Ceragon Networks Ltd (CRNT) 2007 Q4 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Limited fourth quarter and year-end [2000] (sic -- see press release) 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 would 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. Thank you for joining us today. With me on the call is Tali Idan, our CFO.

We are pleased to report record results and another excellent year. For 2007, our revenues grew 49% and non-GAAP net income grew 129%. This was our sixth straight year of strong revenue growth, averaging 55% per year. We believe the primary growth drivers for high-capacity wireless backhaul to remain in place, and we continue to expect revenue growth of 25% to 30% in 2008, with additional operating leverage leading to operating and net income growth at the higher rate.

We are continuing to enjoy strong demand for high-capacity SDH solutions from wireless service providers, with a majority being cellular operators. We expect the trends driving growth in this segment to continue. This includes rapid wireless subscriber growth will continue, especially in emerging markets. Increased demand for data services will continue, ranging from text messaging to Internet browsing and newer data services.

Even in a tight capital spending environment, we expect wireless backhaul projects to be funded due to the attractive economics and the operators' need to reduce operating expenses. In addition, we are in the very early stages of a major migration to IP backhaul. We believe we are extremely well positioned to capture a high share of this market due to our track record and experience in IP, and also due to our differentiated product offerings like our [native carrier] technology, which enables cellular operators to migrate seamlessly to IP.

Early adopters are beginning to deploy this solution, and we are seeing substantial interest from cellular operators. Also, new WiMAX networks are being deployed using our native IP solutions. In 2007, 32% of our revenues came from IP solutions, still mainly from private networks. As we enter 2008, we also have multiple opportunities with service providers in the pipeline.

In 2007, our OEM revenue grew 14% to $31 million, but declined as a percentage of revenue because our direct business grew even faster. In Q4, our OEM business dipped a little, but we do not see this as a trend. We expect OEM business to continue growing during 2008, and we are currently bidding for new opportunities with all our OEM partners. We believe our relations, leading technology, continuous cost reduction and excellent delivery capabilities position us to make the most of this channel.

In order to continue to grow profits faster than revenue, we will continue to work on our execution capabilities. As you remember, one of our major objectives has been to reduce delivery time to 30 days or less, which we achieved in Q4. We believe achieving this objective gives us a competitive advantage and contributes to increased sales, while also reducing our backlog.

With more [churns] business, book and bill same quarter in the mix, we are checking frequently and carefully for changes in the market, now even more so due to growing concerns about tight credit and the possibility of a slowing global economy, and up to now we have not detected any change in market conditions.

So, to summarize, the feedback from the field is positive. We have a strong pipeline of business and the outlook for 2008 remains the same. Now I would like to turn the call over to Tali.

Thank you, Ira. Q4 was again a record quarter, a strong finish to an excellent year. The results and breakouts for the full year of 2007 are as follows. Revenues increased 49% to $161.9 million and GAAP net income increased to $13.1 million or $.41 per diluted share. Excluding stock-based compensation and a one-time charge, non-GAAP net income for the year increased 129% to $15.3 million or $0.48 per diluted share.

For the full year, service provider category accounted for 77% of total revenues and the private network segment for 23%. The geographical breakdown of the full-year revenues is as follows. EMEA 32%, North America 21%, Asia Pacific 42% and Latin America 5%. Revenues from the Asia-Pacific region more than doubled during 2007, growing much faster than the other regions and therefore accounting for a larger proportion of the total. OEM revenues in 2007 grew on an absolute basis, but declined to 19%, 1-9, of the total revenues, from 25% in 2006 as direct business grew much faster.

On a non-GAAP basis, gross margin in 2007 increased to 36.2% from 35.3% in 2006. Operating margin increased to 8.7% from 5% a year ago. And net margin increased to 9.5% from 6.2% in 2006, reflecting our success in improving the operating leverage.

Turning to the details of Q4, revenues grew 40% to $46.1 million compared to $32.9 million in Q4 of 2006. We continue to grow profits faster than revenues, and GAAP net income grew to a new record of $4.4 million or $.12 per diluted share on a significantly higher share count due to the following offering. Following the [several] million share offering, we expect our weighted average share count to be close to 40 million shares in Q1 2008 and to increase gradually after that.

Excluding stock-based compensation, non-GAAP net income in Q4 grew 83% to $4.9 million, or $0.014, 1-4, $.14 per share.

Turning to the revenue breakdown, the service provider category accounted for 79% of total revenues in Q4. Private networks represented the remaining 21%. This category is comprised of enterprise and government customers.

The Asia-Pacific region continued to grow, accounting for 49% of total revenue in Q4. North America accounted for 15% of revenues. EMEA accounted for 32% of revenues. And Latin America for the remaining 4%. We had only one 10% customer in the quarter, a direct customer in India.

OEMs accounted for 11% of total revenues in Q4. Gross margin in Q4 remained around 36%. Operating margin in Q4 was 8.8%. Our objective is to reach 10% operating margin in 2008. Our net margin in Q4 increased to 10.6%, primarily due to the increase in financial income from the proceeds of the offering. Let me remind you that starting Q2 of 2008, we expect to pay income tax on interest income only at a corporate tax rate of 27%.

Operating cash flow was negative by $5.4 million, primarily reflecting higher level of receivables. Turning to the balance sheet, total cash and cash investments increased to $122 million, primarily reflecting net proceeds of about $88 million from the follow-on offering, offset by cash used in operating activities.

