quarter? And how should we think about that at least for the near-term in terms of the next couple of quarters?

It's really a long list of factors that impact each and every quarter and it's not easy to analyze them. I will mention a few of them, but again, the best I can say is that we will be within this range. It depends on the deal of size; larger deals tend to have lower prices depending on the product mix because there are some products that are more or less profitable than others. It depends on geographical distributions because you may see different prices in different areas.

The channel that is being utilized, manufacturing costs, component costs, overhead, shipping, obsolescence -- so there are really many factors and it's very difficult to analyze 3 basis points. But I think going forward we will remain in the range that we are projecting because we've really done a lot of modeling from our point of view, short-term, long-term, and this is the range we feel comfortable to be in.

Okay. And then lastly, just on the industry front, there has been some speculation that management changes at Sprint may alter their time frame for the WiMAX rollout of their network. I wanted to check in to see if you folks are seeing any changes in the time frame. Certainly more importantly, whether or not they may -- that change may alter potential longer-term opportunities at the carrier for you guys.

Well, the only thing I know is the same as you do. I've read the outside report and same title for speculations. We are not seeing anything internally yet, but knowing of large organizations until things in the top percolate downward, it might take time and that's not saying a yes or a no. I don't expect in our relationship and where we are with them to be affected at this point. It will take more time for us to see things definitely if at all.

Fantastic. Thank you very much for taking my questions.

Jeff Kvaal, Lehman Brothers.

Thanks very much. Ira, I was wondering if you could talk a little bit about what you guys are seeing in the OEM channel? Obviously a number of folks there have been talking about the market not meeting their expectations overall, although not necessarily referencing your particular pocket of that. And then Tali, I was wonder if you could talk a little bit about the impact of the IP productline on your margin structure? Thanks very much.

For the first question, you probably are referring mainly to one of the large players like Ericsson and others. Our pipeline with our OEMs I don't think is affected by the major trends (inaudible) because bills with the OEM both direct our sales into the main carriers in Europe is low. Most of our sales to that channel is either in Africa or in the A-Pac region from all of the OEMs. This is one who's specific, and then those who still see we'll direct and wield them strong demand. I don't think that is changing at least in the near-term.

And regarding the IP profitability, currently most of our IP products have been sold into private networks. So these are typically smaller deals and smaller deals tend to have higher prices. However, smaller deals usually being sold through distributors, so there is kind of a margin erosion when you sell through a channel.

In the future we hope to see IP being sold more and more into cellular operators, then you sell direct in most of the cases. However these are larger deals and there will be more pricing pressure. I think that if I'm trying to weigh all of these factors together I believe that in the future when IP will get into much larger deals we will see pricing pressure on the deal. Just similar to what we see in the SDH which is being sold in large deals to operators.

Okay. Is that particularly the case in the cellular end markets?

Yes, in the cellular markets we do have more pressure on prices because of the size of the deals which are large.

Thank you very much, Tali.

James Faucette, Pacific Crest Securities.

This is Steve Clement for James. Thanks for taking my call. Back on Nokia Siemens, wondering if you could break that out as a percentage of revenue and just wondering what your outlook is for that OEM partner as a percentage of revenue in 2008, how you expect that to develop?

I think I mentioned that the Nokia Siemens network was a 10% customer this quarter (inaudible) a guideline out of the 18% where they are. They're usually around between we have two major OEMs about equal. So that gives you about the sizes there. Moving forward into 2008 I think for the foreseeable future we'll see similar behavior from our OEM partners, as I indicated before.

With the rationalization going on at Nokia Siemens, do you have a sense that there internal (inaudible) backhaul products would be deemphasized or potentially cut?

At this point I don't have indication either way. I would love that to happen and we'd take a much larger share. Had I had an indication of that happening, as I stated, I think (inaudible) before we are in a good operative situation with them. They sell some of their own product, they sell hours, we sometimes compete on the outside, we sometimes compete on the inside for different deals, different parameters why we win internally. A lot of it is having to do with cost with our availability for IP products which we don't have, the ability of product for the (inaudible) market which they do not have. So this is bringing into that (inaudible) situation with (inaudible) continue.

And then with regards to Sprint Nextel, they've apparently reissued an RFP for (inaudible) backhaul. Just wondering why they did that, if there was some aspect of your performance with the initial RFP that they weren't happy with.

We used the RFP for the microwave backhaul because they -- I think re-expensed their need and the way they plan the next one. Originally they planned for an all IP network. And then they figured out that they really needed a mixture of VPN and IP on the network because in the same tower they'll be going WiMAX they have their CDMA equipment which is TDM equipment and they need to backhaul -- so we're exactly the same on the same equipment. This by the way plays very nicely into our strong capabilities of the latest wear on our products which is a mixture of carrying both DDM and IP basically in the year. But at this point the RFP is just at initial stages. Again, we compete like many others in the process.

Just wondering how important the contribution for Sprint would be to the outlook that you provided for 2008 and how soon you would expect that that will customer could be contributing to your result?

