Ceragon Networks Ltd (CRNT) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and good day, everyone. Welcome to the Ceragon Networks Ltd. first quarter 2010 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 the 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. During the question-and-answer session please limit yourself to one question. We will poll for following questions if time permits.

I'd now like to 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.

We reported a very strong Q1. We exceeded the top end of our revenue guidance, reporting all-time record revenues. Revenues exceeded expectations in Q1 because we were able to do more from the backlog in delivery, implementation and revenue recognition from some turnkey projects to meet the customer requirements.

After extremely strong bookings in Q4, our book to bill dipped below 1 this quarter. Overall demand and business trends in Q1 were in line with our expectations. The shifts we saw this quarter are project related, and we continue to expect 30% to 35% revenue growth for the full year with more confidence towards the high end.

Cellular operators continue to account for the vast majority of our revenue. Worldwide, these operators are making plans to add LTE or upgrade to HSPA and we are as optimistic as anyone about the potential for adding IP to the backhaul. However, it's important to be clear that most of the current cellular network deployments are still 2G and 3G. This explains the popularity of our Native2 product line as operators seek maximum flexibility.

Cellular operators can use TDM today with the capability of adding IP to handle HSPA or LTE, which are co-located in the same base station with existing technology. This same flexibility is also required in the capacity, megabits to the tower, where the market is requiring a mid capacity today with licensing upgraded to higher capacities in the future.

Meanwhile, we continue to shift our all-IP solution to a leading US-based 4G wireless operator, and we have added new all-IP backhaul customers during the quarter as well. Demand for all-IP solution is definitely growing, but it's important to keep the pace of growth in perspective. Remember that in certain regions of the world, especially North America, fiber backhaul may dominate initial 4G deployment. These are likely to be in major city centers where data pain points are most severe and where fiber is prevalent. As a result, it may take some time for all-IP microwave demand to accelerate.

We believe our competitive strength is in the breadth of our family of solutions that provide maximum flexibility, superior [rated] performance, integrated IP and TDM and cost effectiveness for all types of customers, which is overlaid with our full network implementation services.

During Q1 we introduced both an all-outdoor and an all-indoor solution to support a variety of installation scenarios. This new platform supports the entire FibeAir product line and are ideal for a pure IP application as well as for Native2, migrating TDM networks to IP using a single hardware design.

As to being able to tailor solutions to customer-specific requirements will continue to be an important advantage as the market evolves. Originally, overall patterns have not really changed despite some apparent differences from Q4. Revenues from Western Europe returned to more typical levels after the strength in Q4. Eastern Europe and Africa continued to be slow to improve. APAC revenues showed a major increase both sequentially and year-over-year as we recognized substantial revenue from turnkey projects in India. Indian operators are heavily involved with the 3G auction going on. However, new government regulations have slowed down the booking cycle. In all regions we see a continuing trend toward more turnkey projects where carriers expect us to supply a complete network.

North America continued at a good pace in Q1, owing to continued business from the major US-based 4G wireless operator I mentioned a moment ago. Latin America is affected by the ordering pattern of a large customer there.

NSN was not a 10% customer in Q1, but this is related to a pause in buying pattern of an end customer in India.

To summarize, the year is shaping up according to the expectation we shared with you on our last call. Immediate demand is still standard in the APAC region, driven mainly by subscriber growth. Demand for all-IP solution is growing from a small base, and we continue to win our share of available business. LTE is moving through the planning stages, and operators are very focused on a flexible solution that accommodates requirements of both current and future networks.

As we explained on the last call, we increased expenses during Q1 mostly in pre-sale sales and professional services. This reflects more customers expecting us to assist them with complete network planning and other professional services in addition to providing equipment. Even with the need to increase expenses, we were able to improve operating leverage in Q1 and make substantial progress towards our target operating model for the year.

Now I'll turn the call over to Tali for more details.

Thank you, Ira; good morning, everyone. Revenues in Q1 reached an all-time high of $59.7 million, a 12% sequential improvement from Q4. GAAP net income was $3 million or $0.08 per diluted share. Excluding stock-based compensation, non-GAAP net income in Q1 was $4 million or $0.11 per diluted share.

