Ceragon Networks Ltd (CRNT) 2010 Q2 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Ltd. second-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 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 pull for follow-up questions if time permits.

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

Thank you for joining us today. With me on the call is Tali Idan, our CFO. Q2 was an excellent quarter represented by a record revenue, high gross margins, and improved operating margins. As expected, the strong revenues reflected both new book and ship business and backlog converting to revenue.

Overall demand and business trends in Q2 continued to be in line with our expectations. We see a strong demand for more data worldwide which is reflected in purchasing decisions for more capacity and features up front. This has been reflected in our gross margin increase.

Despite the situation in India, which I will discuss in a minute, we believe we can achieve our goal of 30% to 35% growth for the year. Orders outside India grew nicely in Q2 and our book-to-bill was above 1 in the rest of the world.

Regionally, overall revenue patterns remained about the same in Q2. Revenues in North America remained at the high level by historical standards aside from one customer. The continued strength in APAC revenues reflected some special additional revenue recognition from turnkey projects in India.

Fortunately, we are enjoying a substantial backlog in India that continues to convert to revenue. There is an ongoing strong demand from India driven mainly by continued strong subscriber growth and additional expansion plans after the 3G option has been completed. The mobile operators are all vying to deploy ASP and be the first to offer 3G services.

However, we are experiencing a delay in new orders since Q1. The delays have been caused by new and tighter security regulation being imposed by the Indian government. The new regulations are intended to ensure the telecom networks in India are free of fiber and adhere to information security management standards by requiring both operators, managed services providers, and equipment vendors to enter into mandatory agreements that provide for sale certification, third-party audits, and severe penalties if any security threat is found.

Needless to say, that we adhere to all the requirements.

Until all the aspects of the process have been finalized and everyone signs the relevant documents orders and shipments are being held but installation of available equipment continues at the record rate. We don't see as an impact for the current quarter and Q3 revenues are expected to be similar to Q2 as we continue to convert backlog in to revenue.

Demand is very strong and the operators will be pushing to make up for the delays because they need their equipment, especially to meet their commitment for launching 3G network. We assume things open up in time to report a modest amount of book and ship business from India in Q4. The strong order patterns in the rest of the world will enable us to end the year with our target range of 30% to 35% growth.

I also would like to say a few words about competition and our strategy for maintaining and gaining share going forward. First, it's important to note that our rather long list of wireless backlog vendors we have only two primary competitors globally.

In some cases we compete with certain large vendors with a bundling backhaul and complete network deals. In other cases we compete with highly-specialized vendors whose solution is designed for a particular type of operator and business model. And we compete others only in particular geographic regions. Regardless of these factors our strength compared to each of those competitors are difficult to replicate.

More data in the network; we provide capabilities to better use both the available limited frequency and the network to deliver more data. Complete product portfolio; we have the broadest range of wireless backhaul solutions from short range to long range, from mid capacity to high capacity, from low power to [explore] power, from TDM to IC to Native2.

Continuous cost reduction; we have an ongoing design-to-cost program that reduces the number of components, integrates them from the ground up with other efficiencies that make us the low-cost producer. We do not sacrifice radio and networking features or functionality for the cost as we provide the most advanced features which widens the cost-benefit gap even more.

A good example of this strategy at work is the (inaudible) we made this quarter to license advanced network management systems software that we intend to enhance and modify to suit our exact requirements. By purchasing this technology instead of developing from scratch in house we are able to save money and accelerate the time to market for advanced networking capabilities. Those features will enable our customers to better plan and manage their wireless backhaul network for increased data usage and capacity.

We are also exploring opportunities to buy versus build when it comes to technology enhancements and we expect to make further technology acquisitions in the future in order to retain our technology leadership. Another area of growing importance is the ability to provide full turnkey solutions including services, and we have improved our position in this regard.

To summarize, we are still on track to meet our growth target but we are less comfortable with the high end of the range due to security situation in India. Meanwhile, underlying demand remained very strong driven by very strong subscriber growth and the explosion of data creating a backhaul bottleneck.

