Ceragon Networks Ltd (CRNT) 2008 Q2 法說會逐字稿

Good day, everyone. Welcome to Ceragon Networks Limited second-quarter 2008 results conference call. Today's call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks; and Mr. Tali Idan, CFO of Ceragon Networks.

Today's presentation will include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause Ceragon's actual results to be materially different from those expressed or implied by such statements.

For additional information regarding the risks associated with Ceragon's business, please refer to Ceragon's Annual Report on Form 20-F and Ceragon's reports filed with the SEC. Web users can visit Ceragon at www.ceragon.com to read the complete forward-looking statement language.

I will now turn the call over to Mr. Ira Palti, President and CEO of Ceragon. Please go ahead, sir.

Thank you for joining us today. With me on the call is Tali Idan, our CFO.

In the second quarter, we flew past the top end of our target range, reaching an all-time record of $55 million in revenue. Bookings remained very strong and our book-to-bill of greater than one, even with a big jump in Q2 revenues. We continue to benefit from the growing worldwide demand for high-capacity backhaul. In addition to growing demand for extension and upgrades with our high-capacity solutions for cellular networks, I'm pleased to say that we are seeing the migration to all-IP cellular networks beginning earlier than we originally expected.

Geographically, most of the strength is coming from the A-Pac region. In addition to the well-known wireless boom in India, we are seeing excellent growth from other parts of the region.

For example, during Q2 we added an important new customer in Vietnam and we expanded the scope of our relationship with Digitel in the Philippines to include our IP solution for the first time. Digitel is starting to use next-generation cellular base stations, which include native IP interfaces in a parallel IP backhaul network using our IP-MAX solution.

Growth in Latin America in Q2 reflects follow-on business from a leading mobile operator in Mexico, which was a 10% customer for the quarter. As we expected, North America continues to be the only weak spot, a continuation of the pattern which began in Q1. We believe that North America will remain weak for the balance of 2008 for both carrier business and private networks.

In 2009, we expect improvements led by the growth in mobile backhaul networks resulting from the high data usage caused by the new iPhone launch and similar devices. In addition, once the merger of Sprint's XOHM and Clearwire receive the required regulatory approvals later this year and the new organization and its working methods are finalized, the new Clearwire could provide a boost to North American demand next year.

EMEA made a smaller contribution to revenues in Q2, but this relates to timing rather than demand issues. Our bookings from EMEA continue to be strong, and we do not see any slowdown in this region.

Our OEM revenues continued to grow rapidly, and OEM business accounted for almost 37% of total revenues, the highest for any quarter so far. In addition, we recently announced a strategic partnership with ECI Telecom in which ECI will resell our backhaul solution. A few days ago, we announced the first major joint customer, ELRO, a utilities company which is building a nationwide WiMAX network in Denmark. This three-year frame agreement is one example of the strength we see coming from outside Asia, both in Europe and Australia.

In Q2, we had a much higher proportion of business through OEM from Asia and (inaudible) larger deal size, which affected our margin. This shift also changes a little bit our P&L model going forward. Tali will discuss this in more detail.

In addition to the shift in mix, we face a weaker dollar. We were able to mitigate some of the impact and even managed to report a slight sequential increase in profits despite those challenges.

This quarter, we introduced our next-generation platform of radios which enable us to continue our product cost reduction plans. We started shipping the new platform to India during this quarter while continuing to ramp up production rapidly.

For the strong demand on a global basis, execution remains the critical success factor and we continue to emphasize technological innovation in the IP backhaul space as well as continuous product cost reduction and stringent expense control. Looking ahead, we expect to continue our growth in the second half of the year and we are revising our [2008] target to better than 35% growth in revenue and (inaudible) very strong 2007. Now, I would like to turn the call over to Tali.

Thank you Ira. In Q2 revenues grew 48% to a new record of $55.2 million compared to $37.3 million in Q2 2007. GAAP net income was $15.5 million or $0.40 per diluted share which included an $11.2 million income tax benefit related to the creation of the deffered tax assets. I will explain the tax situation in detail in a moment.