DSOs increased to 79 days. Going forward, we expect DSOs to be in the range of 70 days to 90 days, reflecting more large Asian customers in the mix. Book-to-bill was lower than one in Q4. Although backlog somewhat decreased during the quarter, we continue to enjoy a backlog of more than a quarter ahead. We expect revenues in Q1 of 2008 to be quite similar to Q4, and we are guiding to the range of $44 million to $48 million of revenue in Q1.

To follow up on a point Ira made about shortened delivery time, now that we have reduced our delivery times to 30 days, it means that more of our business is booked and shipped within the quarter, which is also a factor in the wider range of our revenue guidance. For the full year of 2008, we continue to target 25% to 30% growth, revenue growth, on top of a very strong year in 2007.

Now we will be happy to take your questions.

(OPERATOR INSTRUCTIONS). Tim Long, Banc of America.

Thank you. Two questions, if I could. First, could you talk a little bit about the private network business? Obviously, that was one of the weaker sequential moves off a pretty strong number last quarter. What do you think the outlook is there? Do you think this is the piece of your business where you are seeing more of an economic impact? Could you just give us some color around the decline there?

And then back to the operator business, could you talk a little bit about -- obviously Asia has been really strong. How sustainable do you think that is as we head into next year? What should we be looking for as far as some real growth drivers there? Thank you.

Thanks, Tim. I will address the two questions. The first one, you asked about the private segment. Let's remember in the private segment we have two types of customers. We have private enterprises and we have government business. Last quarter, as we mentioned, we had a 10% customer on the government segment, and those types of customers tend to be a little lumpy, in the sense that we have larger fluctuations in the private segment over time, and some of those come in and go out of specific quarters.

In the private enterprise business, from all of the checks we have done up to now, it looks like the business will be continuing at the same level as it has been in this year, and a little bit growing next year as some of those enterprises shift from lower capacity to higher capacity type of business.

To address the second question regarding the Asia-Pacific region, I think that the cellular growth within the Asia-Pacific region is in the middle of its happening. It is not a beginning, but it is nowhere close to the end. Just to give an example, just last week the Indian government awarded new circles, or new territories, for the six existing cellular operators, new GSM licenses and additional licenses to, I think, six new operators within India. And they all expect to increase their both footprint throughout India and increase the number of subscribers. And this is just India. We see similar expansion throughout the Asia-Pacific region.

Blaine Carroll, Financial Midwest Securities.

Thank you. Hi, Ira. Hi, Tali. Nice quarter. Tali -- I guess Ira, if I could. You talked about the book-to-bill, but could you also talk about your backlog going into the current quarter and how booked you are for the revenue guidance that you gave?

Usually -- for the revenue guidance that we gave, Tali I think gave the indication that our backlog is more than one quarter. Now, let's remember on that that not all of it is turnable into revenues this quarter. The backlog which usually and varying degrees spreads out in the current quarter, the quarter after and a little bit even a quarter further down. So it is usually, on a typical quarter, about 40% of that turnable into -- 40% to 50% of that turnable into business within the existing quarter.

Okay. And Ira, if you could, sort of refresh our memory on acquisition strategy for the Company -- you know, what type of technologies you would be looking for, what type of dilution would you expect in the near term or accretion thereafter. And just sort of the overall strategy of the firm, if you were out looking for acquisitions?

So I will start with your last sentence. If we were looking for acquisitions -- because I think that's very careful -- as I said very carefully, we will look at acquisitions very, very carefully over time. In general, the mindset -- and nothing has been decided -- probably to look for things which enhance our position within the backhaul market in general.

That is where we feel strong, that is where we have the customer relationship and that is where we are present in the field. So we would like to strengthen additional offerings into this. We do not need additional offerings to complement our solution, but there are additional solutions out there for backhaul which might complement our offering to our customers.

And the only other comment -- you asked about where -- other financial parameters, I will repeat. I think the motto that we are saying as a management that over time we want to increase profits faster than our top line. So we will probably translate that into the relative parameters into an acquisition as well.

Okay. And then one for Tali, if I could. On the DSOs, could you just go into a little bit more detail on why receivables jumped? And is there any risk to any of the receivables? Are they backed by letters of credit, particularly the ones in some of these emerging markets?

Okay. As far as risk, we feel comfortable. I should tell you that the vast majority of our customers -- the balances of our customers are insured by a credit insurance company. And in those cases where the credit insurance does not insure them, we require a letter of credit or we require a large down payment. So I think that relatively maybe to other companies, we have low risk and we are very careful about it.

What we are seeing, we are seeing pressure in Asia, as you may have heard many times and you see a lot of pressure from many directions. And one of the directions is longer payment terms, slightly longer payment terms. And I think that this -- we are trying as much as possible not to do it, but sometimes we do have to give something to the table. So that is the main thing that I am seeing. I am seeing slightly longer terms for larger customers from Asia, but they are strong customers.

Okay. Very good, thank you. Good luck.

Thank you.

Bill Choi, Jefferies & Company.

Okay, thanks. Actually, it's somewhat of a follow-up on that DSO question. Can you talk about the linearity in the quarter? And it kind of insinuates that -- a lot of shipments in the tail end of the quarter. Which area kind of strengthened or weakened as we went into the end of the quarter?

Well, I think that we are quite a linear company, both in orders that we are getting and in shipments. Don't forget that we have to produce and ship. And maybe -- it is not software. Software is much easier to ship a lot towards the end of the quarter, but when you really do hardware, you produce it throughout the quarter and we indeed ship throughout the quarter. So we are quite linear.