The re-occurring request we are hearing from all our customers can be summarized in two words -- more data in the network. Whatever they were planning six months ago, it's greater now and they don't necessarily want to pay a lot more for it but they buy it. The market is moving toward a particular strength, high capacity at low cost without sacrificing advanced features.

Meanwhile LTE is moving through the planning stages toward deployment and operators are very focused on the flexible solutions that accommodate the requirements of both current and future networks, building networks today with higher capacities both in the radio and network design for more data within the difficult limitations they have.

In addition, all IP solutions are growing from a small base and will continue as well. Therefore we expect to enjoy strong demand trends for several years and will continue to differentiate ourselves from the competition through advanced technology for more data delivery and superior execution.

Now I would like to turn the call over to Tali. Tali?

Thank you, Ira. Good morning, everyone. Revenues in Q2 reached an all-time high of $60.9 million as more sequential improvements on a very strong Q1. GAAP net income was $2.6 million or $0.07 per diluted share. Included in GAAP net income is an R&D expense of $1.15 million for purchasing a technology license. Details are provided in a separate press release we issued earlier today.

The entire cost of the acquired technology was expensed because it requires further development which carries some technological risk. The expense is excluded from non-GAAP results because of its one-time nature in order to provide a meaningful comparison with prior period. Excluding stock-based compensation and this one-time expense non-GAAP net income in Q2 was $4.6 million or $0.13 per diluted share.

The geographic breakout of revenues appears in the press release. As you can see, APAC's share of total revenues was about the same as Q1 as we continued to recognize revenue on turnkey projects in India which contributed similar amount of revenues as in Q1. EMEA continued to reflect relative softness in Eastern Europe and Africa.

Aside from the absence of business from one 4G wireless operator North America showed continued strength.

We had two 10% customers in Q2. One was an OEM partner and the other was an Indian operator. Our four OEMs together accounted for 16% of total revenues in Q2.

The non-GAAP gross margin in Q2 increased to 35.4% reflecting several factors including continued improvement in product cost, an additional price paid for premium features and functionality. We believe these factors will help us hold our gross margin in the mid-30s regardless of geographic mix.

Non-GAAP operating expenses increased slightly to $16.9 million. As mentioned this excluded the $[1.15] million one-time expense for the acquired technology. Operating cash flow in Q2 was negative by about $1 million and at the end of the quarter cash and cash investments totaled approximately $95 million.

DSOs were 84. Our inventory went down to $68.6 million. In Q2 about 37% of our inventory represented products already shipped but unrecognized as revenue.

Overall book-to-bill in Q2 was below one reflecting the security situation in India. Excluding India, our book-to-bill ratio was above one and we still have backlog remaining from several turnkey projects which will convert to revenues during the second half of the year. Therefore, we currently expect revenues for Q3 and Q4 to be similar to Q2.

Our specific guidance for Q3 is for revenues in the range of $59 million to $63 million. For the full year we continue to target growth in the range of 30% to 35% with profits growing at a higher rate than revenue.

Now we will be happy to take your calls.

(Operator Instructions) Ittai Kidron, Oppenheimer.

Thank you and congrats, guys, on a good quarter. Ira and Tali, good morning. I wanted to get a better understanding of your working assumptions for India in the second half. Ira, did I get your comments correctly that it's only in the fourth quarter that you expect some of this security delay to be relieved somewhat and for revenue to come in?

First, let's look at the assumption from two perspectives. A, revenue will continue to come in from India, both for the third and the fourth quarter, based on continued installation activities we are going and the backlog that we have. A comment I have is that we are assuming for our target for Q4 that we need some book and ship revenues from India during that quarter to meet our targets.

What is it that blocks some of the business in India yet some of it does flow through? How come there is discrimination there on what --?

There is no discrimination. You need to separate two things -- revenues and what we recognize in the revenues and that for all operators is equipment which was ordered prior to Q1 which is already in India and is being sold and we are recognizing the revenue based on completion and acceptance of terms and installation terms. What is really being blocked is new orders.

The Indian telecom mobile operators cannot issue new orders until all the agreements between the Indian government, Ministry of Telecom, the operators, and the different vendors, managed service providers, will be fined. And so it's two different timings on that issue.