Excluding stock-based compensation and tax benefits, non-GAAP net income in Q2 grew 50% to $4.9 million compared to $3.3 million in Q2 of 2007. Non-GAAP EPS was $0.13 compared to $0.11 in Q2 last year on a much higher share count.

Turning to the revenue breakdown, the service provider category accounted for 89% of total revenues in Q2, the highest proportion of revenues we've seen so far. Private networks represented the remaining 11%. The private network category is comprised of enterprise and government customers (inaudible) exceed the continuation of the softness that began during Q1.

IP revenues in Q2 were 24% of total revenues. As Ira noted, the Asia-Pacific region continued to grow rapidly, accounting for 57% of total revenues. EMEA accounted for 22% of revenues and Latin America increased to 15% of revenues while North America accounted for the remaining 6%.

We had two 10% customers in the quarter. One was our long-standing customer in Mexico and the other one was (inaudible) Networks.

OEMs accounted for almost 37% of total revenues in Q2. In light of the strong OEM business in the first half of the year, we expect OEM business to account for 30 to 35% of full-year 2008 revenues.

Non-GAAP gross margin in Q2 was 34% mainly due to the relative higher contribution for OEMs and the continued strength from Asia. Operating margin was 7.8% reflecting the lower gross margin. Assuming no change in mix as we continue to (inaudible) our next generation platform, we expect our gross margin to return to the 35 to 36% range in Q4 and beyond.

Foreign currency negatively impacted in Q2 at about $600,000 reflecting the fact that we were partially hedged during the quarter. In Q2 we were able to mitigate about half of this impact for a net impact of about $300,000.

We are not hedged for the second half and if the dollar remains at current levels, it will have any additional negative impact of $600,000; double the Q2 impact in each of Q3 and Q4. We're working on ways to mitigate more of this impact than we were able to do in Q2, however, we of see no improvement in the dollar it will be quite challenging to reach our goal of 10% operating margin by the end of the year.

Before we turn to the balance sheet, I would like to explain how income taxes will begin to impact our financials. The $11.2 million tax benefit that was included in our GAAP net income relates mainly to our net operating losses.

Because we established a pattern of profitability, accounting rules require us to reflect the future benefit from a portion of these NOLs by creating a deferred tax asset and begin charging (inaudible) expense against it. As we continue to show profitability, we will gradually increase the tax asset to include the remaining NOLs.

We will also start including income tax expense at the current corporate rate of 27%. The net effect of the fixed expense on one hand and the additional tax benefit on the other hand is expected to create a net tax expense of about 5 to 10% of income.

In Q2 we paid $7.4 million to the Office of the Chief Scientist in Israel to recover the entire remaining debt in order to save interest expense. The remainder of the cash used in operations was from working capital to support the growing level of sales. Thus total cash and cash investments was $108 million at the end of Q2, compared to $121 million at the end of Q1.

DSO's were 93 days, reflecting in addition to higher revenues, the typically longer payment terms for Asian customers. Q2 bookings remain very strong. Book-to-bill was above one and we continue to have a backlog that is more than one quarter ahead.

We expect Q3 revenues to be in the range of 56 to $60 million. For the full year 2008 we're raising our revenue growth targets to 35% plus over last year's revenues, reflecting the continuation of topline growth during the second half. Now we will be happy to take your questions.

(OPERATOR INSTRUCTIONS) Tim Warren, Bank of America.

Thank you. Two questions, if I could. First, good revenue performance in the quarter. It sounded like OEM has really ticked up. How would you characterize the deal sizes? Were there a lot of large deals contributing? Could you just talk to us about kind of sustainability of some of the deals in the quarter and how that plays into your visibility?

And then second on the margin side, you mentioned it might be challenging getting to that 10 percent bogey this year if the dollar does not improve. Could you just remind us on what some of the other puts and takes there are going to be and whether or not that -- if it doesn't happen in Q4 is that something we should expect in the first half of '09? Thank you.

Oh okay, I will take the first half. What we see is the growth in (inaudible) and through the OEM channel deal sizes does increase. It has to do what we see a lot of deployment in the Asia-Pacific region, specifically in India with operators which are going through very large expansion projects. We do expect this to be sustainable and because the operators are not onetime [buys], part of this plan with most of them for at least the next 18 to 24 months of ramping up and expanding their networks and we expect to continue seeing those deal sizes and that level of activity.

