Ceragon Networks Ltd (CRNT) 2009 Q3 法說會逐字稿

Thank you, ladies and gentlemen, good day everyone. Welcome to the Ceragon Networks Limited third 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 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 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.

As expected, Q3 reflected the beginning of a trend towards improving revenues led by India. Q3 was another quarter of strong bookings, reflecting the fundamental strength in demand for high-capacity backhauls, and we expect the revenue growth to continue into 2010.

Sale activities remain high as customers cope with the challenge of handling more subscribers and more data on their existing networks. As they plan the network migration to support IP for deploying new networks, demand is increasing for 4G-ready solutions, both for cellular migration to LTE and for WiMAX networks.

Recent deal wins illustrate this demand. Our global supply agreement with Hutchison 3 Group relates to plan migration from TDM to IP architecture using our Native2 technologies for various cellular networks around the globe, supporting the large increase in data traffic.

Meanwhile, greenfield WiMAX networks in the US and other regions require a Native IP capability. Our solutions support all-access technologies, and these wins are examples of our ability to penetrate various types of new customers with our IP-10 platform.

It's worth repeating that the whole market for wireless backhaul will be moving towards high capacity. Operators are seeking future-proof solutions that will avoid the need to replace hardware. In many places like India, for example, operators are rapidly rolling out GSM capacity in response to continued strong subscriber growth with an eye towards 3G and strong data growth in the future.

We expect demand from India to remain strong as Indian operators acquire additional spectrum in upcoming auctions, and continue to deploy aggressively. Meanwhile, in the rest of the world, future-proof high-capacity backhaul projects are still mostly in the planning and RFQ stages with orders likely to pick up sometime next year.

In all regions we are seeing a trend to more turnkey projects to supplying complete networks. These projects mean acceptance milestones which will affect revenue recognition. For example revenues from the equipment we are shipping and installing in turnkey projects now will be recognized mostly in 2010.

We are finding that more RFPs contain a requirement for local professional service capabilities upfront rather than allowing the vendor to land the deal and then add professional services people in the region. When it comes to technology we're constantly number one or number two, so we are looking to increase our professional service capabilities as an important strategic priority in order to enhance our ability to win more large turnkey projects in the future.

Looking ahead to next year we expect a continuation of the quarter-to-quarter improvements that began in Q3 with more operating leverage as revenues improve.

Tali will give a more detailed picture of Q3. Tali.

Thank you, Ira. Good morning, everyone.

Revenues in Q3 were $44.7 million, a sequential improvement from Q2. $58.1 million in Q3 of last year was our peak revenue quarter so far. And we are pleased to be moving that direction again.

GAAP net income was $1.1 million or $0.03 per diluted share. Excluding stock-based compensation, non-GAAP net income in Q3 was $1.8 million, or $0.05 per diluted share.

Sales to Asia Pacific region continue to improve sequentially, amounting to 47% of total revenue in Q3. EMEA region also improved, reaching 39% of total revenue. North America improved to 10% of revenue; and Latin America declined sequentially to 4% of total revenue, reflecting the ordering pattern of a large customer in that region rather than any change in underlying demand.

OEMs accounted for 21% of total revenues in Q3, and Nokia Siemens Networks, our OEM partner, was again a 10% customer. Another operator in India was also a 10% customer in Q3.

The non-GAAP gross margin in Q3 was 31.9%, only slightly lower than Q2 even though revenue in India increased, reflecting the success of the more cost-effective IP-10 product in that region. Non-GAAP operating expenses remained steady at $12.9 million.

We generated over $4 million in operating cash flow in the quarter. And at the end of Q3 cash and cash investments totaled approximately $100 million. We continue to be successful with our collections. Nevertheless, our DSO slightly increased to 116 days as a result of some more business from the Asia Pacific region where payment terms tend to be longer than normal.

Our inventory increased to $50 million reflecting more turnkey projects, as Ira described. In Q3 about 50% of our inventory represented products already shipped, but unrecognized as revenue.