Okay, very good. And with regards to the fourth quarter then, if you assume that you need, as you said, a little bit more of India in the fourth quarter to get to what you guided right now as flat, does this imply the rest of the world you actually expect to decline sequentially from September to December? Why would that happen?

No, because the revenues from installation projects in India in Q4 will a little bit decline as we go through our backlog. We do assume the rest of the world, based on its growth this quarter, will continue to grow and also compensate for some of it.

Got you. Lastly, Clearwire, is there any color you can give us there on the reasoning? It seems like multiple vendors have been impacted by this. Whatever color you can give us on your assessment on what is going on in that account.

What is going on in that account, when -- I will put it this way. There is a side when you go to your mother and have a very large family dinner I don't think you can turn around in the next two hours and have another one, and I think they have to do the digesting and completing the installations until come back in to the order (inaudible).

Okay. Is there a timeline by which you think they can digest more?

I don't know yet.

Very good. Good luck, guys.

Amir Rozwadowski, Barclays Capital.

Thank you very much and good morning, Ira and Tali. Ira, just talk a bit more about the India challenges. If we look at your guidance of 30% to 35%, albeit you folks are a little bit less comfortable on the high end but it seems as though you are comfortable in keeping your guidance in place.

If we assume that India is a little bit more challenging than when you originally issued that guidance because of these security issues, where outside of India are you seeing improved purchasing trends to offset some of that, the challenges that are going on in India?

I think we are seeing the effects -- now it's not large numbers which are offsetting one way or another, that is why we are staying within the guideline ranges. But we are offsetting it by seeing a little bit more in Latin America, a little bit in Africa. Also we see even without the Clearwire side in the US strong demand and increased. So we are compensating for it in growth in other places.

And if we look to the improved North American demand outside of Clearwire is that coming from more private networks or is that some of the carriers there increasing their spending on microwave?

It's some of the smaller areas carriers are increasing their spending on microwave.

Okay. And then if we look at your gross margins for the quarter, certainly a very strong performance. If we think about India at some point coming back, perhaps in the fourth quarter or maybe even in 2011, would that serve as a negative impact on your gross margin mix or --? I am trying to understand what the sustainability of the gross margins are at these levels.

Well, as you noticed level of APAC and the level of Indio was quite high both in Q1 and Q2. Nevertheless, we were able to improve the gross margin with a high portion of India. So right now we feel very comfortable with our previous projections for the rest of the year of the mid-30%s. Meaning we are able to improve profitability also in India.

If you are looking far beyond this year, I suppose we will have to revisit it again when we approach 2011. But right now the trends are positive.

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

Steve Ferranti, Stephens Inc.

Ira, based on your conversations with your customers in India these days are you anticipating that once these security regulations get themselves resolved are you anticipating any sort of snapback in orders?

It would seem like given the growth trends there and in terms of subscribers that they are in it. And plus the 3G licenses they just bought, it would seem like there should be some level of pent-up demand being built up given their inability to place orders.

Yes, I think what he is saying is true but I will have to take it with a small caveat. I think there is a pent-up demand. As I indicated earlier, they are all under huge pressure to deploy because everyone wants to be right out the gate with the 3G and be the first to provide the services.

But I think that the gating factor there is not as much as equipment and shipping equipment and getting orders. It's in most cases the ability to install, deliver, and go for the project phases to commission a network. And this is a little bit of a slower process which is a bit harder to make major jumps or quick jumps in the capacities that you drive so that pent-up demand will be converted into revenues over a longer period of time.

I see, okay. And I guess what have you guys seen in terms of -- this situation with these security clearances seems to have, I think, dragged out a little bit longer than anybody really had expected. What are the factors that you think are associated with that?

I think the factors associated with that is you are dealing with a government and any government worldwide is usually a slow responder versus very large organizations and a complex issue. All of this at the end of the day translated into things staying here a little bit longer.

Okay, understand. Last one for me, just I guess touching back on Clearwire again. Your competitor within that customer had seemed to suggest that Clearwire had taken on as much inventory as they would need basically to get them through their 2010 buildout plans. Is that your view as well and what -- are you getting any sense for what 2011 might hold?