The geographic breakout of revenues appears in the press release. As you can see, APAC's share of total revenues jumped as a result of recognizing substantial revenue on turnkey projects in India. At the same time, EMEA declined as a percent of total revenues, reflecting continued relative softness in Eastern Europe and Africa. We have signed a new OEM agreement and we now have four OEM partners, which together accounted for 10% of total revenues in Q1.

We had two 10% customers in Q1, both Indian operators. The non-GAAP gross margin in Q1 was 34.2%, somewhat higher than we expected, due to higher volume and a favorable product mix. Non-GAAP operating expenses increased to $16.3 million as we added to headcount to support future growth. Note that the sequential increase in G&A expenses relates to a reclassification of information technology expenses that had been distributed among various expenses categories and are now centralized in general and administrative expenses. The G&A figure for Q1 2009 we are also reclassified for comparability.

Operating cash flow in Q1 was approximately $850,000, and at the end of the quarter cash and cash investments totaled approximately $99 million. DSOs improved significantly to 88 days as a result of very strong collections. Our inventory increased to $74 million. In Q1 about 47% of our inventory represented product already shipped but unrecognized as revenues.

With higher than expected revenues, our book to bill ratio was below 1. However, our backlog remains high by historical standards, reflecting several turnkey projects which will convert to revenues during the year. For Q2 we are guiding to revenues of $59 million to $63 million. The changes since our last call relate mainly to timing of revenue recognition, and the business outlook for the year continues to be positive. Therefore, we remain confident in targeting revenue growth rates in the range of 30% to 35% for the year with profits growing at a higher rate than revenues. Our challenge will be to sustain Q1 operating margin during the balance of the year, which would represent significant progress towards our long-term target of 10%.

Now we will be happy to take your calls.

(Operator instructions) Ittai Kidron, Oppenheimer.

Congratulations on a good quarter. I had a few questions, Tali, just clarifying the classification of expenses. It seemed like it benefited gross margin as well. Is that a fair assumption? And how do I reconcile the strong business you had in India with the strong margin that you are showing?

First of all, some of the expenses were included also in gross margin or in cost of goods sold of last year; not substantial amounts, probably up to 0.5 points if I compare to Q2.

As far as India, I would say two things. Number one, we did have a favorable product mix. This quarter we sold products in which we make more. And the second one is related to the indirect expenses, but in this case it's an overall company expenses, so it's not directly related to India.

Okay, and a follow-up for Ira. With regards to the rest of the year, your guidance, it looks like, if you just take the midpoint of your guidance for the second quarter, that you have very muted growth in the second half of the year. So I'm trying to understand why is it you are not too positive that the momentum you are seeing here near-term carries over into the second half. And, second, maybe you can update us also on the North American customer, how much of your North American business was that North American customer and any updates on Verizon would be appreciated.

So you have three questions that you put up.

First of all, we think we are in a very positive momentum moving forward, and we are making major jumps forward. I don't think the jumps that we have seen will continue in the same rate but will continue to grow, and making a 35% growth over last year into this year is a major jump although it's probably a little bit more evenly distributed throughout the year because we are able to work faster this quarter and move ahead. That was your first question.

The second question you asked about our major US customer out there, we continue to do business with them. We don't give out specific figures about specific customers, but they were a significant customer this quarter but not a 10% customer.

And your last question, you asked about the US market, about Verizon. Verizon we are still trying to get into Verizon and be part of their list. They did announce that, at least for now, they are staying with the current vendors that they are using for microwave, and we still have a lot of work to enter the network.

Amir Rozwadowski, Barclays Capital.

Just going back to that customer you mentioned in North America, it seems that they had come back and repurchased this quarter, helping sustain ongoing strength in the region. How much opportunity is left there? It seems as though they came to you folks and purchased initial equipment. It seems like they're coming back to you. Do you still see a pretty decent run rate with that customer?

Like all customers, we are pushing forward and continuing business with them. I think that they are planning and have been, at least publicly saying they are continuing their rollout throughout the US, and we hope to be and have share of that rollout.