Our book-to-bill ratio continues to be well above 1. Backlog continues to grow with more turnkey projects which will convert to revenues gradually into 2010. We continue to expect improvement in revenues into next year with most of the near-term improvements expected to come from India. As long as India remains a high proportion of our revenue mix, we expect our gross margin to be under pressure.

For Q4 we are guiding for revenues of $48 million to $52 million. Going forward, we will continue our strong emphasis on further cost reduction and tight expense control. Our aim is to improve operating leverage as the revenue improvement continues into next year. How much progress we can achieve will be highly dependent on the geographic mix and deal size, which is difficult to predict at this stage.

Our target for 2010 is to reach or surpass the halfway mark towards our long-term goal of 10% operating margin.

Now we will be happy to take your calls.

Marissa?

(Operator Instructions) Thank you. The first question comes from the line of Amir Rozwadowski, Barclays Capital. Please go ahead.

Thank you very much, and good morning, Tali and Ira.

Good morning.

Hi, Amir.

I was wondering if we could drill in a bit in terms of the overall activity that you're seeing, Ira. It seems as though Asia Pacific still remains a very strong region of growth for you. But if we take a look at North America, North America seems to have also picked up. I was wondering if you could give us a little bit of color in terms of the activity that you're seeing from the region and when we should think about timing for broader potential RFPs around high-capacity backhaul within the region.

Okay. If I look at the broad picture I think what I'm referring to is we see Asia Pacific mainly in the -- continuing very strong growth. In the other regions, I think, in all of them, we have seen an increased level of activity. But we still don't see in all of them a significant jump in order pickup. It's mainly a lot of level of activity. It's some improvement.

Now, you mentioned, yes, we saw a little of pickup in the US, we saw similar things in Europe. But those, from my perspective, is more starting to grow. We haven't seen the very large RFPs. Some of them are in progress at different stages, being converted into significant orders and sales at this point. And we expect those to be somewhere in -- somewhere into 2010, probably middle to second half.

Okay. So middle to second half of 2010 is when we should think about it. But in terms of activity level, and your discussions with your carrier partners, those seem to be better than they were six months ago, or how should we think about that?

A lot better than they were about six months ago, yes.

Great. Thank you very much for the incremental color, Ira.

Thanks, Amir.

Thank you. Next question comes from the line of Matt Robison, Wedbush Securities. Please go ahead.

Hey, good morning, and congratulations on the quarter and the cash flow.

Good morning, Matt.

First up -- first of all, headcount and OEM percentage.

Headcount was 455 --

Tali, you're on mute.

Okay. I will repeat. Headcount at the end of the quarter was 455 employees. OEM portion was 21% of revenues.

Okay. And your deferred revenue was more than doubled sequentially to what looks like a record high, was that -- does that correlate with what you -- with what you're talking about with the turnkey programs?

Yes, absolutely. You see it, on one hand an increase of inventory because we do have much more inventory at customer sites waiting for acceptance; on the other hand customers did give us advance payments. So you see it in this deferred revenue line item.

And your accounts payable stretched. Should we expect that to come back this quarter, or is this the level where you're going to sustain it?

No, this is a new level, reflecting more business.

Okay. And how should we expect the turnkey to change gross margin?

Well, that -- I think that still geography is the major issue, less than whether it's turnkey or not.

And --

So I feel --

And not having a lot of the -- a large staff of folks in the field to deploy networks, how do you address the need to come up with these turnkey resources?

What we do on the turnkey project, we provide mainly the supervision, planning, and commissioning side. The actual staff are the large staff which do the hard work, which -- what we call climbing the towers -- is not our staff, we use local subcontractors in all regions which will give us a lot of flexibility and the ability to do those turnkey projects throughout the different regions, and the ability to sometimes move teams around.

Yes, the US business is picking up a bit. Was that more a reflection of private network activity, or was that more still mobile networks?

It's mobile and WiMAX networks.

And it was interesting to see the revenue increase with sales and marketing down sequentially. Is that just a reflection of the austerity measures you took earlier in the year or is there a channel effect?

