Ceragon Networks Ltd (CRNT) 2010 Q3 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Ltd. third-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; Mr. Tali Idan, CFO of Ceragon Networks; and Ms. Tsipi Kagan.

Today's presentation will include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are subject to risk and uncertainties that could cause Ceragon's actual results to be materially different than 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 of Ceragon's reports filed with the SEC.

Web users can visit Ceragon at WWW.Ceragon.com to read the complete forward-looking statements language. During the question-and-answer session, please limit yourself to one question. We will poll for follow-up questions if time permits.

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

Thank you for joining us today. With me on the call is Tali Idan, our CFO, and Tsipi Kagan, who will join Ceragon as CFO on November 1. We are looking forward to having her join us and we welcome her to the Company. And we are now -- Tali will continue contributing as part of the management team going forward. Tsipi?

Thank you, Ira. Hello, everyone. I am pleased to be joining Ceragon and I look forward to meeting all of you in the near future.

Q3 was an excellent quarter by all measures. We again reported record revenues, high gross margin, and improved operating margin. Our overall book-to-bill ratio was about one in Q3. It was well above one for the regions excluding India, where the new and complex security requirements have delayed orders until recently.

With strong demand throughout the world combined with our strong execution, we now expect to achieve annual revenue growth toward the upper end of our target range, 30% to 35% for the full year, and exceed our original net operating margin targets for the year.

Regionally, Q3 was similar to Q2 and in line with our expectations. Operators in India began to release purchase orders at the end of Q3. We have received several more orders from India during the early part of Q4. As we have mentioned before, underlying demand is quite robust; operators are intent on releasing orders to meet their commitment for launching the 3G network.

We expect order prevalence to be back to normal toward Q1 or early Q2 as each operator concludes its process with the government and some wait to complete annual budgets. There will probably be a surge in orders in 2011 which will increase our backlog. We don't expect a corresponding surge in revenues because with some of our carriers we recognize revenues only after installation and acceptance, and our practical limitation associated with how fast we can work with our customers to install equipment.

We are pleased to sign a multi-year agreement with TELE2 in Russia during Q3. Eastern Europe has been one of the few soft spot areas so far this year and we think this shows that we are returning to a growth environment in Eastern Europe.

We are pleased with our overall position in Europe and APAC where we have been putting a lot of focus and resources since 2007. We have also made excellent progress in North America. We are enjoying repeat business with a growing number of diverse wireless customers such as Rogers Communications, one of Canada's largest telecom service providers.

Now we are focusing more attention on Latin America and Africa. We see a lot of potential to increase our business and share of market in these regions. In Nigeria, for example, the number of mobile subscribers has doubled between 2006 and 2009; still the country is only 50% mobile penetration. We have been evaluating various alternatives for improving our traction in these markets.

Looking ahead we continue to expect growth in demand for microwave backhaul in all regions of the world. Europe, already heavily dependent on microwave backhaul, will be going through a major upgrade cycle from low and medium capacity to high capacity to accommodate the explosion in data usage. As one example, Hutchison Austria is upgrading their entire network with our equipment.

In North America we expect microwave backhaul to play an increasing role when a second-phase rollout of 4G networks extend beyond the dense urban areas. This will take a while until it starts. Of course, the emerging markets will continue to experience the highest rate of subscriber growth as well as a trend toward more data usage.

Serving the worldwide markets effectively presents a unique set of challenges. Due to the lower ARPU or lower revenue per bit, operators must manage equipment and operating costs very carefully. At the same time, high capacity, feature-rich solutions are required.

With the pace of subscriber and data growth in those countries volumes are high, which means competition is fierce. In addition, including OEM partners as part of the go-to-market strategy means sharing already been margins.

We have met the important requirements for successfully addressing worldwide markets that some of our competitors have yet to accomplish. This includes a single platform that enables scale, advanced networking features, advanced spectrum usage, continuous design [to cost] cycles, and efficient supply chain.