Well, if I look at your growth rate for this year, is there an assumption that you'll continue to regain business at that customer? Or, would that just be layered on top of your outlook?

What we are saying and I think I have been saying a lot of times around that -- we are not dependent on any single customer in any of our planning forward. We look at the different probabilities. Yes, there is some numbers baked into our plan from the rest of the year from that customer, the same way that it's baked in numbers from a lot of other customers over the year.

That's helpful. And then, Tali, just on the gross margins, again, it seems as though we have sustained gross margins here despite increased revenues from regions such as India, which seems to be a positive towards the mix. How sustainable do you think those gross margins are on a going-forward basis?

Well, we are projecting that the second half should be better and should approach the mid-30s. We continue with this projection. We were projecting less for the second half. We still have a lot of revenues from India projected for Q2. So I think we should be cautious when we give projections on the gross margin. But as you see, we feel more comfortable with better or higher gross margin than we predicted before.

Daniel Meron, RBC Capital Markets.

Can you quantify the amount of increase coming from the revenue recognition that happened, and also share with us some color on what drove that? Is there a specific milestone that you reached, something with the customer? And then also, related to that maybe, you mentioned that new government regulations may slow down some orders in India. So if you can just share with us more color on the Indian markets in that respect?

I'll start with your first question. I think that if you look back, we had Q2, Q3 and Q4 of last year, very strong bookings towards -- that we received, which a lot of that was revenue related -- sorry, project related during that quarter, which generated a very large backlog. And as we walk into this year and continue into this year, part of our confidence and strength is that we'll continue to recognize that revenue as we do the implementation and receive the acceptances from the projects, which is really a lot of milestones as we move forward.

Some of the revenues are dependent on those milestones. So we did, in some implementation, strong implementation based on the customer demand from that backlog. And we continue to maintain a very large backlog as we'll roll those projects throughout the year.

You asked for some color on India. India is going through some regulatory phase at this point, with the Indian government looking at what they call security restrictions on importing communication equipment into India, and you need to get clearances for that. It's holding back the booking cycle. My expectation is that we'll see that being relieved, hopefully sometime during this quarter, during Q2, which has slowed down booking cycles in Q1.

Okay, got you, thanks. But, can you just quantify it, the number of revenue recognition that you got in this quarter and then I'll jump back into the queue? Thank you.

Just take our guidance for the quarter, which was, I think, 56 to 59 or 54 to 58. We are a little bit above that. That's probably the difference.

Matt Thornton, Avian Securities.

Good morning, guys, and congrats on the nice quarter. Not to beat a dead horse, but coming back to your large North American customer there, can you just update us on where you stand in terms of visibility? I know it wasn't all that great when we spoke last quarter. How has that changed this quarter? Just talk about how you are executing there, and the relationship there, and then perhaps the risk of a third source coming in there as well.

You see me hesitating because I usually prefer not to speak about specific customers and our implementation with them because it's really, I would say, private information. Yes, we continue to execute with the customers. We continue to deploy with the customers. We have visibility with that customer not any different than we have with other customers. I think that was asked a little bit before. I think that customer, at least publicly, is saying that they will deploy and continue to deploy significantly throughout the year, and we hope that will be part of that deployment cycle.

And don't read hope as -- we don't know anything about it, but don't read hope that I'm 100% sure that we got all of it. So it's somewhere in between. It's a lot of hard work with the customers to work and continue satisfying their requirements, both in products and in delivery and implementation, and that's what we do with all our customers worldwide.

Got you, okay, fair enough, that's helpful. And then a couple of bigger picture questions. In terms of the 30% to 35% top-line guidance, it sounds like you're getting a little more confident towards the high end. But what are the biggest risks, what are the top two or three risks that you see to achieving that target this year?

We have a very strong backlog. That's why we believe we can achieve the high end of that target or be close to the high end of that target. There are risks, because not everything is in hand at this point and we need to bring in, still, significant bookings throughout the year to do that. And that's still a risk.