So you guys were typical 50% in the final month?

No, less than 50%.

Okay. And then just on the OEMs, I know you guys obviously have positive outlook about OEM business coming back. Can you just explain a little further what happened in the quarter that led to OEMs slowing down, besides the big private project that got completed in Q3?

And then kind of on that segment, Chinese OEMs have largely been gaining share. What is your current relationship with the large Chinese vendors and how meaningful do we think a relationship can develop in 2008 with these guys?

Okay, I will take it as three sections there and start with the pieces. One of our customers which we work through our OEM was backlogged for about a quarter on their installation project. So what we saw is a delay of about a quarter in their purchasing, which is typical to very large order; we've seen continuous orders from them for about six quarters and have already seen the orders this quarter from them. So they were backed up, and it goes through the OEM, which reduced a little bit on the OEM channel overall.

If you look specifically at the OEM, more than them, I think I mentioned on my opening talk that with all our OEMs we are going after new deals, new bids and new customers. So I see that as moving forward and continuing relationship.

I think you mentioned in that regard the large private network deal from last quarter. We do not count that deal as part of the OEM, although it went through a channel -- but not a direct sale; it went through a system integrator. It is not counted in our OEM revenues in general. OEMs that we use are typically large or a little bit smaller telecom equipment vendor, which helps us go into the cellular markets.

You have asked about the Chinese. The only OEM we talk about openly right now is Nokia Siemens networks, and then we have two additional OEMs which are large telecom equipment vendors from various regions in the world.

Okay. Thanks for the details.

Rich Church, Collins Stewart.

Okay, thank you. Ira, could you talk about the Nokia Siemens networks in terms of the relationship there? Any new developments with their product development efforts? And also, last year around this time, you had talked about getting some color for the full year's outlook. Are you getting a similar read on 2008 now?

We are getting a similar read in 2008, which we believe will stay at the same level as 2007 from them. Their product outlook is something you will have to ask them, but they are moving on some of the products. I don't think the landscape has changed there. I think we are maintaining nicely in 2008 our advantages, both on the IP space and the costs and our delivery capabilities with them. And as I mentioned, with all our OEMs we are going after new business, new deals. That means including with Nokia Siemens. And we are winning new accounts with them.

Great. With regards to the IP migration by the carriers, could you comment on RFPs -- quantify maybe RFPs that you are competing for and what geographies and do you expect any revenue in 2008 from those?

The region which we see leading the change is mainly Europe right now. Asia-Pacific is too -- I would say -- most regions too busy still in 2G deployments and getting subscribers. And I am not counting WiMAX RFPs in that space with a migration like Sprint, which is making the eye -- I would say talk in the US.

But cellular migration is starting within Europe, mainly with the deployment of HSDPA. HSDPA base stations with IP interfaces are coming out in the first half of 2008, and we will see network migrating to that. I am seeing a few in the lower kinds of RFPs out there at this point. And we do expect revenues from those in 2008.

Great. The second half?

Oh, some already in the first half.

Okay, great.

Small, but some of it in the first half as well.

And Tali, on the Q1 outlook, do you see any major changes to either OpEx or the gross margin?

No, no major changes. I think it is the same model, except that, of course, mentioned we do plan to continuing profitability and reach 10% for the year. But the gross margin, you know, the same range as we have been speaking before, and slight improvement in expenses.

You had a comment in the release about coming out with cost-reduced products. Do you have a goal for gross margins exiting '08?

We are continuing our cost reduction activities, both products and others. And I think as Tali mentioned, we are planning on continuing with the same range of gross margin that we are in.

Great. Thanks.

Amir Rozwadowski, Lehman Brothers.

Thank you very much. Tali and Ira, just a quick clarification. You had mentioned that you have service providers in the pipeline looking at IP-based systems. And I know you have given some color in terms of geography. Can you characterize the types of carriers that have been looking at that? Do we expect these to be Tier 1 established carriers?

Like in any of the migration stories, usually you would find established carriers, but a little bit of the smaller ones. There might be a Tier 1 within the country, but usually it is a within-country type of a carrier doing the migration first.

We have seen the interest also from the very big international carriers, but I don't expect them to start the migration in '08, but probably in '09. By the time they finish their RFIs, RFP selection, [Lead] process, it will be 2009. But we will start seeing carriers -- established carriers with very large installed bases starting migration in '08.

Great. Thanks. And then I was wondering if you could give us an update in terms of what you are seeing at the Sprint opportunity. We have obviously seen some shifts in management there. I wanted to characterize sort of where you folks saw your business, and if there was any update as to how much you think you can achieve in 2008, 2009 and so forth.

Our status with Sprint right now, we are in the labs. Like other vendors as well, systems being tested, integrated. And they have not finished their selection process or awarded things they had on the backhaul. From a working level perspective, it is full steam ahead to complete all the process and do the rollout, and that is what we hear from all of their teams.

Probably you have a better assessment than I do on what is happening at the political management level and how will this have effects. We have been very, very cautious in our outlook for '08 in factoring Sprint in, if at all.

Okay. Thank you very much.

Jeff Kvaal, Lehman Brothers.

Yes, thanks very much.

Good morning, Jeff.

Good morning, Ira. Good morning, Tali. I was wondering if you could give us a little bit of a sense of what your revenue and gross margin requirements are for you to be at the double-digit operating margin level.