As to leadership, our recent acquisition of Elxys Innovations will further enhance our position. Elxys is a next-generation RF integrated circuit design house that has been our partner for years. Bringing the RFIC design capabilities in-house will enable us to further enhance our radio performance and further optimize our system in terms of pipe integration and lower power consumption. This integration has allowed for a rich feature set while significantly reducing system costs.

We believe we are the low-cost producer in our segment, certainly among the specialist vendors. We have managed to gain significant share and make money in even the most difficult and competitive markets. Now we are placing our strategic focus on extending this leadership to other regions, Latin America and Africa in particular. In addition to continuing our growth in APAC, Europe, and North America we see abundant opportunities to accelerate growth in those other regions as well.

To summarize, we see a number of catalysts for continued growth next year and beyond -- resumption of normal ordering patterns in India, continued robust demand from other parts of the APAC region, beginning of capacity upgrade cycle in Europe, improved traction in Latin America and Africa, 4G network buildout eventually extending beyond major metropolitan areas in North America.

We have a high degree of confidence that this catalyst will occur based on our customers' perspectives and needs but with varied timing for each. The consensus of the industry analysts is that our overall market is likely to grow about 10% in 2011. We have historically outperformed the overall microwave backhaul market and we think we can continue to do so.

Taking the long view we are challenging ourselves with ambitious goals with our leading position in both innovative radio capabilities and costs combined with our global reach, strong channel relationships. We are intent on retaining and increasing our market share so we can continue to grow faster than the overall market.

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

Thank you, Ira. Revenues in Q3 reached an all-time high of $62.3 million, which was towards the upper end of our guidance. GAAP net income was $4.6 million or $0.13 per diluted share. Excluding stock-based compensation non-GAAP net income in Q3 was $5.5 million or $0.15 per diluted share.

The geographic breakup of revenues appears in the press release. As you can see, the only significant change was that Latin America increased to 11% of total revenue, the highest level in several quarters. This was primarily due to a new customer [in Brazil]. We are working with an OEM partner and this customer.

Our four OEMs together accounted for 33% of total revenues in Q3, a big increase from recent quarters. We had two 10% customers in Q3; one was an OEM partner and the other was an Indian operator.

The non-GAAP gross margin in Q3 was 36.7% reflecting several factors including continued improvement in vertical costs and improved pricing that reflects the addition of [premium] features and functionality. Non-GAAP operating expenses increased slightly to $17.8 million.

Operating cash flow in Q3 was negative by about $15 million and at the end of the quarter cash and cash investments totaled approximately $77 million. Cash balances also reflect the $1.2 million net payment for the acquisition of Elxys. The operating cash flow resulted mainly from an increase in receivables and a decrease in payables.

The increase in trade receivables is because, once again, we have more customers with relatively longer payment terms, similar to the mix we experienced throughout 2009. As a result the DSOs increased to 100. This does not represent an increase in collection risk. These are mostly these same customers we have worked with in the past with a successful collections history.

The decrease in payables resulted from advanced payments to our EMF manufactures. This reflected the need to share some of the risk associated with the hold on orders from India. As the inflow of orders from India increases we expect this situation to reverse, probably at the end of Q1 or the beginning of Q2.

Our inventory went down to $61.9 million. In Q3 about 34% of our inventory represented products already shipped but unrecognized as revenue. Our overall book-to-bill ratio in Q3 was about one; however, excluding India, our book-to-bill ratio was again above one. For Q4 we are guiding to revenue in the range of $63 million to $65 million. This guidance corresponds to the upper end of our original growth target of 30% to 35% for the year.

As you recall our target range for operating margin in 2010 was 5% to 7%. We are very excited we are on the way to exceed this target. With all those drivers in place we are expecting an excellent year in 2011.

As Ira indicated, it's still too early to give a specific target range because the exact timing of new projects, basic installation, and revenue recognition requirements is difficult to predict this far in advance. What we can say now is that we continue to be optimistic about the business outlook and we are expecting to see growth from all regions next year.

Now we will be happy to take your calls.

(Operator Instructions) Mike Walkley, Canaccord Genuity.