For the second question, you do know that we do have this challenge and target to reach 10% operating margin at the end of the year. And unfortunately the ratio between the shekel and the dollar or the strengthening of the shekel against the dollar is really making it challenging. Let me say this -- it still depends a lot about the ratio between the two which is uncertain. However, this goal is very important for us and I have no doubt that we will budget for next year, we will make sure to reach this target over the first half of this year.

Ittai Kidron, Oppenheimer.

Hi, guys. I have first of all a quick question on the new products that you've started rolling out. It seems like the fact that they are coming, that helps on gross margin. Can you tell us how quickly is that transition to the new products? And Tali, can you clarify with regards to return to the 35, 36%; I believe you mentioned fourth quarter. So what should we assume for third quarter gross margins?

We're rolling out quite rapidly the new products. We do expect that by the first half of next year most of our products will be based on the new platform and it is a gradual very rapid rollout of the new platform to customers. But it will take time until the second half of next year but it's part of what will be driving back the gross margins.

And so the Q3 estimated gross margin, it is about similar to the one in Q2. We think we will have the same mix still in telling Q3 with improvements in Q4 and beyond.

Just to clarify on that, the 10% you said -- you -- might be a challenge hitting the 10% operating margin if the FX remains an issue. Is that an annual comment meaning reaching 10% for the year or to any specific [orders] in the second half?

We target of reaching 10% in Q4 of this year. (multiple speakers) Now it seems difficult. (multiple speakers) Go ahead.

With respect to the tax rate, what should we assume then on tax rate for '09? Is that then -- we should already assume somewhere midpoint between 5 and 10% effective proforma tax rate for '09?

Yes. I would say that probably for the remainder of '08 is more towards the 5% and growing gradually throughout '09 toward the 10%.

Okay, thank you. Good luck, guys.

Blaine Carroll, FTN Midwest Securities.

Congratulations on the quarter. It looks like the growth is clearly there. Tali, one of the things you mentioned -- or Ira, maybe it was in your prepared comments on the gross margin was -- the mix of OEM and Asia-Pac, I was wondering if you could talk about sort of the component cost within your cost of goods sold and what type of impact that might be having on gross margin as well.

The component cost in general has not changed significantly. The outcome by the way (inaudible) very aggressive cost reduction activities both on the current and on next generation platform that we're using. But if I am looking on a one-to-one basis we're about the same. The only place where we see a little bit of an increasing component cost is around antennas which is -- the antenna manufacturers have been increasing the prices slightly.

Does any of that have to do with shipping cost, do you think?

It has to do was shipping cost and it has to do with aluminum cost.

And then on the DSOs, they clearly jumped up during the quarter and you're saying it was a lengthening payment cycle with some of your customers. Are any of those receivables at risk at this point, Tali?

Have what?

Are any of these receivables at risk? Are any of them extending beyond the normal times?

No, I don't think they are at risk. Most of our customers in Asia are strong companies. It is really part of the (inaudible) negotiations with our (inaudible) Asian in customers and therefore we do see a certain increase in DSOs.

I should say that another component in this increase of DSOs is coming from the fact that revenue really jumped from Q1 to Q2. If I calculate the DSO on an average basis, when I ever the AR balance at the beginning (inaudible) quarter I would get DSOs 81 days only and that is [as much as in 93]. However, as I said before, the main issue right now it is longer payment terms in Asia.

And was the quarter more back-end loaded? Did that contribute to it?

It was more than we experienced in [backloaded], yes.

And then last one. When you're talking about the target of the 10% in '09, when you're doing your budgeting and that will factor into the budgeting. What areas would you focus on to eliminate cost in '09 in order to get to that 10%? Would you cut back on R&D? Would you cut back on marketing expense, things of that nature?

As far as operating expenses, I think that if you look backward you will see that we're kind of decreasing both expenses gradually over time. Both the R&D had been increasing and the sales and marketing has been increasing -- decreasing, I'm sorry; both of them. But this is really our policy to decrease these expenses gradually as revenue grows and we will concentrate on continuing doing this as well as improving gross margin.