I suppose that it depends what you call operating margin double-digit. Right now, we are targeting the 10% that is our goal from several years ago. And we think that we can achieve it with the targets that we are putting to ourselves, which is 25% to 30% growth in revenue.

As far as gross margin, I think we feel comfortable around 36% gross margin. We used to say 35% to 36%. I think that after a full year where we at 36 or slightly above, I can say that I do feel comfortable around 36%. And that should be sufficient to achieve the 10% goal.

Okay. And that is including the migration to A, carrier, and within carrier, the IP-based stations?

Yes, it includes so many factors, including that.

Could you tell us a little bit about the migration to IP and how that is progressing?

What we see right now is that, I would say, early adopters of the technology, but also people who look at it carefully, are looking at what we will do with the backhaul network once both Ericsson and Nokia Siemens come out with base stations which have both TDM and IP interfaces. It will be TDM interfaces for the voice circuits and then IP interfaces for the HSUPA, HSDPA type of an application. And they need to carry both at the same time back to the backend servers.

For people looking for differing solutions there, what we are hearing, which matches very nicely our technologies and our offerings, is our native square technology, which enables them to carry both natively and then merge them back into the network, allows them to save a lot of the OpEx. And in addition, that same type of technology allows us to do other things in the radios that allows us to pass a much higher capacity within the same link budget that they use today, because they will have to carry a lot more traffic to the base station.

Okay. So when should Ericsson and others have IP in their --?

I think what we know and what we are seeing from people we are involved in, they are testing those and have started deploying in some places with test deployments. People, I expect them in the first half of this year to start seeing those base stations.

Okay, fantastic. And how -- do these carry a premium for you folks?

It does carry a premium, but not a significant one, as people expect IP in general to be at lower cost than (technical difficulty).

Okay. Makes sense. And then my last question is on the relative wider range of guidance this quarter versus visibility, how does your visibility differ from how it has been in prior quarters, i.e., how much book-and-ship business do you need in March versus what you might have needed in prior quarters?

In March, I don't -- if I wait for book-and-ship in March, it will be a little bit on the late side; it will be very negligible within March. It is usually a January, February story that I need to book and bill. Let's remember most of the things that we do, we are on 30 days' shipping schedule and we build to order. We don't ship from stock.

Yes. No. Pardon me -- you are right. I guess to broaden it a little bit, when you are setting your guidance entering the March quarter versus setting your guidance entering the December quarter, you know, how much --?

It is growing, but not -- it has been growing over last year, quarter over quarter, but as we shortened the delivery time. Not significantly different than last quarter.

Okay. Thanks very much.

James Faucette, Pacific Crest.

Thank you very much. I had a few market questions, then a couple of operational follow-up questions. First of all, you indicated on the private network side for 2008, I think you said that you expect a little bit of growth in that area in 2008. Does that mean that we should expect it to grow quite a bit slower than the overall corporate rate and the carrier business you expect to grow faster than the 25% to 30% you have outlined?

In the mix, yes.

Okay, great. And then can you talk a little bit about the little bit -- or quite a bit lower North America in the fourth quarter at 15% of revenue is considerably below what the average had been for the year. Can you just talk a little bit about what the factors were there and how you expect those to develop going into 2008?

I think that US was for quite a long time in the range of 23%, 25% of our revenues. And we have seen it quite stable in this range. Now, it is true that Asia is growing faster and therefore other regions are growing relatively slower, but I think all regions are growing as well as the US.

As a matter of fact, if I compare past with future, past in the US was based mainly on private networks, and future is based currently and more so in the future about operators and cellular networks. So I think that North America will continue to grow in a nice rate.

But with the December quarter coming in at 15% of revenue, I am just wondering why the mix was so far skewed out of the North America, and if you think that should come back. It seems as though you are saying that should come back in 2008, back to that 20% to 25% range. Is that right?

Yes, I mean, they were pretty strong in Q3. So there was kind of -- you can call it a shift. I wouldn't look at -- it is true that Q4 is relatively weaker, but Q3 was stronger. So on the average, they were within our expectations, in the normal range.

Great.

And altogether and looking forward, I am saying we see strengthening in the US, as operators -- as more backhaul is being put into mobile networks.

Great. That's very useful. And then finally, just on the operating expenses, can you once again, I guess, just repeat how you would expect OpEx to be in the first quarter versus the fourth quarter, and then how we should think about its development through the rest of 2008?

I would say again that expenses -- we continue to grow -- I think it is the same trend that you have been seeing in this year and the prior years -- expenses do grow in dollar terms, but in percentage terms -- percentage of revenue terms, they do slow down. And therefore, operating expenses continue to improve as we have been improving them throughout the years, and then our goal is to reach 10% operating margin in 2008.

So in the first quarter, would you expect OpEx to be down as a percentage of revenue or not necessarily?

It is very difficult to pinpoint a certain quarter, but overall, the trend is a trend of reduction of percentage.

Great. Thank you very much.

Matt Robison, Ferris, Baker Watts.

On the OpEx for the fourth quarter, was there anything that you would consider exceptional? A pretty substantial increase there, so can you comment on that first?

No, I don't believe that we had any substantial increases in expenses.

And on the private network side, I think you had a kind a tough comparison versus 3Q, which I guess also meant that North American business was a tough comparison. Do you see the pork spending that we have seen come into Homeland Security related private network deployments, is that starting to dissipate? Because there was quite a bit of that both in '06 and '07, where you saw New York and Houston and these various other big cities putting up microwave with your products. Has that diminished in your pipeline (multiple speakers)?