I mentioned before something about the regulatory environment in India. India is a large piece of our business, which can be that stretches a little bit longer than might affect a little bit the results. Where our belief is that we are moving ahead very nicely.

And then just one last one, if I could, on competition. Could you talk a little bit about what you've seen incrementally on the competitive landscape? And then just remind us of how you feel about your cost position currently on the IT-capable platform relative to your peers?

I think that if I'm looking at the competitive landscape out there, I think we have -- and I think I mentioned on the call, we have a product which I think in all functional parameters is, in many cases, superior to most of the competition in being able to do both superior radio technology and very high integration of TDM and IP for the migration and all-IP capability. And I think this is winning us a lot of business and a lot of points within the customers.

If you look at the landscape, and I think I mentioned on one of the last calls on that, one of the things that is changing in some of the areas around the world is that we see Huawei being a much larger competitor than we saw before in a lot of the instances, as they move to become a significant system provider of end-to-end solutions.

Perfect. Thanks for the color, guys, and congrats again.

Bill Choi, Jefferies & Co.

This is Munjal on behalf of Bill. Just a couple of questions. First, could you just give us the headcount at the end of the quarter and your mix of IP sales?

Yes. Headcount, 523 employees. IP was 60% of revenues. And you know, it includes also the Native2, the dual platform, of course.

And if you look at -- what was your comment on operating margin? You mentioned -- should we expect like improvement from Q1 onwards throughout the year, or do you think you will continue to invest in hiring more people? So how should we think about OpEx and operating margins?

Yes, we will continue to invest in more people and more expenses. We said that for this year our target was 5 to 7, and apparently we reached 7. Well, it is a challenge [to reach] (multiple speakers) the 7. But it's still my goal to reach 7, or the 5 to 7, and I feel more confident than I felt maybe three months ago.

And just lastly, on book to bill being less than 1, is there any seasonality part of it, or is it primarily related to India, where you just had such a large recognition?

If I'm looking at book to bill, some way the seasonality Q1 is usually a little bit slower than other quarters, some of it having to do with, we had very strong Q3 and Q4, where my belief is we saw the orders then, and then we saw some delay as things have to mature for the next cycle.

Thanks a lot. Congratulations.

Alex Henderson, Miller Tabak.

I've got a couple of questions for you, if I could. The first one is I'm trying to understand a little bit better about the change in operational approach of the Indian government with respect to slowing down the bookings rate. Is that something you are expecting to resolve itself over the next quarter or two? How do we think about that in context of them opening up the 3G licensing, bidding process, as a demand driver that should accelerate the India order rate?

I believe the issue there, at least for us, will be resolved over the next few weeks. It won't take a quarter or two, within -- they changed a little bit their approach and required more certification and more regulatory work. I think, at least for us, we'll be over that hurdle within the next few weeks.

If I adjust for that temporary hit to the bookings rate in the prior quarter, would your book to bill have been close to 1? In other words, did that temporary impediment cause a dip (multiple speakers) in the book to bill?

The only thing I'll say is that maybe because we don't compute it this way, I'm very much in favor of not playing guessing games.

I'm just trying to understand what the mechanics are, though.

The mechanics are probably that it delayed a lot of the bookings.

So how do you anticipate the other variable in the Indian market kicking in, i.e., the 3G licensing and all of that sort of stuff?

I think I said before, from my perspective, the 3G licensing is already baked into all the models, so all the operators that we work with are assuming they will win 3G licenses. And the networks that they are building today already account for that in the type of equipment that they are building and the capacities they're planning of the 3G. So it's really one long continuum. I don't expect it to kick in as an additional step as an overlay. And on the other hand, without the regulatory environment, I wouldn't have even suspected it would have slowed down things. No one waited for it.

So especially in India, where a lot of the 3G will be used as additional spectrum for voice, not for data.

Shifting gears to the US market, the Clearwire guys are talking about turning up their network at the end of the third quarter. Obviously, that would force them to think internally about testing the network and troubleshooting the network as opposed to deploying new gear in the fourth quarter. Is that part of your expectation for somewhat of a dividend in the fourth quarter or in the back half, causing a little bit of slowdown in that time frame?