And you mean decrease as a percentage of sales?

Decrease as a percentage of sales? Yes.

Okay. Great, thanks and good luck.

Amir Razwadowski, Lehman Brothers.

Thank you very much Ira and Tali. In terms of the revenue growth, I was wondering if we could talk about your visibility there. It seems as though certainly you're benefiting from ongoing strength in Asia Pacific. Is that more capacity expansion or just keeping up with the rapid subscriber growth? And I just want to get a sense as to -- if this is something we should expect ongoing or where we [have] sort of in the buildout stage there.

The buildout stage where I think as I said a little while ago, we expect this is a process which will continue for the next 18 to 24 months and some of those that will continue to ramp up their expansions into mainly new geographies and adding capacity in existing geographies to meet the subscriber demand and we have reasonable visibility into the way they proceed forward.

Okay, that is helpful. And then I was wondering if we could talk a little bit about North America. It seems some of the weakness that you've experienced in Q1 is ongoing. I was wondering if you could talk about it in terms of the magnitude. Are we experiencing a worsening of the situation or are you looking at it more as a in-line trajectory with weakness beginning in Q1?

It's more like in-line trajectory that began in Q1. We saw mainly in Q1 a slight decrease in the private network which stayed at the same levels and a more significant decrease in the carrier business in the US with -- some of our customers are still [thinking their] steps forward in the current economy and where they need to put their resources. But it is more in line with Q1. I have not seen a change or worsening during this quarter.

Should we think of that -- if you have seen some of the carrier customers (inaudible) current economic environment, given where traffic growth is, is there an opportunity somewhere down the line where they're going to need to come back to you folks in terms of additional capacity expansion or --?

There's a clear opportunity there. I think I said in my comments I do expect by the beginning of '09 the pressure on some of those networks will become such that it will come back and rebuild the networks because of the data pressure. We do expect those -- it is very hard to time because when you have to time on the one hand the macroeconomics with [data] demand, with things that you see within the network. But it is clear that those networks will have to expand (inaudible) capacities. (multiple speakers) we are in discussions with some of the US carriers around that. It will depend on what time we will take the action.

That actually was my last question. In terms of the upgrade progress of IP within the carrier network, just wanted to get a sense of where we are there.

Okay, there it is interesting to know the trends are a little bit changing. For a while Europe was leading that trend. I think Europe is still on the same time scale that was originally there which meant this year it is design [wins], this year it is network design. It is really starting to deploy in the beginning of '09, middle of '09.

What we're starting to see is some operators in A-Pac like Digitel, our customer, jump starting that type of a cycle, moving a little bit faster and doing some of that type of integration toward the second half of this year end of this year. US, I think all operators are discussing it. They'll be a little but slower on the pickup of IP -- all-IP networks for backhauling.

Okay. That is very helpful. Thank you very much.

Irit Jacoby, Susquehanna.

I notice that you mentioned that Europe remains stronger, that you are not seeing any slowdown in this market. But it seems that EMEA revenues this quarter were lower quarter-over-quarter [now for] year-over-year?

EMEA revenues were lower this quarter and (inaudible) correctly. But as I stated, we do not see a decline in the demand. It mainly has to do with timing issues which has to do with some of the EMEA revenue large projects we are doing in Africa and other regions which had to do with timing differences between demand and revenue recognition due to revenue recognition policies.

Okay, fair enough. Again, if you can give more color on IP deployments; you mentioned that you see that across the board geographically but it is it mostly cellular driven or do you also see some uptake on WiMAX networks?

We see uptake on mobile WiMAX networks. I think I mentioned on the call ELRO in Denmark is deploying WiMAX. I don't see that as a very large uptake at this point because the WiMAX networks in most deployments are still slow. On the cellular, as I said, I see a little bit of an uptake. It is not there yet. It is mainly what I would call planning activities. It's design, it is testing, it is (inaudible) testing, it is (inaudible). It's not at the level which is generating large and significant revenue.

Okay. And then finally on OEM, have you seen expansion of OEM involvement in other geographies beyond Asia-Pac? Do you see any potential for OEM in North America or maybe more OEM business in Europe than you have had in the past?