No, that is not diminished in the pipeline, but as I said, those are usually lumpy deals. We didn't have any of those significant deals within the fourth quarter, and we do see some of those deals in '08.

Are we going to have to wait until the back half of the year or do you see them coming back? I mean, I know that March quarter sometimes is a little weak for North American spending because of the weather conditions. But when do you think you'll see it start to come back?

Hard to tell. Because on some of those, the cycles of approval are a little bit unpredictable from that sense, because it is governmental deals and it is hard sometimes to know what are the approval cycles. We do see a few of those deals in the pipeline, but they are spread all across the year.

What was Nokia as a portion of the OEM sales?

It was about 5%.

Oh, so it was about half or less than half of OEM.

Yes.

Okay, thanks.

In OEM?

Yes, it was about half the OEM.

Okay. Thanks a lot.

Kevin Dede, Morgan Joseph.

Good morning, guys. It's Kevin Dede. Congrats on a nice job.

Thank you.

So Ira, you mentioned flat expectations for Nokia. Now is that in absolute terms or percentage terms?

In absolute terms for the year.

Okay. And have you indicated who your 10% customer in India is?

No, we have indicated it's one of our direct customers within India.

And that is as much as you are talking to.

That is as much we are talking to based on their request.

Okay. Are your expectations there that there is life to that business going forward? I mean, obviously you said that there are six new operators and more licensing.

As I said I think on prior call, we have five customers -- five significant customers in India, five operators, two of them being Nokia Siemens and three direct. We do expect all of them to continue with significant business into this year and next year, because all of them got additional licenses now in the new auctions and bidding and they will be expanding into new circles within India, in addition to probably seeing a few more customers from the people who got new licenses in India.

And would you mind characterizing pricing -- I mean, competitively driven pricing pressure in '07 versus '06, and what you might expect this year?

Competitively driven pricing this year continued the trends we have seen in prior years of declines about 10% to 15%. And we expect that to continue going forward. Different pricing in different markets. Different pressures in different markets. And I think that from our perspective, as the geography mix changes, we might see a little bit stronger, so that Asia pricing is a little bit lower than in other sections.

But in general we feel comfortable with our gross margins because I think someone prior on the call asked about cost reduction activities and others, and I think we know how to offset those pressures within our mix and move forward and continue competing effectively in the market.

Okay. Last question for me, can you give us an indication of what you think will happen at FiberTower, given the changes there?

From what we are hearing from them, they will continue on going the same direction and continue their business. But that is what I am hearing from them. And if you ask a CEO, when this new CEO comes on the job, they usually make changes. But that, we will have to wait and see who is the new CEO on the job.

Very good. Okay. Thanks, Ira.

Daniel Meron, RBC Capital Markets.

Thank you. Hi, guys. A couple of questions. First of all, if you can give us a sense on the ForEx impact. OpEx did rise this quarter. Obviously, the revenues continued to rise, but this quarter was ahead of the top-line growth. How do you expect that and how do you factor that into 2008 guidance?

I think that the general trend is reduction of operating expenses as a percentage of revenues. So you know, it could be that one quarter it will be a little bit higher, but overall the trend is reduction. A continuing increase in absolute terms, but reduction as a percentage. And this is our goal for next year as well, to continue and make operating expenses lower in terms of revenues.

Right. But the ForEx, how was that in the play during this quarter and how do you think about it going into 2008?

Well, let's hope that the dollar will not stay as weak as it is right now. Right now, we do have expenses, of course, in Israeli shekel and of course they are worth more dollars, these expenses. It's not a huge amount, because a lot of our expenses, first of all, are the cost of the product, and then there are many other expenses. And I am usually hedged for a quarter plus ahead, but if it stays the same rate as it is right now, we may see some impact beyond Q1.

So then the 10%, how would you get to the 10% operating margin that you just mentioned if you do have continued ForEx impact?

We will make efforts.

That is right from what you are saying, but if you calculate it correctly, hopefully that the foreign exchange effects on our OpEx are not that large, because the salary content in shekels is relatively small from our operating expenses. So the overall effects on our budget are low.

Okay. So maybe you can give us some sense on what was the impact in the fourth quarter. Because, you know, I am just trying to see to what extent the changes in the quarter were impacted by the changes in the ForEx.

See, when you speak about impact, it is always compared to a certain expectation, and this is why it makes it difficult to say. And our expectations -- it was according to our expectations because we were able to hedge. So I did not have to change my internal model in order to allow higher expenses.

And the same approach -- at least from my point of view, it is the same approach for next year. I have certain expectations; I'm hedged on part of them. And so far I feel comfortable with the Q1 and part of Q2 which it will be according to my expectations. It is difficult for me to say, you know, I did have a negative impact of $300,000. I cannot say that because it was not the case.

Okay. That's fair. And then on the IP and the transformation to IP, what extent of the business -- I might have missed this before -- but what extent of the business was IP-related this quarter? How should we think about going into 2008 what is going to be the mix? And if you can also comment on who do you expect to compete with in the back half of 2008 as far as your competition.

The IP portion of our revenues or our product revenues was 32% this year. And most of it is private --

For the quarter?

For the quarter, it was slightly higher, 34%.

And most of that business is today private networks. It is not the carrier. The carriers -- well, it is private networks or it's private networks and it's WiMAX deployments. Carrier business, cellular carrier business is just emerging -- very, very small amount at this point. And we expect this small amount to grow in '08, but not significantly, because I don't think the major shift will happen in '08.

