Ceragon Networks Ltd (CRNT) 2009 Q2 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Ltd. second-quarter 2009 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 risk associated with Ceragon 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 conference 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 Q2, we experienced the same general business conditions as in Q1, with one notable exception. Our booking improved significantly, mainly in India. This is not surprising, since the region continues to experience very strong subscriber growth and operators continue to add GSM capacity.

Based on the recent order trends, we expect gradual improvement in revenue during the second half of the year.

The level of sales activity for upgrading networks is very high, but decision cycles remain longer than normal. For the -- fundamental strength and demand for high-capacity IP-based backhaul isn't apparent in our current results.

As operators plan additional wireless backhaul capacity, they are placing a lot of emphasis on future proof solutions that will avoid the need to replace equipment. This shows up mainly in two ways -- capacity and network architecture. Operators are planning high-capacity links to every base station. They assume 100-megabit need in the future. Even though they may not enable all of it immediately, they are happy to pay the incremental cost to avoid having to replace hardware and get the operational flexibility today.

Therefore, the whole market for wireless backhaul is rapidly becoming high-capacity right in our ballpark.

In addition, seller operators in both developed and emerging markets are putting a lot of focus on a migration path to all IP networks in their evaluation process. These operators consider advanced IP capabilities with [PTM] capabilities a must in all high-capacity backhaul solutions, even if they intend to use only TDM capabilities at first and use the IP features later on.

In developed markets, mainly Europe and North America, we are seeing a flood of RFIs and RFPs for the migration. Operators scramble to extend backhaul capacity in a way that will address the immediate exploding beta needs of existing networks as well as provide the flexibility to accommodate the migration to an all-IP architecture.

In emerging markets, operators will probably not enable IP functionality as quickly as in developed countries, but the requirement for IP functionality is just as strong.

Our recent new customer wins, Tata in India and Hutchison 3 Group in places like Australia and Europe, are good examples of both developed and emerging-market demand for IP-ready solutions. We think this is a very important trend that we will be able to capitalize on very successfully with our field-proven migration solution point.

For WiMAX as well as private-network segment, IP-only backhaul solution represents the entire market. But similar operators need both TDM and IP capabilities, which we provide with our Native2 technology. With our comprehensive FibeAir IP-10 product family, we can offer customers any combination of Native TDM and Native IP capabilities and avoid the need for expensive four gigabytes upgrades in the future. We expect this advantage to enable us to penetrate new customers where we haven't had a presence before.

As the macroeconomic environment gradually improves over the next several quarters, we will keep concentrating on maintaining our favorable product-cost advantage, enhancing our technology superiority, and on controlling operating expenses. In [air iable], we made further progress during Q2.

The main underlying growth driver for our markets' record subscriber growth and increasing data traffic are occurring worldwide. However, specific customer requirements vary somewhat by geography and segment. Therefore, we will also position ourselves to take advantage of developing opportunities for optimizing our resources in each region and segment.

For example, looking into next year, we see a lot of potential for increased business in the carrier state and local government and private network segments, based on the U.S. broadband stimulus project.

For the balance of 2009, however, the gradual improvement we are expecting will come from Asia, mainly from India. This growth is driven by capacity requirements of GSM networks. We anticipate yet another phase of growth in India to occur sometime after new 3G licenses are awarded during the second half of 2009.

Tali will give a more detailed picture of Q2. Tali?

Thank you, Ira. Revenues in Q2 were $42.2 million, compared to $55.2 million in Q2 of 2008. GAAP net income was $233,000, or $0.01 per diluted share. Excluding stock-based compensation, non-GAAP net income in Q2 was $1 million, or $0.03 per share.

Sales to the APAC region improved sequentially, amounting to 44% of total revenue in Q2. EMEA also improved, to 37% of total revenue. North America and Latin America declined sequentially, accounting for 9% and 10%, respectively.

OEMs accounted for 29% of total revenues in Q2, and we had one 10% customer during the quarter, Nokia Siemens Networks, our OEM partner.