Yes, we see a potential for it at this point I think because of the huge expansion in the Asia-Pac region it is in a way overshadowing those things. But we do see revenues coming from other regions as well with the OEM.

Okay, great. Thank you.

Steve Ferranti, Stephens.

Thank you. Great job on the revenue growth, guys. I wondered if you could just give us a little but more color in terms of the carriers' efforts to transition to IP networks. What point of the process are you most often seeing these days? Is it RFI? Is it RFP? Is it actually the point of trialing? Kind of where are those guys in terms of actual efforts in making that migration?

The whole spectrum. I cannot pinpoint a single (inaudible). There's a lot of carriers. Some of them are not doing anything at this point (inaudible) some of them who are deploying. I would be mostly -- if I need to weight it, I will weight it more towards not doing anything in some ways because it is just starting the cycle at this point.

What we see it is from the leading carriers, most of them are in the phase of issuing our (inaudible) issuing our (inaudible), some of them are with lab testing. It is a new concept for them. They have to change the concept of how -- the way they build the backhaul networks. It does take the time and we're involved with a lot of them in doing that process.

And I think -- I thought your comment was interesting in terms of what North America at least over the next couple of quarters thought it would remain sort of soft. I would actually think the iPhone would sort of spur carriers' thinking in terms of transitioning to IP backhaul. Are you seeing any signs there in particular?

I see the signs. I see the discussions. But I think that turning this into revenue will take time. [We're in] discussions with a lot of the US carriers around those types of transitions.

Okay, great and last one for me. If you could provide us a little more color in terms of the product network segment. What is driving the sluggishness there and how long do you think it lasts and is it related to any particular geography? Thanks.

Related mainly to the US geography, most of the private networks business comes from the US because of regulatory environment. In most countries around the world, the private segment (inaudible) does not exist for backhaul (inaudible) for microwave. You cannot do it directly. It's mainly US, Germany and Australia (inaudible) and it is larger portion US. At this point we see it a little bit on the slow side and from here you will have to [ask] the macroeconomics what's the [impact].

Okay, great. Thanks.

James Faucette, Pacific Crest.

Thanks very much; a few questions. Firstly, just a question on the competitive landscape. With the perceived acceleration towards all-IP, can you just characterize for us any changes you have seen in the competitive landscape either new products from existing competitors or if IP products from upstarts have started to gain more traction recently?

I think that -- we will start it this way. Most of the transition for cellular networks -- and I will separate WiMAX in a second as a separate story -- have to do with a capability of doing both TDM and IP at the same time. If I am looking at the competitive landscape there, it has not changed significantly over the last two or three quarters.

I think we are one of the main players. I think our (inaudible) is one of the main players. I see Alcatel-Lucent coming up with some products and I think both (inaudible) Ericsson are major players in the wireless backhaul and probably Nokia Siemens sometime down the road will come up with their own products.

Great. Then I just wanted to ask a little bit about your growth forecast for the rest of this year and how we should think about the seasonality of the third and fourth quarters. Typically you would see the fourth quarter being strong. I'm just wondering if after the strong September quarter that you are looking for that you would expect sequential increase in the December quarter.

I guess the reason I am asking is that if you were to hit the high end of the range that you gave for the September quarter, even a flat December quarter would put you well above that 35% revenue growth target. And I'm just trying to calibrate the fourth quarter outlook correctly, if we should expect to see normal seasonal growth or if that could be closer to flat.

For us, I don't think we really have seasonality trends. Throughout recent years we've been growing quarter-over-quarter and this is usually (inaudible) characterizes our book, it characterizes mostly our production capacity. So, I believe that revenues will continue to grow quarter after quarter. This is our projection.

Great, thank you. And then just the last question. I guess this also is tied in to a little bit growth. But obviously, you have had pretty substantial use of cash over the last few quarters to support that very strong growth. Is this a phenomenon that we should expect to continue for the foreseeable future or do you feel like you are now getting to a period and a point where the use of cash to support the growth should start to stabilize? Thank you very much.