No, it's mainly the effects of steps we have taken during the year. And we're seeing some of those effects coming into Q3.

So, Tali, getting back to the balance sheet and the cash flow, was this maybe -- or was this a record cash flow quarter for you? It had to be pretty close.

Yes, it is.

Would -- could you --?

Yes, this is actually -- actually, so far, we were positive the entire year. We plan to be positive -- we were positive for the three quarters, and I do believe we will be positive for the entire year, which is the first time for us.

Okay. And so you -- the outlook for the current quarter looks like it will still be a solid cash flow performance.

This is correct, yes.

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

Thank you, Matt.

Mr. George Iwanyc, Oppenheimer, your line is open.

Thank you for taking my questions, Tali and Ira.

Good morning, George.

On the OpEx side, you've done a great job there, keeping costs under control. Just following up on the professional services comments, do you expect that to have much of an impact on what you are going to see on the OpEx level?

Not significantly, but slowly we might see during next year a little bit of effect on the OpEx levels.

In the near term?

Because, as I said, we need to build some of the professional services capabilities in some of the regions.

Near term, is it still flattish before we get to 2010?

The expenses?

Yes.

Yes --

Okay.

No, I believe that we will see some increase in Q4, which reflects a higher level of business.

Okay. And following up on the gross margin comments on mix, do you still see something around 32% as an area to look for with the strength you're seeing in India, or is it something that can get us closer to the 30% area?

Well, I cannot be so accurate. But I already said last time that it may go down towards the 30%. So we will have to see the final mix. But this is the range more or less.

Okay. And just one last question. The activity you're seeing on the RFP side, future-proofing and preparing for 4G, whether it's LTE or WiMAX, what type of capacity difference are you seeing the carriers prepping you for?

What we are really seeing is that if current 2G networks people are talking on single base stations around the 5 megabit to 10 megabit, they are already talking about moving it up to 25 megabit, around 3G class, HSDPA type of technologies, where they plan on 50 megabit and 100 megabit per base station towards the 4G and the WiMAX. So looking at WiMAX deployment worldwide at this point which is the early incarnations of 4G technologies, most people are already planning 100 megabits per base station.

And have you seen any need yet for software upgrades yet?

You're probably referring to license upgrades on the capacity. In some places we have seen that starting to happen at very low volumes at this point.

Thank you very much.

Thank you very much, George.

Thank you. Mr. Blaine Carroll, FTN Equity Capital Markets, your line is open.

Yes, thank you. Hi, Ira.

Morning.

Hi, Tali.

A couple of questions if I can. First of all, Ira, as you're talking about them preparing for 100 megabits per site, are you seeing anything different on the competitive front? I don't mean your normal competitors. I mean maybe some competing technologies that are coming in.

Okay, from a competing technologies, when you're looking at that, the only small change we see is that in some places we see the 70-gigahertz, 80-gigahertz type of radios, which are very high-end frequencies coming in in very low volumes because of the range. They can service only a very short range relative to the distance between the base stations.

The other thing that we see around the technologies front, we see more people thinking twice and three times about putting in fiber where it's available, because that's where -- how they can get the different things out there.

So that's the feeling, and I'm looking at it as that's mostly the technology that -- we see a little bit of change in the landscape. On the other hand, we see a lot of people saying okay, if we need to replace E1/T1 they will go to microwave a lot more because it's quicker, cheaper to get the 100 megabits to the base station.

All right. Is it fair to say that they're looking to the fiber where maybe some base stations have been daisy-chained together, and maybe it's the last link back to the NOC.

The last link to the NOC is usually fiber.

Okay. All right. And nothing from pseudowire or anything like that?

No. Now you're talking about a different -- a totally different story which has nothing to do with the capacity. What we see mainly right now as a requirement for the deployments is what we call Native2, some people call hybrid, which is base stations interlinked both with TDM E1/T1 links and IP as a requirement, starting sometimes with a lot of E1s, a little IP, and then shifting towards more IP, less E1s.