As I said, when talking to specific customers, we are very tied to their plans, working together with their plans on when do they deploy, when do they turn up the networks. And usually what we see in customers worldwide that, either they have -- both they have cycles and, in many places, they do things in parallel. Like they have one region being deployed, one region being tested. So they move in parallel. And I think the customer you mentioned probably is able to do things in parallel as well.

The other question I would have for you is on the cost side. You have been moving your production from Israel to Pac Rim. Can you give us an update on how that progress is going and what the cost-benefit -- whether that's impacting the gross margin improvement?

I think we've been with a very strong cost position all along, both manufacturing in Israel and in Pac Rim, where the cost position is mainly dependent on good design and putting in the right design in the markets. The other pieces are important, but not as important as the good design. We are not moving manufacturing from Israel to the Pac Rim. We have added additional manufacturing capabilities, while increasing both manufacturing here in Israel and in the Pac Rim region to meet the customer demand.

But the Pac Rim region is growing faster as a percentage of your production, yes?

A little bit faster but not much faster.

Ilya Grozovsky, Morgan Joseph.

Thanks, guys; my question has been asked and answered.

Stephen Ferranti, Stephens Inc.

Thanks, nice job on the quarter, guys. Would you refresh us on your channel strategy in India; i.e., how many carriers you are going direct versus indirect or OEMs there?

I think that at this point, life is becoming a little bit more complicated, and I'll explain. We are working with seven different operators in India. And what we see within those seven, one, two, three, four, five of the operators we are in various degrees of channel strategies. With some of those we go direct, and we might have one OEM or we might have two of our OEMs approaching. It all depends on the way the operator divides out to what they call circled regions, which is they deploy and how do they deploy managed services. And we see ourselves selling either direct to some circles or we are one or two of the OEMs to other circles. So it has a mixture of strategies. A lot of it has to do in the ground, depending on the managed services and how is the project being split. So I see all of it all over the map.

Okay, that's helpful. No clear answer, I guess, but --.

It's not clear answer on the ground, so --.

It's as clear as it can be, right?

Yes.

And then just one last one for me. When you do see Huawei in the markets, are they selling in as part of a bundled solution, or are you actually seeing them selling in standalone microwave equipment?

In most of the projects that we see them, they sell as a bundled solution, although here and there I see them also selling only microwave. Most of what they sell is bundled solutions.

Just let me sneak one last quick one in. The new OEM agreement you talked about in the script, any additional color you can provide there in terms of what product line it's associated with? Any additional color you could give us there would be helpful. Thanks.

It's all our product line, it's -- most of it is our IP-10 and RFU-C product lines, in addition to our HP [or] indoor solutions. And that OEM comes from the Western world.

Aalok Shah, D.A. Davidson.

One quick question and you may have mentioned this. How much were OEM sales in the quarter?

Altogether, 10% of the revenues.

And, Tali, do you expect that type of revenue from OEMs throughout the rest of the year when you look at your backlog?

No, I think it will be higher than the 10%.

Okay. And then, on the competition front, real quick, I know people have already mentioned Huawei. But has anything changed on the competitive front that you've seen over the last maybe two quarters now? Has the pricing gotten even more dynamic? And then, is the overall microwave market right now lifting all boats? Or, is it --- are you seeing more pockets of strength based on geographic issues more than anything else at this point?

If I start in answering on the pricing issues, no, we don't see any significant change the last two quarters. Pricing has always been competitive, and I think that same situation continues moving forward, like in any of the telecom equipment business, and has been like that also with the microwave business. So I don't see a significant change in the competitive landscape, at this point.

Scott Searle, Merriman.

Quick question, Tali -- on the private radio front, did you give the breakout of that percentage of revenues?

Which one?

Private enterprise business.

Private versus enterprise? Yes, it's the usual, I think. It has been stable for a long period of time. 90%, nine zero percent, operator; and, 10% private networks.