The non-GAAP gross margin in Q2 was 32.1%, mainly reflecting the geographic shift in revenues relative to Q1.

As a result of our continued emphasis on cost control during Q2, our non-GAAP operating expenses declined by almost 10% from Q1, to $12.9 million. We are pleased to report that we have generated over $5 million in positive operating cash flow again in Q2, and at the end of Q2, cash and cash investments totaled $96 million.

We continued our share repurchase program in Q2, completing $16 million of the $20 million authorized by the Board. Within a slow collection environment overall, our efforts have continued to be successful, and we remain confident in the collectibility of our receivables. Our DSOs declined to 212 days, still high by historical levels due to customers' ongoing focus on cash conservation.

Our inventory increased to $42.2 million, due to an increase in unrecognized revenue. In Q2, over 45% of our inventory represented products already shipped but unrecognized as revenue. Our inventory related to ongoing operations actually declined sequentially from Q1.

Our booking improves in Q2 and we're well above a book-to-bill ratio of one. We continue to have more than one quarter of backlog.

With the improvement in order patterns, we have somewhat better near-term visibility. We expect gradual improvement in revenues during the remainder of the year, accompanied by a gradual moderate decline in gross margin, since most of the improvement is expected to come from customers in India. Specifically, we are guiding to revenues of $42 million to $46 million in Q3.

In view of the geographic mix expected during the second half of the year, we will continue our strong emphasis on tight expense control and working capital management in order to remain profitable and continue to generate positive cash flow.

Now, we will be happy to take your calls.

(Operator Instructions). Ittai Kidron, Oppenheimer & Co..

Thank you very much. Good results. Couple of questions. First, on the operating expenses. Tali, fantastic job. How much more is there to do that you can do over there and how are you doing it with the exchange rate not really being that much in your favor here?

I thought with the exchange rate actually we hedged the entire year upfront.

At what level?

Level of close to four shekels per dollar, especially in the second half of the year. So I'm not really sensitive to changes that are -- may be happening in this way.

As for expenses, our goal is to stay quite flattish for the rest of the year. It's a challenging goal, and we are taking it upon ourselves.

Okay, and taking your comments on how your mix is going to change as given where you are seeing the demand, should we assume gross margins going lower from 32? And is there a risk you see in breaking the 30% level?

As I said, we believe that they will moderately decline for the remainder of the year, but no, I don't think they will go under 30%.

And lastly, with regards to the Accounts Receivable, if I'm not mistaken, a big portion of that is related to some of your customers in India. And so, as you are seeing increased demand right now from that region, what are you doing in order to supply that demand, yet at the same time not get again in situations where 180 days is the normal payment timeframe? Are you seeing a lot of demand from those who owe you a lot of money? In which case, are you using that to make them pay, finally?

Yes. We definitely are putting pressure on customers who are late there, and unfortunately, several customers in India are late. Those that are ordering more, we are putting pressure on them to pay first.

Most of the large orders that we recently received were not coming from customers who owe us money, but those who owe us, we will not deliver additional.

And let me take the opportunity to speak about customers' receivables. Seems like I made a mistake in my part before when I spoke about the DSO. DSO is 112. I probably said 212, so I apologize for that.

Maybe I can ask one on Ira. Ira, when do you think LTE really -- all of this demand that you are talking about and how customers are trying to future-proof their networks, when do you see Europe being a much bigger part of the equation?

What's really happening, as I said, on the sales level activity, a lot of RFIS, RFPs lead trial. Anyone who is redoing their backhaul network today is planning on high-capacity Native2, both TDM and IT, as the backhaul methodology.

People are rebuilding -- planning on rebuilding the network starting beginning of next year. Where they're really aiming at end of 2010, 2011 towards LTE deployment, but meanwhile, they need to support the huge growth in data classic rates or [righteous VTA] technologies coming from whatever handheld device that you want.

Good luck, guys.

Amir Rozwadowski, Barclays Capital.