In some deployments people talk about going all IP and only IP, something we can do, and then overlaying the TDM over IP where pseudowires is one of the solutions. And we have seen differing solutions coming from different base station vendors or sometimes people like Cisco or Juniper on how to overlay the TDM over IP when it becomes in small quantities.

Okay. And then two separate type of questions, as far as the orders go, maybe for Tali, how far out are the orders extending right now? I understand revenue recognition in 2010. But how far out are the orders extending?

And then secondly on inventory that's currently out there at the customer site, is there more inventory, less inventory, are they basically installing everything they have, or is there a little bit of inventory build out there right now, and you're going to wait for some of those radios to get installed?

Well, they are trying to install as fast as they can, and to overcome issues, but yes, we do see the installation going on. So everyone is trying to be effective, not to accumulate inventory of no need and to install as much as fast as possible. Of course, it's supposed to -- it does take time. And the speed of the installation is still unknown. Therefore, we -- it's little bit difficult to predict revenue recognition timing.

Okay, thank you.

Thank you very much.

Thank you. Next question comes from the line of Steve Ferranti, Stephens Incorporated. Please go ahead.

Hey, thanks, good morning.

Good morning, Steve.

Ira, in -- just getting back to some of the bigger RFPs that are out there regarding LTE buildouts in North America, to what extent do you think carriers, in terms of at least the initial rollout, will be looking to use fiber maybe more than wireless backhaul techniques? In other words, some of the initial cities that -- I'm imagining that they're going to hit some of their more populous cities at first, which would in theory at least have a more widespread fiber infrastructure.

So to what extent do you think that these rollouts will use fiber more so in the beginning stages and then perhaps microwave as the deployments roll on?

I think you are reading the picture very correctly. Especially that my expectation at least in 2010 starting very early LTE rollouts will not be even cities. It will be center of something, the center of the city. And those will be initially based on a lot of fiber.

As people start to expand from the very core of the cities into more of the outer bound of the city, and then the city outskirts, you'll see a lot more microwave coming in. By the way, very similar to what we saw four, five years ago around initial 3G deployments. Let's remember 2010 will be mostly LTE trials. It won't be totally commercial yet.

Right, understand, understand. And then once we do start getting out toward the -- outside some of those more fiber-rich areas if you will. What -- have you guys looked at maybe percentage of base stations that might lean more towards fiber versus microwave? What's the opportunity once you get outside of those regions in your view?

In my view, and that's what we're hearing from the customers, is today about 15% of the base stations in the US, around that number, use microwave. People talk about doubling that number, about 30%.

Okay, very helpful.

And then, Tali, just -- how should we start thinking about maybe seasonality as we look calendar year '10. It seems like we've got a couple of dynamics at play. We've got a little bit of smoothing effect, I would imagine, from the revenue recognition criteria that you're starting to see. How might that affect the shape of what the quarterly run rate looks like in calendar year '10?

No, our experience so far is that we don't have seasonality in revenue. There is some seasonality in the booking trends where the second and third quarter tends to be stronger than the first and the fourth, but usually on revenue we don't have seasonality.

Okay, fair enough. That's it from me. Thanks guys.

Thank you very much.

Next question comes from the line of Daniel Meron, RBC Capital Markets. Please go ahead.

Hello.

Thank you. Ira and Tali, congrats on the ongoing execution here. A couple of quick questions.

Good afternoon, Daniel.

Yes. First of all, I may have missed your commentary on the growth rate next year. Can you quantify it a little bit for us?

Yes, you may have missed it. We didn't really quantify growth rate for next year. I did give some guidance for Q4. And as far as next year, well, I'm sure that we will discuss it in more details in the upcoming conference call.

In any case, just to repeat the guidance for next quarter, we are expecting revenues to be in the range of $48 million to $52 million.

Right, you do not provide a bottom line now net-net because of the regional mix that will shift things around.

Yes, we didn't provide a bottom line for next year.

Okay. And as we look into the industry growth rates, not specifically for you guys, the industry growth rate, could it go back to the level that characterized the last cycle, say, 2008, or should we expect somewhat of a diminished growth rate in the industry as some of them may be still waiting for the major push from LTE?