I believe it starts to stabilize and -- but from time to time the growth surprises me as well. So, we will wait and see. But I certainly hope and believe that we should start stabilizing cash and start generating cash.

Daniel Meron, RBC Capital Markets.

Congrats on the continued topline momentum. Can you give us a little bit more color on the (inaudible) with Sprint. Clearwire obviously you discussed it to a short extent. But if you can give us a little bit more color on your thinking about the timing in 2009? Thank you.

As I discussed on a call, I think the main issue -- Sprint XOHM and Clearwire are merging. The good news is there is money there, there's money and the project will happen. Timing -- from experience it does take time. When you merge a small organization with a huge organization, although XOHM is not [all] Sprint -- but it comes with the culture and the DNA of a very large organization.

Until regulatory (inaudible) nothing will happen. There will be a lot of plans. After regulatory (inaudible) you have to merge a lot of people, build in processes and do things. I think this is a first step of (inaudible) story and (inaudible) will start really ramping up and building outside.

So, I know that you've throughout the year of kind of reduced your outlook from Sprint-Clearwater so by now it is probably going to zero (inaudible)?

It is probably going toward zero at this point.

And you still made up those numbers from elsewhere as far as growth, so that is pretty impressive. And then as far as, Tali, if you could just give us a sense on the DSO level that you expect and how we should think about it over the course of the next three quarters? And also on the tax levels, should we expect a linear growth starting from the third quarter going from 5% then growing over time?

As far as the DSO, we have a target of 70 to 90. And speaking to this target even though as you can imagine it is becoming challenging but this is definitely our target and we want to stay there. As far as the tax rate, it is really not the [science]. So I gave a range and I think that it will gradually grow from the 5 towards the 10 but I cannot say anything more accurate than that.

(multiple speakers) there are two streams. There's going to be a stream of regular experience plus there's going to be another stream of probably (inaudible) continue to be the deferred tax asset. So it's difficult to project.

Okay, that's fair. And then should we expect the same tax (inaudible) for 2009 as well assume that you want (inaudible) NOLs before hand?

Right. My estimate that this trend is going to stay for '08 and '09 until we exhaust the NOL and then from that point on we will show an income tax expense that is the then current corporate tax rate.

And then last one form me. You are growing this year north of 35% which is impressive. Going back to your prior commentary that you expect long-term growth in this business of 25%, should we expect the same kind of growth of 25% over the revised growth figures for 2008 as we had in 2009?

Yes, that is my expectation.

Matt Robison, Pacific Growth Equities.

Congratulations on executing such a big topline this quarter. Your OEM mix, was there a second or third OEM that was -- in the past you gave some proportion on that. Maybe you could give us some flavor on that. And I'm curious with regard to the DSO, is it fair to assume that you have not had to change your terms with the OEMs and that you had some of these large overseas customers with -- that wanted extended terms on your OEM business was maybe a bit backloaded?

As far as the DSOs, they're mainly coming from customers which are not OEM customers. And as far as the revenue mix, yes; we did have (inaudible) from the other two OEM's. None of them reached the 10% level but they were participants (inaudible) revenue this quarter.

I guess if they were both very close to 10% then Nokia could've been 17 or 18% of sales. My feeling is that it was probably a lot more than that. Is that correct?

I prefer to stay with the numbers I have given and (inaudible) regarding which one of [those] but --

Did the business in India reflect some degree of pent-up demand? I recall that there has been some regulatory impediments toward some of your customers taking a lot of product in the last couple of quarters prior to this one.

One part of the pent-up demand and the boom that we see in India is a change in the regulatory environment. It's not the environment. It's the change in India. What happened in India was that everyone was waiting for expansion of their licenses. By the middle or towards the end of the first quarter, the government had started to allocate additional licenses to all operators in India where the seven major ones now own licenses for all 23 circles in India.

This started all of them and not all of them are customers of ours but started all of them in really both planning and rapid expansion to cover the areas where they got the licenses. And that's what I'm saying. I'm expecting this process to continue for the next at least two years.

What are your leadtimes now?

Leadtimes are relatively somewhere between 30 and 60 days depending on equipment.