I think I would compare with that assessment. And 2011 I think is still to be discussed and I think it's a question which should be really directed to Clearwire. I don't know what their exact plans are.

Fair enough. Thank you, guys.

Alex Henderson, Miller Tabak.

I got a couple of questions here off of stuff that has already been said so let me just see if I can run through them. First off, on Clearwire my understanding is that you have been developing a product that is somewhat customized for them. Is that an accurate read?

That is a read; I don't think we ever mentioned something like that. Yes, that was one of their demands and it's a discussion I had with a customer.

Is it likely that that would at some juncture result in some better visibility to that 4G customer coming back with orders through you at a slightly higher percentage rate than you might have gotten otherwise?

It might be, but at this point I am looking at all of this as a total speculation. I think that the issue is going back and understanding their plans from them and how they want to continue rolling out their network and doing their business. So anything I will say around those things is total speculation at this point.

Okay. Second, you haven't mentioned the asymmetrical product. Can you talk a little bit about what kind of response you are getting to that?

We are doing some experiments with some customers around all sorts of different technologies which enable them to better serve the network, provide more data in the network sense, not necessarily only on a pure link capacity, with different modes and different ways of using their limited [pro spectrum] and network capabilities to provide more data.

So have you gotten any response back from customers on that approach?

In discussions with customers.

So too early, still?

Too early still.

The other comment that you made was on the gross margins. You have come to a mid-30%s, the trends are improving but you kind of trailed off when you started talking about 2011. I would assume that at this juncture there is no reason to believe that gross margins would not continue to improve in 2011.

Is there any -- can you give us some pings and pongs of whether you think that is the right way to start?

I think that will stay in the mid-30%s; they will probably improve. They might improve, they might come down. It's very hard to predict at this point, but I think that we have seen gradual slow improvements.

Okay. And then on the India stuff just so that I understand the dynamics a little bit, clearly the red tape issue is an ongoing problem but I would think that the inventory in the field would also be starting to run out.

Is the Indian government cognizant of the degree to which they are holding back their economy by not allowing that gear in? How do we think about what pressure is on them to get this resolved?

To that I will say very simple. I think that you are raising a very valid point. If you read the Indian newspapers you will see a lot of articles on both sides of the story. I think some of the operators are pushing; they need to deploy 3G, they got licenses. But in any government-operated regulatory environment you reach a balance and that takes time.

Okay. So bottom line though is that if you didn't get any book and ship on 4Q, if the tape problems and the ordering problems persisted how much exposure would there be to 4Q?

There would be some exposure to (multiple speakers).

Are we talking about $5 million or $10 million or are we talking about less than that?

Probably less than that.

Okay, I will cede the floor. Thank you.

Matt Thornton, Avian Securities.

Good morning, guys. Thanks for taking my question. Just coming back to India really quickly, I think we have talked a lot about the timing and the prospects for a catch up in that business, but is there any risk of loss orders there? Is there any risk that carriers are going back and reevaluating plans and vendors?

And not just specific to Ceragon, but in general. Is there any risk of loss of those orders?

Until I see an -- and that is true for India as well as another place -- I feel until I see an order in hand it's a bird in the sky. And I need to have it in hand and until that point there is always a risk.

Now there is a large risk? Probably not because we are in there talking very extensively with the customers.

Okay. And then on that same notion, Ira, you made it a point to discuss the competitive landscape in your prepared remarks. Can you just talk a little bit about what has been, what the change has been or the trend has been in India? Has there been any change in the competitive landscape in the background of all this?

In the background on all of this we haven't seen a major trend -- changes in India. I think we are seeing the same competitors in there, being Erickson and NEC. We see NSN both being a partner and a competitor in India and we see Huawei playing as well. I don't think I have seen a major change from anything here in the last six months.

And then just coming back to the prior guidance commentary, last quarter you guys talked about operating margin 5% to 7% risk to the high-end. Obviously, Tali, you talked a little bit about gross margin. It sounds like you have got increased conviction and increased comfort with the mid-30% range.

So how can we think about the operating margin guidance go forward? And when you think the 2011, I think you guys have previously said that you could achieve the 10% number at least one quarter in 2011. I guess how can we think about that timeline as we go forward here since you guys are obviously running at a much better run rate here coming out of the first half of the year?