Thank you very much and good morning. I was wondering, if we could -- you'd mentioned that India seems to be improving and that gives you a little bit more comfortability moving into the back half of the year. You'd mentioned, on the previous question, about Europe. What about trends in North America here? How should we think about things there?

Trends in North America are very similar to Europe, where you see the big operators really planning on moving towards LTE with initial deployment sometimes toward the end of this year, 2010, but really needing to support a huge amount of data traffic coming on the network as of now.

So we see exactly the similar trend. A lot of high-capacity IP TDM mixture of backhaul.

Okay. So perhaps -- should we expect revenue growth from those trends at some point in 2010, is the way to think about things?

Probably towards the end of this year, really close to the end of this year, and 2010, yes.

Okay, okay. And you have pretty good visibility into that towards the end of this year?

Yes.

Great. Great. And then, you had mentioned in terms of timing of India 3G licenses, another sort of wave in deployment. How should we think about that? Obviously, that's been a bit of a moving target in terms of regulatory actions, but do you feel comfortable in terms of that being a nearer term or at least more visibility when it comes to the potential opportunity there?

It will occur. As you said, it's a moving target. And I think if you ask the operators in India, it's a moving target for them as well. It's probably, again, either real late in the year or beginning of next year, the 3G will come on as the next wave in India.

And then, of course --

But until then, we will see a huge amount of GSM deployment.

And then, the size of that 3G opportunity, if we were to think about it in comparative magnitude to what has happened thus far in the GSM builds, for example, is that much larger for you folks?

No, it's probably about the same size.

Great. Thank you very much for the incremental color.

Thank you very much, Amir.

Matt Robison, Wedbush Morgan Securities Inc..

Thanks for taking the question. Maybe you -- you covered some of the high-level commentary about North America. Can you give us a little more color on just the dynamics with the, I guess, essentially a 50% sequential decrease in revenue, both in North America and Latin America? And then maybe touch on some of the high points of the EMEA business?

Then, also, you mentioned gross margin, should we think of that as just a broader pricing effect in the market? Or is it more mix-oriented with India and OEM? Or is it -- perhaps is there one way more than the other? So start with the regional, though.

I'll start with the regional and get to the gross margins. With the regionals, we have to remember that our base in both North America and Latin America at this point is a relatively small number of customers, where we see ordering cycles within the customers.

And what we showed this quarter, by the way, in both regions is cycles which were for customers that were strong last quarter had, in a way, a pause in ordering this quarter, where we expect them to come back either next quarter or the quarter after that within the ordering cycles.

But the base, if you -- the whole number is not as large, so there is fluctuations in that. And we expect to add additional customers in both regions over the next few quarters, based on our success with our IP solutions.

As to the gross margin, as we always said, the major factor in geographical mix on the effect of what's happening to the gross margins, and that's what we are seeing within the numbers.

What was the strength in EMEA?

Strength in EMEA had to do with some of the customers starting to move towards IP. You saw an announcement around Hutchison 3G -- sorry, Hutchison 3 Group, and some of it is customers in Europe as well.

Okay. And Tali, what -- I just have -- I didn't catch quite what you said about book-to-bill. Can you repeat that for me?

I said book-to-bill was well above one.

Oh, strong. Thank you. That's it for me for now. Thanks.

Bill Choi, Jefferies & Co..

Thanks. Did you guys give out the percentage that is IP-related this quarter?

No, we didn't give it, but I would say IP percentage was 40%.

Okay. And any sense that we could get on what percentage of that is kind of pure software versus the [floral] capacity increases on IP-10?

At this point, I would put it as really capacity increases at this point zero. It's too early in the sales cycle that we see capacity increases. What the customers are really buying is what they need as a capacity for today. Not what they need for the future.

And we expect them, at some point, to buy capacity increases, but I'm waiting to see that before -- we will talk in detail when I can talk about the trend.

Ira, you did mention that most of the discussions today are already trying to future-proof to 100 megabits and much higher capacities. In the upcoming sales cycle, when RFPs turn into actual orders, are we thinking higher capacity out the door with the software enabled? Or software licenses down the road?