It will be mainly design wins. It will be working with operators in their labs and initial deployments. As I think I said at the beginning in my talk, we do have a few cases of early adopters of the technology which are starting to deploy the technology as they start and prepare for the migration.

You asked about competition. Competition in this space, right now the main competition that we have is from Harris Stratex with their product lines. We do see people like NEC and Ericsson offering solutions, mainly a two- or three-box type of a solution, (inaudible) to stop the gap. They'll probably have products in the second half of '09. And we will probably see activity from Alcatel, Lucent -- they have announced a new product line based around their router line which would probably be available also in the second half of the year.

Okay. So you are looking at NEC, Ericsson, Alcatel, Lucent in the back half of 2008?

Ericsson and NEC will probably provide two-box solutions during 2008 and probably only in '09 will have their own products.

Okay. Very good. Thank you. Good luck.

George Iwanyc, Oppenheimer.

Thank you for taking my questions, Ira and Tali. When you look at the trends in Latin America, can you give us an idea of how big an opportunity you see there in 2008?

Latin America has been in the 5% to 7% in our revenues in '07; we expect the same 5 percentage to be in '08 as well.

Okay. And following up on your comments on WiMAX, can you give us a sense of the current bid activity you are seeing there and how you anticipate that to ramp as the year goes on?

We see bid activities around WiMAX, most of the things we see right now is people still doing WiMAX for broadband type of applications, both large and small deals. But it is mostly WiMAX for broadband. And there are initial bids for the mobile parts, but those are too early. And what people are doing there is the WiMAX providers are winning or going in there, and it's usually very small deployments, which are done on wireline backhaul for the testing purposes.

Okay. So you are not building in a very aggressive number in the 25% to 30% growth --

No.

And finally, can you give us an update on the NEC claims?

No update.

Larry Harris, CL King.

Yes, thank you and good morning. Just a couple of questions here. One, are you encountering DragonWave in the IP radio market and are there particular countries in the Asia-Pacific region, in addition to India, where you are seeing strength?

Okay. First question, DragonWave, yes do encounter them, mainly on WiMAX deals. So they have pure IP solutions and their product fits very nicely in that space, and that is where we encounter most of their -- when we compete with them, it is mainly on those types of deals. Asia-Pacific, we see strength both in India, all over Southeast Asia, and Indochina, Vietnam, Thailand, type of places. And I forgot Philippines as well.

I was going to ask that. Okay. Well, thank you very much.

Irit Jakoby, Susquehanna.

Yes, hi. Thank you.

Good morning, Irit.

Hi, good morning. Just wanted to go into again the discussion of your OEM goals. I mean, you had mentioned in the past that you have a target of reaching 50% OEM mix. And I was wondering if it has been revised, and if not, does this include the addition of other large OEMs to the mix? And finally, does the IP product cycle give the opportunity to add other large OEMs?

The answer to your questions is yes, in the long range I want to reach 50% OEM business. It will probably take us longer than we expected, but we want to grow the OEM business. And I think that you indicated some of the directions we are working on is once the shift is done to the IP, it might change the mix of people which are potential, I would say, partner OEMs for that shift, which we are trying to work with.

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

Steve Ferranti, Stephens Incorporated.

Hi, guys. Good morning. Can you talk a little bit outside of emerging markets, you know, what are the dominant trends that you see in terms of carrier deployments? Is it leased-line substitution, is it capacity adds? I would imagine not a lot of new network builds outside of emerging markets. But give a little bit more color in terms of some of the trends you are seeing there.

The main trend, if I am looking from the top, is capacity expansion. Okay? They need a lot more backhaul to each and every base station and then at the aggregation levels as well, because things like the iPhone or other smart phone devices generate a lot more traffic to the base station. And the operators are looking at differing technologies and ways to do that.

What we see is that leased lines in many of the places are maxing out. So they have been built, laid out for a certain capacity around the voice circuits, and when you start adding a lot of data, they max out very easily. So there are two alternatives usually in that case coming in, and we see a few of those. One is I have seen people do conversion of some of the E1/T1 lines into DSL lines to carry some of the IP traffic. And the obvious one is replacing that with a wireless microwave link, which does both IP and the E1/T1s with a much higher capacity.

Okay. Any progress you are seeing or any uptick in activity in North America in terms of leased line substitution? I know some of the carriers have been starting to be a little more vocal in terms of looking at white spaces and those kinds of things for leased line substitution. Are you seeing any pickup in activity there?

The answer is yes. The answer is yes. I think Tali mentioned before if you look at our North American operations, we expect to see for '08 more carrier business than we saw before.

Very good. That is all I have. Thanks, guys.

Kevin Wenck, Polynous Capital Management.

From Q3 to Q4, inventories dropped a little bit more than $2 million. Were you maybe a little surprised at the top line growth in Q4, where you shipped a bit more than you might have expected? Or given the 44 to 48 remaining guidance for Q1, are you somewhat conservatively positioned for Q1?

Okay, let's take it one by one. I think I will take the second one, which is an easier explanation. That is the guidance that we give. We are not conservative and we are not optimistic. That is our best estimate for Q1, and that is the way we build the guidance.