I would say that as far as the target that we set up for ourselves for this year, 5% to 7%, we feel comfortable with the higher end of the range. And then we spoke about 10% as longer-term, I absolutely hope that we will set it as a goal for 2011 and achievement it then.

Got you. So for the full year, not necessarily for one quarter, but a full-year potential target?

For the full year, yes.

Got you. Okay, that is very helpful. Thanks, guys.

Daniel Meron, RBC Capital Markets.

Thank you. Hi, good afternoon. So a couple of questions on my end. First of all, can you discuss a little bit the notion that you get from these days from discussions with carriers in Europe one or the other regarding -- relating to the macro impact? And then the follow-up question relating to that.

Look, I will say about the macro impact I don't know. I think we are too small to understand the macro impact. I think our discussions are too point-related, although we have seen I think one of our customers from the macro impact slowing down and that is one out of quite a few.

I don't have a good read. The read I have is right now that we continue to do business in Europe.

Okay. Fair enough. And, Tali, was there any ForEx impact one way or the other on the current quarter's results or when you look at the outlook? And how should we think about hedging in the coming quarters?

Well, we do hedge the euro partially, meaning I hedged the balances on my balance sheet, but this is after we have recorded revenues. So definitely after we had this large decline in the euro several months ago I was hedged and protected on all the amounts that were owed to me.

As for the future, since I don't know exactly what the revenues, the specific revenues are, it's very difficult to hedge future revenues. So you can assume that those revenues in the euro we do lose some when we convert it to dollars. But when I go and quantify it is not a large amount, but our revenues in euros are about 10% to 12% of total revenues.

Okay. How much is in other currencies, like say the British pound?

The vast majority is dollars, then 10% to 12% is in euro, and I may have a very few percentages in pesos and in Brazil. But very, very small amount.

Okay, got you. And then I would assume that -- was your bottom line positively impacted by the weakening of the shekel or was it pretty much neutral?

No, it's neutral because as far as the shekel is concerned I fully hedged it at the beginning of the year.

Got you, okay. And then last one for me. When I look at your cash conversion -- I know that this quarter was down a little bit, but when I am looking at longer-term perspectives, say over last I guess eight quarters or so, your net income continues to show that, at least on a pro forma basis, that you guys are making money.

When I look at the cost conversion it is still pretty much either flat or slightly down over the last several quarters. When do we get the reversal? When do we start seeing the actual operating cash flow rather than just pro forma earnings in the model? I realize that you are still in a growth phase but still this has been a nagging issue for the last several quarters or years actually.

Yes, I think that you can see on the balance sheet that we did have an increase in inventory and we do mention it each and every conference call that a very large portion of our inventory is related to product sends to customers to be installed and not yet recognized. So we are installing more and more, especially in Indiana as we mentioned before, and I think that that will convert into cash.

Okay. Thank you.

Thank you, Daniel.

Ilya Grozovsky, Morgan Joseph.

Thanks. So not to beat a dead horse but just back to India for a second. Is there any possibility that you guys could actually increase market share in India given that the security concerns for the most part are with some of our competitors' equipment?

Yes, there is a chance of doing that. But it's exactly the reverse of the question that I have about I think awhile, two speakers ago; until I see it in hand it's still in the sky. So we work hard to get as much revenue and as much share of the market as we can.

Okay, but are you seeing any increased interest based on that?

Yes, we see increased interest all over the place but it has to do with specific discussions with the customers.

Okay, thank you.

Scott Searle, Merriman.

Good morning, good afternoon. Ira, just to follow up on India, I just want to make sure I understand the exact process and where we are in the process right now from an approval standpoint.

So at the current time you have submitted to mandatory third-party security audits. Have you completed all of those audits and now you are just waiting for the paperwork or the Indian government to sign in effect? Or are there some other steps?

And could you -- look I understand we are dealing with a government entity here, not the fastest moving, but kind of what is the timeline of different outcomes that you see, both the earliest to maybe to indefinite on the other side of the equation?