I think you're asking one of the harder questions, on what we see as a cycle. If I'm looking out into next year and talking both to different analysts and others I -- we hear both opinions. One is just saying, okay, growth rate will come back to the level we have seen in 2007-2008. And some people say, no, no, we will slow down until people will do the LTE.

Our guesstimate, it will be somewhere in the middle there where we -- because we see growth being driven by places where we see a lot of subscriber growth, and people starting to do planning and deployment to be LTE or high data-rate capable. And so it will be somewhere in the middle.

Let's remember, we talk all the time about LTE-ready. People are deploying or thinking about deploying a lot of capacity already today. Let's remember they already have a major problem around HSDPA class, around HSDPA at rates of 14.4 or even higher to supply all the smart phones out there.

But they're feeling the data pressure already by right now. So when they are looking at supplying that or mitigating the data pressure today, their thinking is, okay, we'll do it today once, but we make it ready for the 4G technologies already.

Okay. So that's why, for example, last week when AT&T commented on their base stations they mentioned that they're moving fiber real quickly, and doubled up on their fiber-based deployments rate.

Yes.

Okay. But later on, just like you explained before, you think that we will see the next cycle moving more to wireless, and as we move out from the city centers out to the outskirts of the city and to suburbs?

Yes.

So the turnkey projects that you won, are these mainly around the growth in emerging markets? And as we look into next year, is there any sense on how much of the growth would be driven by higher subscriber count or just expansion of the coverage in emerging markets like India, or in Africa, or in Asia Pacific versus data-driven spending?

Mostly --

Or is it yet to be seen?

No. Well, the exact number is yet to be seen. I think we'll see broad growth, emerging market, and we'll start seeing growth also on the data side.

Okay. And the turnkey projects, do you have [by count] or are they mostly emerging markets?

(Multiple speakers) -- mostly where we have business in APAC, Africa.

Okay. Got you. And then last one -- last question from me, I might have missed this earlier. On the cash flow perspective from these turnkey projects, how should we think about it? How much will that consume working capital going forward? Or are we seeing it right now?

Yes, there is consumption of cash. In many times, I -- we also get down payments which offset part of the cash consumption to create the products, but overall there is utilization of cash from more turnkey projects.

Got you. Thank you very much. Good luck going forward.

Thank you, Daniel.

The next question comes from the line of Ilya Grozovsky, Morgan Joseph. Please go ahead.

Okay. Thanks.

Morning, Ilya.

Hi, good morning. Can you guys talk a little bit about your recent win with the North American carrier that you guys put out a press release on? When do you think you will see -- start seeing some revenues on that, and how big do you think it could become? Could this be a 10% customer? And how soon?

I think we started recognizing some revenues from that customer already in Q3, and we will see some of it in Q4.

How big it will become is still yet to be seen. I think we just started effectively working with them, and it does take time to convert this into significant revenues. So it's yet to be seen. It will become a 10% customer? Maybe, but I'm not sure yet.

Okay. And then on the housekeeping side, your DSOs trended up and inventories turn -- inventory turns trended down. How do you see those two numbers trending over the next quarter -- couple of quarters here?

On the inventory side I believe that short term we will continue to see inventory growing, because we do have a backlog of turnkey projects, and the revenue recognition on turnkey projects is slow. So you ship the product, they stay in inventory until you recognize.

And the DSO side, I believe that the DSO side will be flattish with improvement, short term and midterm.

Okay, thank you.

Thank you. The next question comes from the line of Larry Harris, CL King. Please go ahead.

Yes, thank you.

Good morning, Larry.

Good morning, and congratulations on the results for the quarter.

Thank you very much.

Did you provide the breakdown between IP versus SDH in terms of revenues for the quarter?

Yes, the IP portion is growing, and this quarter it was over 50% of our revenues, closer to 55% of revenues.

Close to 55%, okay, great.