Great. Thank you very much and congratulations on the strong results. I was wondering if you could walk us through India and what is in your guidance for Q4 in terms of book and ship.

And also if you could just help us with the puts and takes for your gross margin into Q4 and into next year. What levels of mix could make it go higher from the strong results you did in Q3 or what might make it go lower? Thank you.

Hello?

Sorry, I probably was on mute, Mike. Going back to India, I think we see the security clearance issues clearing up in India. They have not cleared completely but we see our resumption of the order cycles for most of the customers.

As I indicated on the call, there are usually timing issues which have to do with them reevaluating budgets. Some of them are still working out the security issues so our assumption is that booking level will return to normal somewhere during Q1 or early Q2; although we will probably see a much stronger booking in Q4 than we have seen in the past, near past.

As to gross margins, I will let Tali.

The outlook for next quarter, I would say, is an additional improvement in gross margin. As far as next year's is concerned, it's a little bit too far to predict but I think that with the gross margins that we experienced this year it's a good guidance for next year.

Ittai Kidron, Oppenheimer.

Thanks. Congrats and good numbers and, CP, good luck to you and, Tali, thank you for your work.

Ira, I want to dig in a little bit into your growth comments on 2011. Can you tell us, in your opinion, how much the backhaul market grew in 2010?

We assume that the market in 2010, the backhaul market, almost didn't grow from what we see in the numbers. But we need to look and people have not published the numbers yet. It usually takes them six months after the end of the year, but in general we think it was flat.

Blaine Carroll, Hudson Securities.

Thank you. Hi, everybody, and, Tali, best of luck

Good morning.

Best of luck, Tali, in the future.

Tali, is staying with us so --.

I know that I can still wish him luck, right?

Yes, you can. He has a lot of work to do.

Thank you very much, Blaine.

You are welcome, Tali. It looks like we are getting shut off after one question so I guess the one I will focus on is on Latin America and if you could sort of talk about some of your initiatives there.

You mentioned a big customer in Brazil. Is this a new OEM relationship as well as one of your existing and then what other initiatives do you have in Latin America to grow that region? Thank you.

One request to the operators, we do ask for one question. At least keep people online and let them finish the one question, the conversation, and then we can continue.

Going back to the OEM, the OEM we are working in Brazil is what we are referring to for the last two years as OEM number two. It's an ongoing relationship which has strengthened over the last two or three quarters, and we are enjoying the work with that OEM moving forward in a few regions around the world.

Okay. And then the time, just very quickly, the timing on recognizing sales in India from the time you get the order until the time that you can recognize. What is a sort of a ballpark on that, Ira? I know it would differ from carrier to carrier but what is a ballpark on that?

Look at this year, for example, I think you get the best ballpark. We ended Q3; we are still recognizing revenues from India from orders we got in Q4 of last year. So it's usually -- if I look at the average, the average is somewhere around five to six months.

Thank you.

And this is really spreading out over time depending on the projects. Some of them are immediate and some of them take over time depending on the type of the carrier and the type of deal we have with them.

Okay. Thanks, everybody.

Amir Rozwadowski, Barclays Capital.

Thank you very much and good morning, folks. Getting back to the gross margins and certainly we have seen your gross margins tick up on a sequential basis here for the last couple of quarters, how should we think about the sustainability of those gross margins over in the longer term? I know you had touched upon that a little bit earlier.

And then perhaps looking towards the operating margin line, obviously your longer-term target has always been that 10%. Should we now consider that 10% within -- now that it's within throwing distance is there sort of a readjustment in terms of where you think the longer-term operating margins for the business could go?

Well, gross margins depend on many factors and this is why we are usually very cautious on prediction because mix may change, but I agree with you that we have for the last three quarters a steady growth trend which we believe will continue in Q4.

As far as next year, I think it will stay at around the same level. This is what I can say right now and what I can say now because it's a mix of geography, a mix of deals, mix of products, mix of channels, and it's quite difficult to predict.