I think on this call we have highlighted that we are not dependent on any single customer. I think that's true also for Sprint. We view Sprint as a large deal. We want to win Sprint but we are not dependent on our toys forecast on anything which has to do with Sprint, the same way we are not dependent on many other deals of similar size which are carrying around the world and I expect that to happen.

Thank you very much.

Larry Harris, Oppenheimer.

Thank you and congratulations on the good results for the quarter. I want to confirm on the tax rate that we're talking about for next year, it's 27% but just on interest income beginning in the second quarter?

This is correct, yes.

Okay. And looking at the sales in the Asia-Pacific region in the third quarter, certainly up fairly significantly on a year-over-year basis, but looks like it declined somewhat sequentially. Was this just normal seasonality or were there other things at work?

Yes, I think that -- even if you go back and you look I think on 2006 for example, a quarterly breakdown, there are some fluctuations in this region and other regions. Think it's quite normal; it's not really a trend.

Understood. And we're starting to see increasing attention and WiMAX in a variety of regions, Taiwan has been in the news the last few days. Also we've seen talk about Australia, Japan. Are you actively participating in some of those RFPs, or do you come in at a later stage?

We are actively participating and involved in some of those RFPs, although different geographies have different characteristics. For example, we do expect a lot of wireless (inaudible) in Australia. Taiwan is characteristic of where they deploy the WiMAX because of the geography. It is mainly fiber, because they have laid down a line of fiber similarly in Japan.

All right, thank you very much.

Santosh Rao, Broadpoint Capital.

Congratulations, Ira and Tali. Just two quick questions. One, can you give us an update on the NEC, the intellectual property issue? What is the worst-case scenario there and your financial exposure there, in case it doesn't go your way?

We have legal opinion and IPR opinion that we are not infringing in any way any of the NEC patents. When you get into a claim of this kind, it is a long and tedious process, and that's why we put out an offer to settle the case.

Any reply from them or any positive signs from them?

Not at this point.

Okay. And just on a different question, with all of the money from the follow-on offering, one of the things you will be doing is looking for acquisitions. What type of acquisitions in general are you looking for?

First, we said we will selectively and very consciously look at the acquisition. It's not something which is a must for our growth, and it is not something that is a must on our strategy for expansion and going forward. If we will be looking, and that is more where my head is and thinking is as having to do with expansion of our product line and capability to strengthen our sales into the (inaudible) segment of the market.

And any particular area, any particular regions you are looking at?

We're looking at different regions right now; nothing which is currently specific.

Okay, that's it for me. Thanks.

Ehud Eisenstein, Oscar Gruss.

Good morning, guys. Just a follow-up on Sprint, how many vendors are currently in the RFP and what are the milestones? I understand it was delayed, but what are the milestones?

I don't know how many vendors are there because it's not an open RFP. My expectation is that we'll see all the usual suspects in there, especially the people who compete in the IP space. And the timeline, my expectation is some time at the beginning or first half of next year.

Beginning or first half. And I apologize, you already addressed that, I was late on the call. But any updates on ClearWire?

Still working with them.

Working?

Working, we are in the labs testing, proceeding with them.

To get approval, I see. And just on the 10%, do you expect to have -- and again, I'm not referring to Sprint or any particular account, but in '08 do you expect 10% customers other than the OEMs?

The answer is, yes. Classically we have -- on any specific order we usually have one 10% customer. Sometimes we do, sometimes we don't. As we grow larger it is a little bit more difficult to get a 10% customer every quarter. But we have always people who get close to that number. So we do expect to have large deals which come in on a quarterly basis. I do not expect a 10% customer on a yearly basis.

Sure. And just on the M&A, it looks like you're looking to raise a significant amount of money. And by your previous comments it doesn't seem that you are going to change the M&A strategy. What's your thoughts on that? Thank you.

As I said, we'll selectively look at opportunities out there. I think we have better resources to do things which were not possible to do in the past. So it opens additional opportunities beyond what was our strategy before that.

Okay, thank you so much. Good luck.

Irit Jakoby, Susquehanna.

So you mentioned this quarter that you had an IP mix of 38%, which is higher than I think your normal 25%. Is it mostly that 10% integrator driving this?

Yes, the main difference is coming from this large deal with the integrator that we mentioned.

And going forward do you expect IP to be a larger -- to take a larger part of the mix? Do you expect it to be in this 30% as we move into 2008?

Yes, I think we can expect shorter term 25 to 30, and then longer-term to grow much, much more than that.

Is WiMAX a big part of it or what other dynamics do you see in IP?

We see two dynamics in there. One is WiMAX which is the deployment today of IP backhauling. But we started seeing the dynamics of cellular operators moving to all IP backhaul networks. Now it's in early stage. We saw and we started selling to at least one of those. We see RFPs from additional, we see RFQs from different operators, and we started seeing the shift in the cellular world to IP. A lot of it, by the way, depends on the availability of IP-based base stations for backhauling which are starting to appear from the larger vendors towards the end of the year. I expect that trend to accelerate towards the middle to second half of next year.

Okay, great. And I apologize if I missed it, but did you mention the percent of revenue that you had coming from OEMs?