And any additional commentary you can provide on Europe? Some of the OEMs, large wireless OEMs reported continued softness in Europe, but your sales continued to grow sequentially, at least Europe, Middle East, and Africa. Any comments on Western Europe, Eastern Europe, Russia; what are you seeing happening?

Well, I think -- and I think mentioned before this is -- I don't see softness in those regions, especially because we work with a lot of tier 2 carriers. We see some softness by the way in Russia, mainly from the very big carriers which we had very little business with them, if at all. So on the tier 2 we see almost a steady state, sometimes switching in between customers. But on the other hand, I cannot say on the other side, okay, everything is booming and expanding.

What we see is what I would call the normal level of business that we had over the last few quarters, which is lower than the year before.

Very good. And have you seen any, just generally, not just Europe, any sort of changes in terms of pricing or just consistent competition?

We see consistent competition. It's not easy out there, but we see consistent competition.

Understood. All right, thank you very much.

Thank you very much, Larry.

Thank you. We have a question from Matt Thornton's line, Avian Securities. Please go ahead.

Hey, Good morning guys, thanks for taking my question.

Good morning, Matt.

First question, just following up on a previous question on some of the recent wins with the large WiMAX operator in the US as well was with Open Range. Any better feel for what the gross margin profile might be for those wins?

The gross margin profile, as we always say, has a large variety depending on mainly deal size and geography. It's a much better gross margin in the US, than what we see in some of the APAC regions, which is reflecting other things as well, because the cost of operations for example in the US is always higher than what you would have in the APAC region; you have to balance both.

In that sense, we expect to see better gross margins. Tali, I think, was referring to that in saying that as long as we see a larger portion of our revenues coming from APAC, mainly in India, we'll still see a pressure on our gross margin.

Got you. So it's fair to think of those wins as accretive to gross margin for where we are currently then?

Yes.

Okay. All right, that's helpful. And then bigger picture, when you look out to 2010, we've got a couple of different drivers. Obviously we've got US stimulus, we've got India 3G; hopefully improving conditions just broadly speaking. Can you rank order some of the drivers for 2010 in terms of what you're looking for?

I'm looking at 2010. What I'm looking for is, at this point, early 2010, is continued strength in APAC region and India around subscriber growth. 3G is part of that game, but 3G in those regions is mainly additional frequencies to support subscribers initially on -- and data only later. And then I think some of the data coupled with improved economic conditions in the developed world driving the business in those areas.

Have you gone any further to quantify the opportunities, for example, from US stimulus? Obviously it's a big opportunity in 2010. Have you guys gone any further to quantify either just the impact in total for wireless backhaul, or for you guys or --?

We quantified -- I know as most of the deals there are coming from small, and a lot of them -- some of them have wireless backhaul, some not -- see that as one more additional large customer in total.

Got you. And then just a couple of housekeeping items, if I could. The -- you gave the IP mix, but the percentage from the new platforms from the IP-10 I think was 45% last quarter.

Yes. It's about 60% this quarter of the new generation.

Got you. And then the service provider versus private networks mix in the quarter?

Almost similar, 90% from service providers, and about 10% from private networks.

Got you. And then finally the buyback program, it doesn't look like you guys did much this quarter on the buyback front. How should we think about that over the next couple of quarters here?

Well, we still have 20% left on the original program. You are right that we have not exercised it during Q3. But it's still open, and we may exercise it later on.

Thanks guys. Congratulations.

Thank you very much.

Next question comes from the line of Jonathan Kreizman, Oscar Gruss. Please go ahead.

Hi, Ira, Tali, congrats for the results.

Good morning, Jonathan.

Good morning. Most of my questions have been answered. Just maybe looking at next year, and the opportunities you see currently down the road, the US, does this reinstate somehow the opportunity for establishing again the gross margins you had previously talked about, at about 35%?

If US will become significant within the revenues, then, yes.

I see.

It has to come very significant within the revenues.

Okay.

We are not at this point planning for next year as being the major portion of the revenues.

Okay. Then a question about the dollar effect. We are still seeing the dollar very weak, with no real outlook for anything better. How is this affecting your operations, your plans and hedging policy?