Then a comment on the inventory --

Then the comment on the inventory. Inventory did go down at the end of Q4. We are not shipping out of inventory; most of the things that you see on our inventory, it is divided into two parts. Part of it is inventory within customer sites already or within customer premises, which has been waiting to be recognized because it's project related and installations and other things. And the other things is inventory that we have for building products. And we do manage and over time shift it both up and down, based on where our expectations are.

Okay. The overall revenue guidance for '08 of 25% to 30% is really attractive growth in an economic environment that the investment community anyway assumes is plunging into recession. But what is your overall economic outlook? And maybe you could give us some comments on how that differs geographically.

First of all, I don't have an overall economic outlook because I am not in that business. It's very hard for me to predict. I think I read the papers. Probably most of you have better -- more detailed understanding.

From what we have seen right now in the market, from talks to customers worldwide and to our sales teams and salespeople, we have not seen any significant changes or any changes at all in what the customers are telling us from what they said before the financial crisis. All of them are planning on continuing in deploying because for most of them it is a critical part of their business, both in reducing OpEx and expansion.

But as I said in my talk, this is something that as management we are monitoring very, very closely to see if there are changes in that type of an outlook or if any of the financial or recession talk that is all around, I would say, filtrates into our market space.

Okay. And then one clarification -- and an apology about an additional question on operating expenses or operating margins. But the impression of the 10% goal, that is for the full year -- that is not for Q4 '08, is that correct?

Yes, for the full year.

Okay. I mean, just one other take on that. That means since it sounds like you're assuming that gross margins are going to be flat -- let's say 36% -- then the other operating expenses have to drop from, let's say, 28.5 to 26 for the full year. I mean, that is about a 10% reduction as a percentage of revenues. And it also implies that by Q4, the operating margin is probably more like 11% to get to that.

I mean, are you really just completely comfortable with that at this point? And of those three items -- R&D, selling and marketing and G&A -- where do you think you're going to get the most leverage?

Well, you know, first of all, it is our goal. And we started setting up this goal several years ago, and we improved it each and every year by about 2 percentage points. This year, as a matter of fact, 2007, it was even more than 2 percentage point improvement in the operating. And we do want to achieve this goal. Now, are we comfortable? Well, so far, you know, we have achieved our plan, so we are absolutely hopeful that we will achieve our plan for 2008 as well.

All right. Thanks. Great year. Congratulations on '07.

Rich Church, Collins Stewart.

Thanks for the follow-up. On the one carrier customer through OEM that you said had pushed out their orders a quarter, could you just give us some more color on why that would have happened?

I didn't say they pushed out the order in that sense, because that -- and I will give you the color. What happened is it is a customer which deploys a significant number of links every quarter, have been buying from us for the last six quarters through the OEM on a regular basis, a significant amount. I think what they found out when they looked at their plans internally, they were backed up by about a quarter on their installation projects.

So they had to shift a little bit the plans on the way they install. It had nothing to do with slowing down. It was them merely adjusting inflow of equipment through the speed that they are installing. And I think they were a little bit angry at themselves in there for not installing as fast as they planned.

And you said you have already received these new orders from them for Q1.

Yes.

And what geography was that?

Asia-Pacific.

Okay. And just one more question. On the Q1 guidance, I guess you guys have posted sequential revenue growth for multiple years here, and your guidance implies you could be down sequentially for the first time in a very long time. I am just curious, is that just conservatism or is this a real (multiple speakers)?

Yes, people ask me if that is our guidance, and I think we give the best estimate. Have we moved? I think Tali said on his comments that we expect Q1 to be similar to Q4. It is not the first time we are giving that type of a guidance. I think we gave that type of a guidance also coming into 2007 -- for Q1 of 2007 versus Q4 of '06. And that is our best estimate right now as we look into the quarter.

Okay, thanks.

Rich Valera, Needham & Company.

Thank you, good morning. Could you describe your competitive differentiators today -- how you win in the marketplace, and say if you think that is going to change when some of the big OEMs you talked about, like NEC and Nokia, come out with products that are ostensibly similar to the ones you have today with more IP capability, and how you will maintain your sort of competitive differentiation, say, a year from now when you have more sort of like products on the market?

First of all, let's remember we play in two markets from that sense. In the market of the SDH or TDM type of links, there is very little differentiation on the functionality. By the way, we have a better product with more features, but it wins us about 10% of the deals in that space. And it is not a knockout; there's specific segments within that.

Most of the other is we have invested very extensively into cost cutting and design to cost measures around the products, and I think we have either the best or equal to the best cost position for winning. Just to give an example, within the India market which considered very hard, only three microwave vendors operate. It is NEC, ourselves and Ericsson within their captive market.

So we win this way, from being competitive. Competitively on the cost allows us to be competitive in the bidding process and a little bit on the functionality. On the IP space, I think we have significant functionality capabilities, and for at least as the market before it matures -- and the market will be for the next two or three years a market which is mainly competitive on the functionality as people define their needs for the migration and how they do the migration -- I think we will maintain our competitive positioning in that space, and our competitive lead with coming up with additional, significant new functionality and solutions around the IP space.

That's very helpful. Thank you.

Matt Robison, Ferris, Baker Watts.

Thanks for letting me have a second question. I wanted to get a headcount and how it changed and where you think it is going for the current quarter. And you did have your OpEx adjusted before the stock comp did increase sequentially faster than revenue. You didn't mention there was anything exceptional, but I mean R&D was up quite a bit. Was there prototyping expenses in the quarter?