I would like to emphasize one other point. We see the increase not as much from the mix and the other parameters but the main factor which is in fact we see within the mix is the trend of the customers to order more license and more feature-rich products. We see that in more and more customers that are gearing up towards very high capacities, very feature-rich licensing to support very large networks.

This tick and a little bit of change in the way ordering patterns are being done is not contributing to, we think, a lot of the increase in the gross margin.

And then from the operating margin --?

(multiple speakers) continue. Let me continue. Amir, you asked about the target operating margin.

Yes, this is true. The target operating margin that we have set for ourselves several years ago was to reach 10% operating margins. This is still our target and we are moving gradually towards this target. We are still keeping it as a target and I think that if we continue with this gradual improvement, which is our goal, we can reach it, let's say, maybe towards the end of next year.

Great. Thank you very much for the incremental color.

Alex Henderson, Miller Tabak.

Just a couple of clarifications. When you said gross margins could stay at these levels I assume you mean the third quarter, not the average for the full year. Second, on the clarification, the Brazilian comment about an OEM. That is not a Brazilian OEM, it's an OEM who is selling into Brazil, is that correct?

Then the question I had for you is your US operations were actually surprisingly low considering -- as a percent considering your target of reaching 20% there. The sluggishness there seems in contrast to the spike in the Asian business. Can you talk a little bit about what is going on in the US market? What your situation is with Clearwire? What is going on with respect to any customization for them?

And, conversely, if the Asian business picked up outside of India could you just mention what is driving that? Thank you.

Okay. I think you asked quite a few questions; I will answer shortly. Gross margin will stay in the ranges that we saw this year. As you said, Q3 is a good approximate, I think, for the full year as well.

But let's talk about some color about Brazil. Yes, it's an OEM from outside of Brazil. There are no local OEMs; a few large telecom equipment vendors selling into Brazil and we are working with one of them.

You looked about the North American market. The North American market at this point for microwave backhaul is a very segmented market where we do not see any very large significant deployments at this point. There is a lot of talk, a lot of people talking, but we don't see those and we are working very hard with the operators where our expectation -- it will take some time for them to do microwave backhaul deployments as most of them are focused at this point on fiber in highly dense urban areas.

You asked about Clearwire. We look at Clearwire as one of our customers the same way as many others around the globe. We continue selling into Clearwire at low quantities at this point waiting for their next cycle of expansion.

Great, thanks.

Ilya Grozovsky, Morgan Joseph.

Good morning. Can we talk a little bit about the accounts receivable and just kind of get a better understanding of what is driving that to these levels?

Yes. The accounts receivable, there is a mix of payment terms, as you can imagine, and it may change so during the first half of the year we had bigger portion of the mix, customers with shorter payments terms. Now we are shifting towards a more normal, should I say, or a little bit longer payment terms which reflects more the experience in 2009.

So it's not a major shift. This is within the range that we have experienced throughout the years. But when it happens, receivables do increase and it's a little bit more difficult to cover for the collections that you expected. But once again, it's not related to collection problems or credit worthiness of customers.

In the fourth quarter would you expect it to be also in the days sales outstanding to be over 100 days or would you expect that to come down a little --?

Ilya, we can hardly hear you. Can you speak up please?

Sure, sorry. Do you expect the days sales outstanding to be at the similar levels next quarter or to come down?

I expect DSOs to be about this level that we have in this --.

Matt Thornton, Avian Securities.

Good morning, guys. Quick question, when you look at 3Q you guys came in about $1 million ahead of the midpoint of guidance. For 4Q you are now guiding, call it, $3 million ahead of the prior implied guidance.

Where did the incremental upside come from because it doesn't sound like Clearwire has returned in any big way? It sounds like India is much more of a bookings game at this point. So I guess from a revenue standpoint where have you seen the upside?

We see the upside -- look at my comments from the beginning. We see book-to-bill worldwide with all our regions, except India, above one. That means we are growing. We are not dependent on any single customer, be it Clearwire or anyone else, for our growth.

We are spread worldwide globally with an, I think I mentioned on the call, just a few accounts and those are not -- we talked about customers in India being 10%. We talked about Brazil; we talked about Hutchison in Austria. We talked about TELE2 in Eastern Europe; we announced this quarter customers in Nigeria.