It is not impacting us immediately because this year we are hedged, fully hedged on the beginning of the year. But I do expect an impact for next year, because next year we will do a new hedge, and therefore the expenses which were quoted in the Israeli shekel will cost us more in dollars.

Okay. Then, if you could talk a little bit about your relationship with Nokia Siemens, and if that is going anywhere else than it is today. I think we saw during the quarter an announcement by Nokia Siemens about their in-house IP solution, which we know that they had the solution beforehand, but there seems to be some kind of upgrade, or could you generally discuss that?

I think we have very strong relations ongoing with Nokia Siemens, bidding them together. We've been together on a lot of deals. They do have an internal solutions. We have been in that situation, them having an internal solution, and us having a solution, and I think the cooperation on that -- and sometimes there's a competition inside, but mainly a cooperation -- is working very nicely.

Let's remember that their solution is just packet and only packet. That's good for some or some proportion of networks. We do have the Native2 which provides a better migration solution for a lot of the networks. So one might expect [we'll] continue to sell both, and the relationship will stay very strong.

Okay. Lastly, about competition, you see from Chinese players; there's Huawei, ZTE. We've heard that they've done significant strides within the past 12 months. Just interested to hear your outlook on them, how their competitiveness is --

I'm looking -- if I'm looking at the competitive landscape, I think the -- and that's true for all telecom equipment, not just ours. The upcoming star and what's sometimes is the toughest competition at this point is Huawei worldwide.

Now, luckily for us, in the microwave phase they do have only a partial solution, not everything on their own. They buy large components from the outside, so their cost base is very high. And we think we have a much better cost base than they do.

I see. Okay, thanks. That's very helpful. Good luck.

Thank you very much.

Thank you. The next question comes from the line of Kevin Dede, Jesup Lamont. Please go ahead.

All right. Let me offer my congrats on the quarter, gentlemen.

Thank you, Kevin. Good morning to you.

Thanks. Ira, did you have 10% customers? Can you give us a read on where Hutchison is, and Nokia in that realm?

Yes. I think we said Nokia was a 10% customer this quarter, out of 21% OEM, but there were more OEMs than just Nokia there in the end. Two other larger pieces in there, two more OEMs there as large pieces. And we had one 10% customer coming out of India, where I do expect over the next few quarters to have on and off 10% customers coming from India.

By the way, not necessarily the same customer all the time, as we work there with six of those, some larger, some smaller, so they'll come in and out as being 10% customers.

So on Verizon's call, they expect to have a considerable number of POPs up and running by the end of next year on LTE. I'm wondering what you think they're doing on the backhaul side given that you guys are an approved supplier there.

I think what will happen initially that a lot of those POPs will be in the center of two or three large cities, and will be, most of them, initially deployed over fiber. We will see some microwave. But I think that the main piece of initial rollouts of any new technology is done at the core of the cities where you have a lot of fiber.

Okay. Tali, you made reference to Q-to-Q growth. I'm just wondering if you meant through the balance -- well, through the -- obviously through the balance of this year, but whether or not that applied through each quarter next year?

Yes, we believe that we will continue to grow. Usually we didn't grow sequentially. We spoke about the fact that we really don't have seasonality. So yes, we believe we will grow quarter after quarter.

Okay. Yes, just looking for crystal clear clarification. Thank you. What was your gross margin expectation for next quarter?

It's still in the low range, and actually I was asked more specifically about it. There is -- the revenues are skewed towards APAC and more towards India, and therefore they will be in the low range of the 30s, somewhere between 30% to 32%.

Okay. And how about OpEx? You did a great job obviously as everyone has made mention this quarter. Do you expect that? Granted, I understand your 5% operating margin target for next year, but I'm curious about what you are thinking for the next quarter.

Well, we do have to grow the business. Actually, I mentioned the headcount, and the headcount grew. We did hire more employees. It is true that most of them are in India, supporting the project and installations there, but we are hiring more. I'm sure we will have travel and additional sales-related expenses, so I do expect Q4 expenses to resume growth.