And sales and marketing was up a lot. Was that commissions because it was more direct? A little more flavor on that. I mean, you mentioned it is going down as a percentage of sales in the future, but you really didn't show that in the December quarter. So maybe give us a little bit more flavor on the dynamics of how you are going to execute that and, of course, answer the headcount question.

Okay, the headcount is about 330 employees at the end of Q4.

So it was up 17 or so?

Yes, slightly -- yes, you are right. As far as OpEx, again yes, it is true that in sales and marketing we had commissions higher than usual. I also have an expense which is related to equipment that they sent to customers for trial, so testing. So many times we sell equipment for testing free of charge, and that was the case also in Q4, mainly related to IP because our IP new equipment is being tested by many customers.

Could that go through R&D?

No, that would go through selling. Selling department will compensate the operation department for producing product and giving it to them. So these are probably two expenses that I can think of and, of course, overall increase in the activity.

Yes, R&D I don't see any major increase. It increased from 4 million in Q3 to 4.2 million in Q4.

Yes, but 3Q was way up from the second quarter, so there was some reason to expect that there wouldn't be a continued ramp there.

No, no. There is nice R&D activity.

So we are not -- it seemed one of the questions earlier talked about the exchange rate and the shekel, or at least implied that. Is that not really a consideration? You feel like you have hedged yourself adequately for that?

Again, I feel I have hedged myself enough for Q1 and part of Q2 regarding based on my plans. If dollar stays the same rate it currently is, then there will be an impact, mainly in the second half of the year. But we don't know what the dollar is going to do. And again, I don't think it is going to be a great impact, probably somewhere in the range of $250,000 per quarter, $300,000 per quarter, if it really stays the same -- as weak as it is right now.

Okay. Now the IP products right now, because they are going into private networks, tend to carry better margins. How do you think the margin works out for IP products by the time they get into public networks?

Same as current TDM products.

Okay. All right. Thanks a lot.

Tony Rao, East Shore Partners.

Good morning. Can you speak a little bit about your EMEA market and APAC, and give a little bit of color about how much of those markets are emerging market business and how much is with existing, mature carriers?

(Technical difficulty) APAC, depending on how you define it, most of the business is with mature carriers. There are deals that we have with new carriers, but most of the deals are with mature carriers. But then, as I said slowly, is if you look at the customer in there which is a mature carrier and they now cover 11 circles and will expand in the next year to 10 additional circles, which means 10 additional geographies within India. And so they are mature where they are; they are not mature where they are going into. But as a carrier themselves, they are a mature carrier from a business perspective, but doing a geographical expansion.

So in APAC, we see most of the things that we say sell is into expansions.

If you look at our EMEA business, that also most of the carriers that we work with are mature carriers. But then you see different expansions. You see expansions in the Africa region happening where they increase mainly capacity on going -- as they expand slowly in the geographies from very urban areas into more, I would say, suburban areas types of things. We see similar activities also in Eastern Europe and former USSR type of countries as they expand. We see some, but it is not a major part of the business, new carriers coming up.

So when you speak about one of the major growth drivers is the fact that in existing markets that capacity expansions are driving the need for alternate forms of backhaul, which are obviously more economical. So would you consider these markets in APAC and EMEA where they are expanding their geography -- would they come under that guideline --?

That is what we call subscriber expansion. When I am talking capacity expansion is someone who is upgrading the towers from, let's say, 10 Mb capacity up to now the 50 Mb capacity to accommodate data.

Okay. Then maybe I should rephrase the question then. So if that is the case -- and that is how I understood the capacity expansion -- isn't that really a small base of your business now, when you look at in virtually all the markets that the carriers that are expanding capacity, you are saying that is a strong driver. But at this point, that is a smaller part of your business. Most of your business is coming from, you know, expanding geographical coverage and so forth.

That is correct.

So to look at the growth that you're looking at in 2008, 25%, 30% growth, then would it be fair to say that the capacity expansion is a much smaller driver, and the bigger driver is actually just the geographic expansion of your customers?

Yes.

One last question. In the North American market, you had a sequential decline here in Q4, driven by the lower percentage of private network business. Have you seen any trends there? We have heard from many different companies reporting that the US enterprise customers are slowing down their spending patterns. Have you seen that as a contributor to what happened in Q4, and do you expect, if you are seeing that, that that trend continues into at least the first half of 2008?

I will say it this way. If we see the sequential decline, it's mainly because we had one large deal in the second half of Q2, and in Q3, it was a large government integrator from Homeland Security. So that pushed up the numbers.

I think our numbers right now in the purely enterprise direct distribution business are too small for me to -- from a statistical perspective to judge if I see a slowdown or not. It is not there yet. It is not that I have thousands and thousands of customers and millions of systems for sales into the market to put any statistical significance into that at this point.

Sounds reasonable. Thank you.

Blaine Carroll, FTN Midwest Securities.

Tali, with the new cash balance, what do you see the financial income line being on a run rate?

Well, you know, the interest rate went down a few days ago. So I am, of course, more disappointed than I was a [few weeks before]. But it looks like the interest income line is going to be in the range of around $1 million a quarter, around $1 million a quarter -- maybe even less now with the decline in the interest rates.

Thank you.

There are no further questions at this time.

I would like to summarize and thank all of you. We had a long conference call this time. Thanks to all of you who stayed with us until the end and with all the details.

I would like -- I probably will see -- both myself and Tali, most of you, face-to-face over the quarter as we travel, so looking to see all of you face-to-face soon. And thanks again.

Thank you.

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