And Tali, based on this portfolio business that you see that will get you between 56 and $60 million in sales this quarter, based on what you know of that, should we expect DSO to come down and deferred revenue to come up this quarter or no real change?

I think Q3 is quite a similar mix to Q2. So I am not expecting major changes in these [license].

And your noncellular service provider business, how did that perform relative to the last couple of quarters?

The other operators I suppose, right?

Yes, I guess so.

There was a certain decline in the mix between cellular operators and other operators. And cellular operators had a bigger proportion when I compare it to the (inaudible) quarter.

Do you see that as a focus of the other operators on select markets and trying to expect more cash flow to their business or is there any kind of a trend that you would point to?

I think if I'm looking at it from a trend perspective, mainly because the proportion is because of cellular growth and then the others were declined and within the other operators, most of those are WiMAX deployments. And because the numbers there are still very relatively small, it is sometimes lumpy. Sometimes I've an operator which for example I took in Q4 of last year (inaudible) larger jump in IP because of the -- it was a large WiMAX separator there (inaudible) deployment.

Okay, thanks a lot.

Kevin Dede, Morgan Joseph & Co. Inc.

Let me add my congrats on the sales numbers guys. Nice job. Tali, with the OCE (inaudible) out, what happens to other income in the third quarter?

The interest rate? The interest income?

Right.

The financial income?

Correct.

Well I think the financial income in Q3 and Q4 should be higher than previous guidance that they gave and I believe that the previous guidance was around $400,000 to $500,000 per quarter. I am raising this guidance towards the $700,000 per quarter financial income.

Okay and how about OpEx now that you're -- what do you see that falling out on given that you're adding another $600,000 on account of the exchange rate?

Well it means that OpEx will grow by at least $600,000 of course assuming that rates stay the same. It would be this amount plus the additional natural growth.

Okay. And, Ira, you mentioned Nokia Siemens network working on an IP TDM radio but that is for the (inaudible) line, right. There's no change in your relationship?

At this point there's no change in the relationship and we keep on pushing through (inaudible) both IP, mostly (inaudible) but IP as well in some of the deals.

Okay, targeting the high-capacity, right? Their radio developments were in the lower capacity lines?

Depending. They are planning on doing everything and they've been planning to do that for the last two years. So it's a wait-and-see.

Then can you speak to the carrier-carrier business you have in the US? Obviously you have chatted a lot about what you expect to happen with Sprint and Clearwire, but can you talk about some of your other business there?

As we said, in the US most of the operators are reevaluating their strategies at this point.

And that includes your carrier-carrier business?

That's including the carrier-carrier business, yes.

Larry Harris, CL King.

Yes, thank you and if I could add my congratulations on the revenue numbers in the quarter. I was wondering if you could speak to what you're seeing in terms of pricing trends or competition related to that in the marketplace and if you could remind us what the gross margins say on IP versus SDH radios are?

IP trends have not changed. We have been seeing a decline in a 10 to 15% in prices year-over-year. (inaudible) that is true on what I call same-mix basis. If you take the same type of a deal in the same geography on the same product after the same channel, that is what we see year-over-year as a trend.

I think that is affecting a little bit more from our side the mix changes. There are differences in the pricing worldwide which is part of the effect that you saw on the gross margins this quarter because of the mix change. It did affect the selling price but not because of the price decline as much as more Asia-Pac versus other places where Asia-Pac is a little bit lower-priced.

I think that is in general. If I'm looking at IP versus SDH, (inaudible) offering there's major price difference if you look at similar capacity. Although we do expect the IP to be little bit lower than the SDH will.

I guess offsetting that would be the product redesign?

Offsetting that will be the product redesign, yes.

Bill Choi, Jefferies.

First, a clarification on this gross margin guidance for Q3. You guys have a couple of products out this quarter. Obviously more of the IP-based FibeAir IP-10 would be next year but why wouldn't you get a more immediate benefit from the shift to the 1500B? And why wouldn't that improve if you have the same kind of mix and somewhat of a slight gross margin improvement in Q3 versus Q2?

If we look at going into Q3 versus Q2, we will be shipping more of the 1500 off which is the new generation. But I think that as an overall it will not have a significant impact still on the gross margin because most of it both for revenue recognition and other issues will show up in Q4.