Okay. Well, thanks, gentlemen, and nice job.

Thank you.

Thank you very much.

Well, thank you. The last question in queue at this time comes from the line of Bill Choi, Jefferies & Company. Please go ahead.

Hello. This is Rahul Khanwalkar, calling in for Bill Choi. I just wanted --

Good morning, Rahul.

Good morning, Tali and Ira. I just wanted to know if you can give us any sense of the backlog dollar volume. You have talked about it a lot. Book-to-bill is greater than 1. So any sense of the backlog?

I would give a general description. We usually don't give numbers on the backlog, but the backlog is more than a quarter ahead. I would say it's well more than a quarter ahead.

Okay. So then the second question would be some of these projects, turnkey projects you have talked about, what is the gestation period for that?

Gestation period for a turnkey project is usually something like a six- to a nine-month type of a cycle where you deploy and you recognize revenues gradually over time as you deploy links and you activate them, and you get acceptances and other things, and can stretch all the way through the year sometimes.

That's why we say that from the turnkey projects we will see them turning into revenues next quarter, but well into 2010 as well.

Okay. So that's why it's safe to assume that you have visibility in your business for at least next six to nine months based on higher deferred revenue, increased inventory, and backlog.

Yes, we have better visibility into next year. That's why we are forecasting gradual growth. I won't say full visibility, because still a certain percentage and a significant percentage every quarter is still turns business where we book and ship and recognize the same quarter.

Okay, okay. That's good. And another thing is in the initial part of this year you had talked about some deterioration in credit quality in developing countries. Have you seen any improvement in credit quality of your customers?

I think that about nine months ago we were concerned with certain customers, certain operators or even groups mostly in Asia, groups, large groups that deal with various industries including the cellular business. And since then I would say that our concerns have been alleviated. Most of these groups have raised money, converted debt into equity, and they are in a much better financial situation now.

Okay. And lastly, I just wanted to have a sense of fiber competition to your business. Is there any region where fiber is more prevalent than microwave and vice versa that we should be looking for?

I think the trends there are what they used be. They haven't changed significantly. If you look at the US, you'll see the larger part of deployments being fiber. You see in Europe where a smaller proportion is fiber. You see places like India and other places in Southeast Asia where you see very little fiber running. And you see the extreme places like in China where it's 100% fiber and will stay 100% fiber.

Okay. Well, thanks a lot, gentlemen, and congratulations, very good quarter.

Thank you very much.

Thank you very much.

We do have a follow-up from the line of Mr. Faucette. Please go ahead.

Thank you very much. Sorry, I got dropped there. I just wanted to ask -- most of my questions have been addressed. But I just wanted to ask as you go into the next and you're looking at more of these turnkey solutions and that kind of thing, how much we should be concerned about potential limitation of actual installers.

Obviously, a lot of carriers are going to be put to (inaudible) trying to put up new microwave connections next year for their backhaul. I was wondering how big a potential limiter that could be or you're not really concerned about that at this point?

Not really concerned. Yes, so that is sometimes an issue but then we go in and heavily train people who -- how to do it. It's not that complex to install microwave. I think the main issue is usually getting the teams and the technical teams. And we have seen from very large deployments in different places that we do, that we can bring in the talent, and do the right [thing of] training the local teams.

Great. That's all I had. Thank you.

Thank you very much, James.

Operator, do we have anymore questions at this point?

Well, yes. We do have another follow-up from the line of Mr. Carroll. Please go ahead.

Yes, Tali, very quickly. You said that we'd see sequential improvement through -- or sequential growth through 2010. Do you expect to grow from the fourth quarter into the first quarter?

Yes, yes. This is usually our trend, so we don't see any reason why it would change from prior years.

Okay, thanks.

You have no further questions at this time, gentlemen. Please continue.

Thank you very much, Karen, for hosting us, and for all of those -- us -- on the call, thank you very much for joining us this morning. I look forward to keep on the discussions with you both on the phone and a one-on-one basis and face-to-face over the quarter as we meet, and both myself and Tali travel. Thank you very much and have a nice day.

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