I think we see growth in all our regions which support an incremental growth from quarter to quarter and makes us feel very comfortable with a very spread out and even growth also into 2011.

Got you. Okay, so multiple drivers. Okay, that is very helpful.

And then maybe you could just give us a quick update on the competitive landscape. Have you seen any changes with any of your typical customers in terms of pricing patterns, new product offerings, I guess anything new on the competitive landscape?

I think the competitive landscape, and I always characterize it as first competition, but nothing changed. I don't think that the competitive landscape has changed. It's a very, very competitive environment out there. I think we see some of our competitors coming out with new products.

We think we have the solutions on the table. We have a very [future set] single platform out there which meets most of the requirements of most of the customers. And with being under our assumption the lowest cost producer out there allows us to compete very effectively worldwide in all regions.

Perfect. Congrats on the results. Thanks, guys.

Thank you very much.

Peter Misek, Jefferies.

Good morning, gentlemen. Just a quick question, a little bit longer term if I may speculate. It appears like there is a confluence of events that are going to help drive the business. We have got potentially big LTE deployments in Europe beginning late next year, maybe 2012.

Can you sort of help us understand longer term the growth profile? We have endured some lumpiness due to the financial crisis but how do you look at the market one, two years out? I know it's difficult; I am not really looking for formal guidance. Also, how do you plan for production, etc.? That would be great. Thanks.

Okay. What we see is there might be a confluence of all the factors into a small timeframe, but my expectation that those will play out over time. Yes, people will start rolling out LTE or will have what they call big LTE deployments in Europe and in the US at the end of 2011, 2012. But let's remember that those will come first and foremost in densely urban areas with a lot of fiber where microwave will take probably 12 to 24 months after that or will be a gradual increase, both in the urban areas and outside.

So my expectation is that the overall market will continue a steady niche up as that happens that people have the data growth. I don't expect to see a major spike up, but I expect a continual growth which will enable us to drive growth in the market whereas also gaining market share will probably grow faster than the market, as we indicated for 2011.

On planning production cycles, I think that one of the things that we achieved on the supply chain and that is a major advantage, we don't need to look that far away. What we need to look into is really two to three quarters out from what we see from customer and this is much more complete because part of our abilities and our technology is that we use standard EMF manufactures or standard EMF lines and we control the whole chain from the RFICs and all sorts of other ASICs. So we don't need to look that far out and we can ramp very quickly on very short terms if we need to.

That was very helpful. Thank you.

Scott Searle, Merriman Capital.

Good morning, good afternoon. Tali, best of luck. It has been fun working with you and, Tsipi, congratulations and welcome aboard.

Thank you very much.

For starters just wanted to clarify, did you provide a number for India revenues in the quarter? And also as it relates to Africa, Ira, did you address whether or not that is specific to a couple of the new customers that you announced or is this really Bharti starting to roll into Zain properties and exerting their buying influence over that and carrying you into the process?

I will start with Africa. No, it's still not. Bharti is like any other customer around the world. We are working very hard to get into the Zain territories with Bharti and without Bharti, by the way. Some of those were customers of ours before they were brought over by Zain and it's part of a major effort that we are pushing forward.

By the way, like a lot of other customers worldwide, we knock on many doors in every quarter. The growth in Africa comes at this point from other customers; some of those we announced early on during the quarter, some of them not yet.

So the India number I will let Tali answer you.

No, we didn't provide -- we usually don't because it's clearly part of the APAC numbers, but since you ask I will give you an answer. Revenues on India this quarter were about one-third of the total revenues.

Okay. And if I could, Ira, you talked about growth of the market in 2010. I am not sure if you provided a number for 2011, but could you take us through your thought process of what you are seeing for 2011 from a market standpoint? And India specifically, will India be a growth category for you now that we have gotten through a lot of the qualification process?

I think I provided on the call an indication that what the analyst reports out there they forecast 2011 to grow by about 10% for the overall microwave market. And we indicated we expect it to grow a little bit faster than the market, like we usually do.