All right. And then the reason you feel pretty confident about 35 to 36 next year is just more of the combined then for the new IP product as well?

Yes.

And, Tali, just on tax here, you have been fairly clear but I just wanted to clarify. So you've been paying 27% tax on the interest income. Are you including that in your total calculation of 5% for the Company?

Let's say yes. (multiple speakers) implicitly let's say yes, that was including (inaudible).

Generally I mean great job on executing in India which is a fast growth market. The other fast growth market, China, maybe you could talk about your opportunities there because I don't know quite about this year where (inaudible) issues. But in '09 clearly there's a lot of plans for major buildouts, possibly even 3G deployment. So can you talk about your positioning there and how you look at perhaps getting a bigger share of that market in '09? Thanks.

The question -- I think I will take it backward -- is there a market in China? Up until now, there has not been a market in China for microwave point-to-point (inaudible) at all. That had to do with in a way government directive and the way China operates where it is almost fiber to every base station. That is the (inaudible) the way they do the business. Very little microwave in China both from us and from other competitors at this point.

I'm not sure if the market will change with the 3G rollouts next year. We are monitoring it very closely hoping that if it will open to take a share of it. But I'm not sure it will open. My guess is it will not. There will be very little microwave in China.

Okay, thanks a lot.

Jeff Kvaal, Lehman Brothers.

My question is about the trajectory of the US. It sounds as thought it's likely to remain on its current pace I guess for the near-term. Ira, do you see a sense of when that might turn around for the one thing? And then maybe the second component of that, does the US business or the trajectory it's on have some impact on your gross margin structure?

On the first part I will say we are hoping and my guess is that beginning '09 we will see the pressure around [data] in some of the networks and things like (inaudible) and nuclear wire coming online into activity affecting that and starting to see some purchases in the US. By the way, pending all of it, macroencomics which is -- I think you're better equipped than I am in reading those.

Yes to the second question. I think part of what we are seeing on the pressure on the gross margin has to do with the mix. Part of it is pushing down the gross margins. As I said, it's first and foremost geography, deal size and channel. And all of those right now on the one hand work very nicely in our favor and pushing up the topline because we are positioned very well both geographically and (inaudible) with delivery volumes and through channels and OEM channels to capture the markets where they grow, it doesn't have an effect on the gross margin because this mix leads to a little bit of a lower gross margin than if we had a very strong US. And what you would expect is the US would come back stronger even at normal levels. It will also push the gross margins up.

Okay. Thank you, Ira. And then I guess this (inaudible) a little bit more deeply. Is there a different dynamic going on for you in the carrier market in the US versus the enterprise market?

The dynamics are that the enterprise market declined but not as strong as the carrier market. Let's remember that for quite a while our market in the US has been mainly carrier-carriers. We did have some of the other carriers in the market but most of the carriers did not deploy their own microwave (inaudible) carrier-carriers and because of the dynamics right now in the market, a lot of those are reevaluating their strategies.

Okay. Excellent. Thank you.

Rich Valera, Needham & Co.

I was wondering if you could comment a little bit more on how you feel your competitive position is at sprint-Clearwire? Obviously there's one competitor that has a strong position with both Clearwire and XOHM. How do you feel you will stack up in '09 when they kind of open up to potentially other microwave vendors?

I usually don't respond to those questions. We are (inaudible). We are a selected vendor for -- in some of those activities. We are in the lab. I think it will be a totally open game when the nuclear will start again and we are working -- I am always cautious (inaudible) and my (inaudible) situation.

That's helpful. One more just on WiMAX in general, how do you see based on your pipeline the trajectory of your WiMAX related business for the balance of 2008 and into 2009?

At least what we see from our (inaudible) right now, it is on the same level; maybe increasing a little but at the same level.

Okay, that's helpful. Thank you.

Jennifer Taylor,Royce & Associates, LLC.

Thank you. All of the questions have been answered.

Thank you. I'd like to thank everyone for being on the call with us and spending the time. I would like to also see you in person probably over the next quarter each and every one of you. We can follow on on the questions and have a more detailed discussion. I would like to thank everyone and have a good day.

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