Got you. And, just to follow up on the gross margin question, certainly did a great job this quarter. It sounds like part of that was mix. Did some of the project-related revenue that you expected to be lower gross margin get pushed out from the first quarter into the second quarter? I guess, specifically, what I'm trying to understand is what gross margins are expected to look like sequentially going into the second quarter. Before, it sounds like you think overall second half if better than first half.

Yes, there are issues of product mix, and this is -- you know, I'm still cautious regarding the second quarter. And, is it significant mix between the two? No, it's not significant mix, but I'm still cautious about Q2. And I think we will tend to see improvement later on.

So, Tali, does that mean -- is there a chance that gross margins could be flattish sequentially, or should we definitely be thinking about modeling them down?

Again, for Q2 I'm cautious, meaning I think it's going to be lower than Q1.

Got you. And, just to follow up on the large North American customer. I think in the fourth quarter, you indicated you thought market share was in the 10% to 15% range. Do you guys think you held share in that account, or not clear at the current time?

I'm trying to remember when I said something stupid like that, about 10% or 15% in any specific customer. No, I did not indicate.

And just lastly, on the India front, is there any negative outcome that you see looking at the 3G or the BWA auctions that would not be positive for you guys? It sounds like you are locked up with most customers who are involved in the bidding process. But is there any big concern or potential outcome from the auctions that would not make you guys happy?

No. I think any results from those auctions will make us happy because it will be distributed between our customers, and all of them will continue the expansion in India.

Jonathan Kreizman, Oscar Gruss

This is Bill Rosenberg on behalf of Jonathan. I'd like to, if I may, understand a little bit better about the professional services segment. Just if you can elaborate a little bit on what the addressable market is or how big it is now, or how big you think it will be, what the potential?

I think that what we are seeing at this point is that, if I look at the different customers that we have, about 50% of the projects that -- of the deployments out there that we are involved in, we are involved in some way or another with different professional services level, all the way from planning, project management and implementation. Not all the projects are the same, not all the projects from revenue recognition perspective behave exactly the same. But we see more and more of our customers, about 50% of the things that we do we are more involved than just equipment.

I'm sorry, what was that, then -- you're more involved than just --?

Than just equipment.

Okay. Is that segment calculated into the guidance? In other words, when you're talking about the 30% to 35%, is that something that you expect to recognize or realize already this year?

Yes. That's a large part of the backlog that we have, is projects that we are implementing and we recognize a large part of it during the year. Let's remember our customers. They want everything yesterday. So meaning a backlog -- I need to rush very quickly to implement. There's very little of that I can say, okay, in 2011.

And one last question. If you can offer any more color into the -- there's a small increase in inventory, $7 million or so this year and [29] last quarter, which -- last quarter, I'm sorry -- which was mostly India, I understand. My question is, it sort of connects to what other people asked about. How much of the backlog do you think is going to go to APAC?

A substantial portion of the backlog is related to APAC, if that's your question.

Larry Harris, CL King.

Congratulations on the results for the quarter. Two questions. One, if you could provide some sense as to how much India is as a percentage of revenues? I assume that, with Asia-Pacific at 53%, we're looking at, I don't know, 30%-40% or more. Could you provide some sense as to the numbers for India?

Yes. It was quite a large portion. It was 40% plus.

In terms -- and maybe you discussed this --- the accounts receivable came down a fair amount. Was that related to some of this turnkey work, where you are able to bill it and collect it? Or, was there something else that contributed to the decline in DSOs?

Overall I would say good collections. And it was spread around the world in many accounts, and many customers. In India we were also able to collect some advance payments as part of the project. And you can see it on the balance sheet, under the line of deferred revenues, which you could have seen for several quarters by now. So, overall, we had good collections.

Alex Henderson.

Just a more technical question on the adoption at the large incumbents, both AT&T and Verizon. The Dry Martini, the 1588 protocol, was passed midsummer 2008. It typically takes three to four years for them to adopt a standard. To the extent that that's the case, that would suggest that they will be in a position in 2011-2012 to really adopt something along those lines. And as they have talked to the issues of deploying mainly in metros this year, obviously, as they shift to more suburban environments and the cost of laying fiber goes down, that will alter their orientation away from fiber towards microwave.