Mainly, what people are ordering today, they are ordering the equipment either almost as a TDM mid-capacity, with very little IP or IP in the ranges of 25 to 50 megabits for the base stations. They are not there yet.

The plan for, I would say, the rest of 2009 and most of 2010 is around total TDM and IP capacity in those ranges. In the low tens, at this point.

Okay. But the RFPs that are currently coming on board, even in 2010, that's going to be in these ranges? And not higher?

No. The RFPs require you to be able to do 100 and above.

Right, but the orders off of those RFPs are not expecting it?

The orders off of (multiple speakers) RFPs are for the -- not expecting it for the low capacity. Most of it.

By the way, it depends -- just think of it if you do a network architecture, you have a lot of links that do 25 megabits. Very quickly you have the rings, or in the aggregation, rings which do 100 and 200 megabits in the network. So you get a mixture.

Okay. So a lot of good news on the RFP front here. Can you step us through some of the RFPs that's been existing that have chances to close? I think they were more Southeast Asia-driven earlier in the year. How are those regions going along in existing RFP coming to a close? Has that trend improved any?

They are moving along, all of them, in different stages. Okay? And we have seen a lot of activity. I'm seeing a lot of them moving ahead because we see a lot of lead trials and partial field trials with our equipment in some of the places, which doesn't mean yet if we won at the endpoint, because a lot of the operators are testing out the concepts at this point.

Okay. And also, can you clarify your comments around a much better 2010 in private networks in the U.S.? I'm curious if you've seen any specific indicators here that would get you more positive on the private networks part?

The indicator -- I think my comment was that what we see in the U.S., we should see two trends. One, as I mentioned before, as we talked in one of the questions, which is the carriers need to upgrade their network to support a lot of data capacity.

And the second one is we see a lot of activity around newer broadband based on the government stimulus plan, which goes to private network, government, municipalities, local, state, smaller carrier types of activities.

Okay. Primarily government-related?

It's government stimulus money-related, but the stimulus money goes in all sorts of directions.

Okay. Then, one final question. Can you compare that 45% of inventory already shipped and not recognized as revenue, that 45%, how that compares in prior quarters, last quarter and a year ago?

Last quarter, it was 40%.

Okay. And a year ago?

Probably less.

Okay, great. Thanks.

Blaine Carroll, FTN Equity Capital.

Thank you. Hi, guys. Tali, just to follow up on that previous question, why is the amount of inventory or a product shipped staying in inventory not being recognized?

We have two types of transactions. One type is we sell equipment and this is debt, so we recognize upon delivery. And the other type is we ship the equipment, install it, and also have to get acceptance for the installation and the payment of the equipment, as well as the installation, depends on this acceptance. This is when I delay the recognition.

Okay. And that's sort of my question. Are the customers pushing out that acceptance in order to strengthen their balance sheet? And then, I actually want to roll that forward as well to the broadband stimulus here in the U.S. and see if there's any revenue recognition criteria that's going to be attached to that, as well.

No, I would say that we are just having -- it's an indicator that we are having more business of the second type, of ship, install, and get acceptance, which is related to both.

And then, any issues that you see when the broadband stimulus package picks up here in the U.S. market as far as booked/shipped/recognized? Or waiting on revenue recognition because of customer acceptance, anything around that?

It's too early to say. If I have to guess, my hunch would be that most of the projects will be of the same -- of the delayed-recognition type.

(multiple speakers) delayed recognition?

Yes. But that's a hunch at this point.

Okay. And then, you mentioned that you had a quarter's worth of revenue in backlog. But I guess the question is, how much of that is shippable and recognizable? And how booked were you going into this quarter? How much turns business do you have to have in a given quarter?

A lot of the backlog that we have is of the type that we still have to install and recognize. That's why, as Tali gave guidance for this quarter, we see very gradual improvement this quarter of $42 million to $46 million as a guidance. Although we have much more than a quarter for backlog.

So -- that's because we will be converting the backlog only gradually into revenue.

Makes sense. And then, Ira, how long does it take from the time that you receive an order to ship the product? What is your sales cycle?