First, we have not gone through all of this and I don't think we will need to, because all this are specific to certain things and not everything.

I mentioned the whole process with self certification, all the signing agreements. I think what we are really waiting for now from that perspective is a finalization of the regulations and the contracts between the Ministry of Telecom and the operators, which will then turn back to back into discussions with the vendors.

I think it's getting closer to a close, although I will not predict an exact time because we started seeing drafts of some of those agreements which have been circulating between the Ministry and the operators and then some of the vendors.

Okay, got you. And by the way, in terms of some of the Chinese vendors' position, the one that impacts you more so being Huawei, have they been marginalized from an operator standpoint in terms of less likely to be selected because of what has happened with the -- originally with the China equipment band? Or, no, has that not really impacted their standing with the operators?

I believe that at the end of the day and that what most of the people in India read, the Chinese vendors will continue to sell in India.

Okay. And just to follow-up on a couple of other regions, you mentioned that Africa was starting to come back. [Barty Zane] has kind of gotten through the early throes of some of the integration it sounds like and I have been hearing about budgets starting to be reappropriated.

Are you benefiting from the [Barty] relationship into [Zane]? Is [Barty] making some of those decisions or are you making other inroads into Africa where you are having some success now?

We are going after all customers worldwide including that type of a change. We do announce customers once we have deals in hand. It's the same story on [Barty]. If we make successes there, we will announce them. If not, probably not.

But at this point the only thing I can comment is we work with everyone.

Got you.

Trying to gain from that with nothing guaranteed on the table.

And in terms of the supply chain right now some other vendors have been having problems with more general types of components and availability. Are you having any issues on the manufacturing or supply chain front?

Not really. At this point, not really.

And just lastly I want to confirm on the gross margin, Tali, the expectation coming into June was that some turnkey revenues could temporarily depress some of the gross margins. Obviously you guys did a great job on that front.

But it sounds like at this point in time you have done enough on the product front and/or been able to manage that process that is that issue completely removed now and ex any sort of pricing issues this should be a steady state kind of gross margin run rate?

Well, as far as turnkey projects, we did have quite a lot of turnkey project revenues in Q1 and Q2. So I feel comfortable with this gross margin even with revenues from turnkey installation projects.

Okay. And just last item, in terms of September, a quarter at the current time, what sort of turns business do you need to hit that number or that range?

It is a typical quarter like any other quarter where we are doing something like a third of (inaudible).

Great. Okay, thanks so much, guys.

Bill Choi, Jefferies.

Just following on this topic with turnkey business, when we look at balance sheet items, between deferred rev and inventory there is some $7 million that changed here. And so I guess I am curious as we look at in India still backlog being converted, how much room, headroom do we have here in terms of these line items stabilizing?

And when orders do start coming in India do you anticipate that again you need to build out these -- it will be more turnkey project-oriented and you would have build up of both deferred rev and inventory that more gets pushed out into sometime in mid-2011? Just if you could talk through partially India and how that might impact the balance sheet items.

I don't think I will refer specifically to the balance sheet items, but I think you are reading it correctly. Those are being related to, by the way, to projects both in India and worldwide -- not only in India.

And I think that they will come down in Q3 and continue coming down a little bit in Q4. And as orders come back from some of those places they will come back up again as we push and we go through the installation cycles.

So when you think about orders improving are you thinking that in 2011 you would get more of a sequential boost up in revenue recognition more like in Q2 kind of time frame, rather than Q1?

I didn't understand. Oh, no, because I think we will have to push the timelines a little bit into Q1 because as we said in some of the places people are under pressure to deploy as soon as possible.

Okay. Also wanted to understand the 53% of revenue in Asia-Pac was India flattish therefore still over 40% of revenue? Can you confirm that?

Yes, this is true.

Okay. All right, great. Thanks.

(Operator Instructions) Larry Harris, CL King.

Good morning. Thank you and congratulations on achieving the results here for the quarter. What was the mix between, day, IT versus SDH radios in the quarter?

It was about 60% revenues coming from IP products.

Great. And with respect to the inventories, just doing some calculations. If I take 37% of the $68.6 million that suggests about $25 million of the products that were shipped but not recognized at the end of this quarter, about $25 million versus about $35 million last quarter.