So I guess the question is this. The comments of some of your competitors, that they have locked in relationships with these two major incumbents -- it seems to me that the incumbents aren't in a position yet to make the decisions on which technology and which vendors to go to and have not finished that process, so that in 2010, predominantly, they would be looking at testbeds and things of that ilk as opposed to any meaningful purchases for their backhaul deployments in 2011 and beyond. Can you talk to the timing and the degree to which the large incumbents are making those decisions?

I think you are right on the point, and I think I hinted before to exactly the same cycle with the large incumbents. They are staying, at this point, with whatever they have as their vendors and are looking at additional technologies, evaluating technologies. And we believe that the cycle there will start with fiber now, microwave later. And we keep on pushing to work with them. And I think you timing is about correct (multiple speakers).

So is it reasonable to conclude that they are not making the decisions imminently and that it's something towards the end of this year when they start thinking about the decisions?

They will make some decisions in cycles and iterations. They will make decisions now, and they will make additional decisions a little bit later, as well.

I see. So, any granularity on the difference in timing between geographies; for instance, the US or continental Europe, on those issues?

Exactly the same type of cycles. They're making decisions for things that they need over the next 12 months. I think they are making decisions now and will probably reopen a lot of those -- as they start rolling more rural environments with LTE, which is probably end of 2010 and middle of 2011, the way they look. And they adapt to different technologies. And you mentioned one of them, but there are other options on the table. And I think one of the issues with each one of the operators is, what is the network architecture they are going to use, which we support most of them.

And then just to follow up on the North American side, obviously one of the things that is going on this year is broadband stim. Can you talk a little bit about the impact of that, how much demand timing there is around that as well as what's going on in your Canadian customers?

The Canadian customers -- we continue on working like we have been before, and we are continuing the relationship and moving forward. On the broadband stimulus -- what we saw up to now, most of it went to fiber implementation. Very little microwave implementation, so we saw very little from that, at this point.

Do you expect anything later in the year, or no?

We are involved in many projects, but maybe.

Daniel Meron.

Can you provide us with a little bit of more color on how do you expect the back half to look like? I think you did mention the guidance for the second quarter, which looks flattish, and talk a little bit about that in a more concise manner. Just trying to figure out if we should expect more acceleration in the back half and what is going to drive that.

As we said, I think that if you need to model the year -- I think we gave guidance for Q2 and then we gave the guidance for the whole year. I think it gives you the parameters. I think Tali mentioned on the gross margins that we expect Q2 to be a little down or flattish and that we'll see a little bit of a higher gross margin in the second half of the year.

(Operator instructions) Ray Conley, Palo Alto Investors.

I have two questions. One is, comment on when do you think we would see margins from software upgrades start to show up in your numbers. You had indicated a lot of the equipment has the upgrade capability.

And the second one would be to just give a little more color on your Nokia Siemens relationship. You have mentioned it was not a 10% customer in the quarter, and where you see that relationship going.

I'll start with the first question. I think that a lot of the sales that we do at this point have the licensing option and the software upgrade in them. But if people ask me on how to model this, at this point in time I would take the conservative approach and not model it in. I want to see that materialize and see that, with the relationship from the customers happening and moving forward. There are good indications because some of the large system vendors do fill the system this way. I want to make sure that we are able to materialize it, and then we'll start modeling it in. So at this point I'm not modeling it in. I wouldn't suggest anyone to model it in, at this point, yet.

You asked about the Nokia Siemens relationship. I think I indicated all along that Nokia always has their own internal products to our products, and we are in a cooperative situation with them. They do sell our products in certain situations where it makes sense both technically and from a cost perspective. And in some of the clients, they push their own products, both the older generation and new generation that they have. My expectation is that we will continue to see business with them as we move forward, at various levels. And I think the relationship will continue as they both introduce their products and they use their own as well.

And there are no further questions. You may continue.

Thank you, everyone, for joining us on the call this morning. And I do expect, if you have follow-on questions and you want one-on-one discussions, we will discuss it with you as we go along and probably see you also face to face during the quarter. Thank you very much for spending the time with us.

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