Well, that's not the sales cycle. That's the order-to-ship cycle. The order-to-ship cycle is somewhere in between 30 to 45 days, depending on the equipment. And that's chipping. That's for the first type.

If you look at installation, that can stretch out over a four- to six-month period.

And then, last one for me, Tali, the share count that we should use into the third quarter?

More or less the same share count, I would say. On one hand, I may buy more shares, but most of the shares have been purchased. 80% of the plan has been purchased already. So now, the question is, of course, the price in the market, which does have an impact.

And then, how many shares did you purchase during the last quarter? I think you gave the aggregate number, but not just for the quarter.

It was not a large amount.

Okay. Although the shares went down by about 4 million shares.

Yes, but a lot of the impact is still coming from the previous quarter because it's an average for the quarter.

I understand. Okay, thanks. Good luck.

Thank you very much.

[Tom Ehrlich], RBC Capital Markets.

Thanks for taking my questions. First of all, Tali and Ira, can you give us a little sense and maybe size the opportunity you see with the U.S. stimulus plan? And maybe I didn't get it on -- maybe it was answered before, but when do you expect orders or signed contracts or distribution of funds in the U.S. stimulus plan?

I'll start with the second part, distribution of funds, and orders is probably late fourth quarter, beginning of next year. You read correctly what's happening in the market, but that may also be delayed.

And sizing, we are still gauging that number and seeing how much we are involved or not. I think that we have the support -- a push within the U.S. market.

And do you think that when orders would start flowing, when you get your chunk of the backhaul in the U.S. stimulus plan, would that support margins -- growth margins enough to get them to, I don't know, early, I don't know, early 2008 or even back to where they were a quarter ago?

Yes, I believe that margins from the U.S. will improve the overall margin, yes.

And another question is, how do you see the current landscape with greenfield carriers? Or is credit still tight for these guys? Or are you seeing some improved trends there?

As we see worldwide, the main issue with greenfield operators and -- our credit is tight, although this quarter we saw two orders from new greenfield operators in the Asia-Pacific region, which are greenfield. Both of them are very well-financed.

That's good to hear. Last question for me would be on the OpEx side, on the cost side. You guys have been very impressively lowering your operating expenses for the past two quarters. And could you give us a sense on where did that impact? In R&D, or sales and the marketing? Where are you cutting edges? Is it still just discretionary things?

As we said last quarter, it's mainly around the discretionary things and being very, very focused. So what we did, and as you can assume in all regions, we looked very carefully and said, okay, for example, in sales and marketing, in this place or that place, our success rate is a little bit lower, or our potential is lower, so we have reduced expenses in those areas and focused on where we have a higher rate of success.

Similar in R&D, we chose which projects which are mainly focused on the IP integration and our IP-10 family of products, and pushed those products forward. It slowed down some of the other products.

Fair enough. Thanks for the color.

Steve Ferranti, Stephens Inc.

Can you talk a little bit about the linearity of order trends during the June quarter? Did you see orders pick up in the second half of the quarter?

Yes. It was very significant. We saw -- I won't say [more], but a significant part of our bookings in the third month.

Okay. And I guess -- if you look across the geographies outside of India, what areas do you think might drive the sort of a recovery here? Will it be EMEA? Maybe North America? What do you see being sort of the next region out of the gate in terms of a recovery in orders?

My guess is that it will be North America and then EMEA, or maybe at the same time. We think that North America will come out first, with EMEA a little bit after that, mainly because the carrier is under a huge pressure from the competitive positioning for providing data -- mobile data services.

And if a year ago we talked and I said, okay, most of them did not have the competitive landscape with all the devices, which the BlackBerrys and the iPhones and the Palm Pre and others, all of them running full data, I think the carriers are under pressure to provide much better data services.

Yes, and do you guys get any insight in terms of how hot carriers are running their networks today? And I guess -- you know, kind of what we're all thinking about, is what's going to be the trigger or the catalyst, really, for the wave of spending that I think folks are expecting to occur, to actually take place?