Yes, we said 18% came from OEMs this quarter, 1-8.

Okay. And is your long-term target still the same, in terms of OEM contribution? Where do you see it going in 2008 and maybe longer-term?

Longer-term we still believe we want to reach 50% of our revenues from OEMs, but it will probably take much longer than we expected. We do expect to increase that number over time. And in 2008, I don't know the number, but it will probably be growing from the 18%.

Okay, great. That's it for me. Thank you.

James Faucette, Pacific Crest Securities.

Steve Clement again. Just a follow-up on the competitive landscape right now. Just wondering what you're seeing from your larger competitors, Nokia Siemens and do you say whether they're getting more aggressive recently or less aggressive? And then also just with your smaller competitors where you're seeing guys like [HaraStrata] and DragonWave crop up, are they getting more aggressive in their activity?

I think that our largest competitor, which is NEC, is as aggressive as ever. They've been aggressive before, they stayed aggressive; I don't think the situation there has changed. The only think which I'm seeing is a little bit of difference in the market. I think I'm starting to see a little bit more competition from HaraStrata than we saw before, mainly on the IP scene.

Okay, thank you.

Rich Church, Collins Stewart.

Nice quarter. Can you talk about WiMAX as a growth driver for 2008 or do you think it's further out? And how much of what you're projecting for the year is driven by WiMAX versus cellular versus other IP?

We expect -- let's start with we expect IP sales in 2008, most of them going into the WiMAX specs to lower percentage versus what we see this year. That, as Tali said before, not significantly, we do expect in the short to midrange them to range in the 25 to 30%. A lot of it is coming from deployment -- WiMAX deployments. Most of them, by the way, are small, because we don't see yet significant very large WiMAX deployments and all of them require their IP backhaul.

Do you think that WiMAX could be -- I don't know if you can quantify 10% of revenue and do you know what it was about in 2007 so far?

It's about that number, yes. In the last quarter about that number.

About 10% in '07?

About 10% in '07, maybe a little bit less. I don't have the number off the top of my head but it's about that number.

And would you guess that it could be 15 or 20 in '08 or still in the 10% range?

Still in the 10% range.

Okay. And then you alluded to new products, I'm just curious. Can you talk about what -- are you looking for higher bandwidths or what types of things might we see?

As we've been doing in our continuous innovation program over time, we are focusing on two major trends in the market. First, we'll add additional functionality to our IP productline with adding capabilities both in bandwidth, both system, both in quality of service capabilities because this is an evolving market. Based on the demands from both cellular networks and WiMAX networks we'll add capability to that space, supporting our [native square] technology which allows for both native PDM and native IP at the same time in the year. In addition, as part of our continuous innovation program we are pushing very strongly on designing to cost and bringing lower design and cost points into the product space.

Do you see that driving gross margins higher or do you think that it will just enable you to keep them consistent over time?

Our guidance forward says that we'll stay within the range that we are, 35 to 36.

Okay. And on the integrator, could use say what percent of revenue that project was in the quarter and then who the integrator was?

The integrator was a 10% customer this quarter, and specifically we haven't mentioned a name.

Okay. It was 10% of revenue or it was larger than 10%?

It was larger; it was a 10% customer.

All right, thanks a lot.

Bill Choi, Jefferies.

This is Rob Galtman in for Bill. Just two quick questions if I could. Going back to the competitive landscape a little bit. I know Alcatel just recently introduced their IP solution. Curious what your thoughts are around that and what that will do to the competitive landscape. And also I know you've mentioned in the past a 12- to 18-month lead over your competitors as far as technologically. If you can maybe just delve into that a little more and mention what specifically gives you that technology lead? Thanks.

Okay, Alcatel has introduced a new product set into the IP space. Let's remember that Alcatel's position within the big vendors is revolving around IP and IP access in a in the (inaudible) and they want to copy that same position into the backhaul and into the cellular networks. They're not as strong in the cellular networks today and they will use that as leverage. I believe that our fiercest competition from the big guys will be -- in the long-range will be Alcatel.

We do believe we have an advantage in our radio technology over the Alcatel products. Based on our experience with doing IP and radio together the solutions they're bringing on the table are very strong on the networking side which they bring from other spaces which this will be their play into the market.

Perfect. Thanks very much.

(OPERATOR INSTRUCTIONS). Daniel Meron, RBC Capital Markets.

Just a quick follow-up. Can you give us a sense on the timing of the follow-on offering, when do you think you'll go on the road, when do think the pricing will be, etc.?

We plan, and it is not final yet, but we plan to be on the road at the end of this month and the beginning of next month. I cannot assure you regarding specific days, but this is our current plan and we are progressing towards this target.

And you expect to price it mid-November, would that be a fair estimate?

The early portion of November, yes. Again, not final but we're talking about the first half of November.

Okay, great. Thanks.

We have no further questions at this time. Please continue.

I would like to thank everyone for joining us for the call today and expect to see many of you face to face as we do every quarter. So thanks for joining us and listening in. Thanks for the great questions in helping us clarify our position. Thank you very much.

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