So does that, for lack of a better term, suggest how much you have in the way of cushion that can be recognized, say, off these turnkey projects that we might have as much as $25 million? Or is there always going to be a certain amount regardless of conditions in India and elsewhere?

It's not only India. There are always other projects but it is a good indication of the amount of turnkey projects. Of course in cost terms not in revenue terms.

But, yes, it is an indication of how much additional turnkey business is waiting to be recognized.

Great, great. And I just wanted to confirm reference to one of the earlier questions that the amount of turns business that you need I guess in the fourth quarter to attain the guidance here of 30% to 35% growth, maybe towards the lower end of the range that you need less than $5 million to $10 million in turns business in India in the fourth quarter?

Yes.

Okay. So is it less than $5 million or is it some where --?

Around that range. Look, the fourth quarter is a little bit further away. There is a lot of parameters that will need to come still in yet.

Understood. Okay, great. Thank you.

James Faucette, PacificCrest.

Thanks very much, good morning. Just wanted to ask a couple of follow-up questions as it relates to the geographies outside of India.

On Europe I think you made the indication that things were just kind of plugging along there without meaningful change. I guess I am trying to get a handle on what you think may need to happen for that market to improve? Is there something that you need to do for Ceragon specifically or is it more of a market demand issued there?

And then for the US, obviously outside of Clearwire you seem to be indicating that things seem pretty good and stable for the rest of your customer base. What is your feeling for the prospect for further acceleration in the US with the other carriers outside of Clearwire?

First and foremost, I think usually it's all about us from the perspective of we take full responsibility and we need to do better to improve our conditions in any of the markets. And I think that is fair.

Yes, in Europe I think that is part of it and we have to continue on doing what we do and increase our share within the market. Similar in the US. I think the trends in both markets are staying about the same.

Europe is growing but not at a very rapid rate where We see most of the growth in EMEA is a little bit in Eastern Europe, Russia, and Africa. Less in classical Europe and the USA. We are going after a lot more customers at this point and I think we are starting to have success with that.

Great. As far as -- back on the gross margin question, is you had indicated that you think that they could slowly continue to go up, but obviously there is always risk that they come down. I guess I am trying to parse that a little bit.

The improvement would you feel -- would that come primarily from I guess just lower costs and cost-reduced products or cost reductions hitting your products? And then on the other hand would you think that your gross margin headwinds would come primarily from competitive issues or how should we think about what the drivers either up or down should be?

I think the three drivers there which play. One, is we really -- we are continuing our cost reduction efforts within the products and I think we are making nice roads in there. Yes, there is competitive pressures which this is the other side.

And the third side which I mentioned is really having to do with the trends that we see. More of the operators are willing to buy up front larger capacities and more features within the product and pay a little bit more for that to future-roof their products.

Great, that is very helpful. Thanks very much.

Rich Valera, Needham & Company.

Thank you. Good morning. Just another follow-up on the gross margin side. Could you remind us what were the dynamics that drove your gross margins to the 32% range which have hit a handful of times over the last couple of years and what gives you the confidence that those dynamics might not come into play again in the future?

Well, you know there are two trends -- there is the price and there is the cost. And as we penetrated more and more into APAC and especially into there was huge price pressure so we were fighting. There was -- on one hand there was the line of price reduction and the other hand was the cost reduction.

Now we are already a big player in APAC and in India. We have the advantage of being a large one. We have the advantage of having good product and the two trends of continuing to reduce the costs on one hand and bringing new features and being able to charge more is what is changing the trend right now.

Do you feel like the pricing dynamics for you in Asia are much more stable and I guess your percentage of revenue from there is also much more stable than it was at that point when your revenue was increasing substantially from that region?

This is correct, yes. That really happened during the period when the percentage of APAC increased. Now we are much stable there.

That is very helpful. Thank you, gentlemen.

There are no further questions. Please continue.

Thank you very much for everyone for joining the call with us this morning. If you have any follow-on questions, we will be glad to entertain them on a one-to-one basis and follow up on calls. You can always reach us. Thank you very much and have a nice day.

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