We are in some carriers, not in all. We know how hot they're running the networks, which is relatively hot. In some places, not in all geographies, but in some places, it is relatively hot the way they run the networks.

If you ask me what the spending cycle is, backhaul would be one of the areas where it'll be spent first, and then the next wave will be when they will start doing LTE data services.

And then, last one for me, I guess as you have discussions with your customers in India in terms of their 3G planning, do you get a sense for -- in terms of architecture, how they are planning to roll backhaul networks out to support 3G? Will they be upgrading existing backhaul sites? Or will it be parallel networks? Any incremental color you can provide there?

If you look at 3G versus the GSM, there are two areas on the network that you need to handle. One will be upgrading existing networks, but you have to remember that in the 3G networks, you have a much higher density of waystation. So they will have to add a significant additional number of waystations to the one that they have, which will create greenfield opportunities.

Okay. Great. That's all I had. Thanks, guys.

Thank you very much.

Ilya Grozovsky, Morgan Joseph & Co. Inc..

It's Ilya Grozovsky here. I just had, I guess, a housekeeping question. What's your DSO target? Where do you see that going?

My target is to reach 80 to 90 days.

And how many quarters do you think it will take to get there?

It's a little bit early to say. It really depends on geographical mix. And right now, we don't have huge visibility, as we described. The visibility is mainly in India.

I believe that as we go along, we will start having better visibility to other geographies, and then I will be able to estimate the geographical mix.

Okay, thank you.

Jonathan Kreizman, Oscar Gruss & Son Inc..

Firstly, with gross margins, I think you mentioned in the past, you kind of targeted a mid-30%, which now I see is changing in terms of what you are seeing going forward. So basically what I want to understand is, is this related only to pricing pressures? Or also to production costs, which you mentioned in the past were getting lower and helping you push margins higher?

Look at the margin question again. There are two -- I would say three factors playing in [more] than the market. The major factor that is affecting the gross margin is what we call geographical mix. The more we see Asia-Pacific sales, the lower the gross margin; the more we see EMEA and North America sales, the higher the gross margin. There's a little bit of difference between the two, but that's where you see the trend.

The other part is do we see heightened price pressures in there, which is part of your question on the pricing. The answer is no. Within every geography, yes, we see the classical price pressure and price declines that are happening in each and every one of the geographies over time. We counter that by being very focused on reducing our production costs, or the product cost in general, which is production costs and a lot of design efforts to come up with cost-efficient products. And that's what's playing in both directions.

So summing this up, what is your long-term perspective or model on gross margins, say, going into next year, or how long you can see this going on?

Our target is still mid-30s, and we believe that going into next year, we will see gradual improvement in the gross margin towards this target.

Okay, great. Now, a few words on competition. Are you seeing any substantial changes in market share within your competitors? For instance, we've seen Huawei and [ZTE] strengthening in this past year. If so, on whose expense are you seeing this happening?

I think you mentioned the major change in competitive landscape is that we started seeing Huawei growing in the microwave space. And mainly, it's not on our share. It's a lot of -- still a lot of low capacity. I think they're taking market share mainly from NEC within this space.

I see. Last question on my side, IP-related revenues were now 40% in this quarter. I think you mentioned previously that you expected to see about 80% revenues by the end of the year coming from IP-related products. Is this still standing?

80% is a very high percentage. No, I don't think we have mentioned that.

So what percent would you be expecting at this point? At the end of the year?

I believe it continues to grow in a gradual rate, and may reach 50%.

50, five oh, right?

Five oh, yes.

Okay. That's all from me. Thanks a lot. Good luck.

Larry Harris, CL King & Associates.

Good morning. Congratulations on the orders. Really good. With respect to R&D, obviously you've done a very good job holding it down and you've prioritized various projects, but as we move closer to, say, shipments and sales of IP radios to some of the global carriers next year, would there be an increase in R&D as you maybe need to customize specific solutions for different carriers?

Maybe, but only slightly -- very slightly.

Great. And with respect to the competitive landscape, you've spoken with respect to Huawei on the TDM side. Have there been any significant changes on the IP side, say, with respect to Ericsson or DragonWave or Harris-Stratex or other players?

I think all the players are in the IP space today either offering products or mainly offering roadmaps. Okay? And as you mentioned, Huawei, we see them competing on the IP space as well, not only on the TDM side, and we see Ericsson with products, and we see others coming up with products.

Mainly what we see today from the -- are mainly lab tests, is that we still have a significant lead in the market with our capabilities. But that does not mean that when people do selection and we stay the only -- choice.

Good. Understood. Thank you.

Thank you very much, Larry.

Matt Thornton, Avian Securities.

First question, just following up on a previous, actually. The fact that you guys are exiting 2Q with a fairly strong backlog, we've got some delayed revenue recognition in 3Q, we get into 4Q, we've got normal seasonality taking place. Could we expect a better sequential bump into 4Q than kind of what you guys are looking for in 3Q?

It's too early to tell at this point as some of the backlog we are coming in will be spread out over three or four quarters -- processes we install. To have a better bump in Q4 than in Q3, I will first have to see additional orders from North America and EMEA coming online.

And then, I just wanted to grab some additional color on some of the recent wins, particularly Tata and Hutchison. When you look to the back half of the year, could either one of these guys be 10%-plus customers, is my first question? And then, on Hutchison, what is the timing of recognition there? I know you mentioned you recognized some in 2Q. Is that a 2Q, 3Q, 4Q kind of thing? Any color around that?

Will they be a 10% customer? Maybe, but I'm not sure any one of them will be a 10% customer [within]. Maybe one of them. I'm not -- it depends on how exactly the numbers there. One of them might be.

Tata is -- most of it is project related with acceptances. Hutchison 3 -- in most of the Hutchison 3 companies, we do not install. But it also depends on -- some of it is one-way, some of it is the other way.

So it's fair to say we probably saw most of the Hutchison 3 revenue recognized in 2Q, then, or -- ?

No, because it's -- remember, what we announced is we are a supplier to the Hutchison 3 Group worldwide. We will see differing projects as different operators worldwide will come online with a position towards IP, and they are just starting.

That's helpful. Then, a couple of other housekeeping items there. What was the mix in the quarter, service provider versus private networks?

It was about 90% service providers.

And the mix of new platform sales? I think it was about 35% last quarter?

It's about 45% now.

Perfect. And then, just last question, I know on the previous call, a lot of the pricing pressure in the previous couple of quarters, 4Q and 1Q, have been driven by currency volatility. Now that things have stabilized to some degree in the currency markets, are you seeing some of that pressure let up?

It's not that the pressure has let up. It's, I think, the operators are more -- know what they are doing. I think part of the pressure was that it was very hard for them to predict where their budgets and do the conversion between local currency to U.S. dollars for worldwide purchasing.

So it's much more rational and -- known type of discussion and a game with them, which helps a little bit in moving the deal a little faster forward.

Perfect. And then just one last one from me. I just want to clarify and make sure I go in -- I understand this correctly. So for gross margins, the back half of the year, a lot of the [ebit] rebound is being led by Asia, and that's the primary pressure on gross margins. As we get to 2010, you're thinking the North America market and some of the other market start to come back a little bit, a little more of a normalized mix, and we can kind of get back to that mid-30% range. Is that the right way to think about gross margins?

That's the right way of thinking about it.

Okay, perfect. Thanks, guys.

James Faucette, Pacific Crest Securities.

This is Nathan Johnsen for James. Thanks for taking my question. I was wondering if you could just repeat what your expectations for operating expenses are in Q3 and Q4?

Yes, the expectation is that the expenses will stay flattish, at around the same level of Q2.

Great. Thank you very much.

We have no further questions. Please continue.

I would like to thank everyone for participating on our call this quarter. And I would like to continue the chatting with you in discussions, both one-on-one and during the quarter, as we meet face to face in different places, both myself and Tali. Thank you very much for joining us.

Thank you. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.