Yes, India will be part of our growth drivers also in 2011, although not the major one for the growth. Yes, and because of security we do expect from a revenue perspective to grow also in India.

Great, thank you.

James Faucette, PacificCrest.

Thank you very much. Good morning. So I just want to follow up on one thing that you had mentioned is that you had talked about expecting to see growth out of Europe.

I guess my question is if you have started to see evidence of them increasing their -- the carriers, they are increasing their purchasing today or is that comment simply based on the expectation that as they buildout additional network capacity that their microwave requirements will grow up?

Yes, we have seen, I think I mentioned on the call one customer of ours in that range which is Hutchison Austria, which is upgrading their whole network to -- really to support much better data services. We see a few other players talking about this, some of them started building out. That is in Europe where people are upgrading their capacity and some of them are still in our [PRFI] stages but some of them have started working as well.

That is great. And then my other question was just as we go into 2011 and beyond how should we think about your mix between OEM partners and direct sales to carrier customers?

This quarter, for example, our OEM sales went up to 33% but if I look at the average for the year I think the number is about 20% for the year on average. And I think that will remain moving forward as the mixture. It's about 70% direct, about 20% OEM, another 10% through I would say varying channels, mainly into enterprise and government customers.

That is great. Very helpful. Thank you very much.

Aalok Shah, D.A. Davidson.

Thank you for taking my question. Ira and Tali, impressive gross margins over the year. Is there one thing you can point to now as to say what has happened with gross margins? Is it a function of revenue or is it mix or maybe kind of give us a sense of how we should even start thinking about 2011?

If your revenue starts to grow, as you have indicated, can expect gross margins to get to the 40% range here at some point in the future?

Yes, again, there are really many factors but the 40% we wish we could reach it but I doubt because again size of the deals, the deals are growing. APAC and India there are a lot of deals to make, more services which are not necessarily coming with better margins.

But I think that the major thing, and this is what Ira mentioned before, is the more feature, better feature, unique features for which you get better pricing. So, yes, I think we mentioned the trend. The trend is still up towards next quarter and we will stay, more or less, in the same range as it is this year, which we think is huge improvement over previously.

Tali, if I can just follow up on that, how much -- is there a way to gauge how big, as a percentage of revenue, services business now is versus last year?

Services are about 7% of revenues so it's still a smaller portion, but it has been growing.

Great, thank you very much.

Daniel Meron, RBC Capital Markets.

Thank you. Hello, Ira. Congrats on joining -- on board, Tsipi, and good luck, Tali.

I got dropped off the line before and so I might have missed it. If you can -- Tali, if you can address the negative cash flow here. I understand the dynamics behind it, but when I look at the history you guys continue to show top-line growth, the P&L looks good, but the cash flow remains pretty negative. And I think over the last several years, ever since you did the follow-on offering, the negative cash flow amounted to, if my math is right, to about $25 million to $30 million.

So I am trying to think, beyond this quarter what is going to reverse it? Every quarter you show growth and then even in times that you don't show growth there is a negative cash burn. So if we can go through the dynamics of that and how it's going to be reversed?

Yes, there are two trends -- one was related to receivables and customers, the other one was related to payables and suppliers -- and both of them have had negative impacts this quarter on us. On the supplier side, because I always talk about the receivables and explained it on the supplier side, which I didn't touch, and that is the second portion of it.

As you know, we had very large growth plans for the year. India stopped the orders towards the beginning of this year. We had to stop orders to suppliers but not always it's possible.

Suppliers, if they place the orders then it's already there and we have to compensate them. We have to pay for the inventory and sometimes we have to compensate them for inventories that they order and fill in and produced products. This is really what happened this quarter, which not only we paid them for what we have pulled out as products, but also paid them advances to finance some components that they had to buy and couldn't.

So that was the portion of suppliers and the portion of the receivables I already explained.

Right. And the bigger picture? I mean is this something that is characteristics of your business? Is it something that has to do with just various instances?

Where do you think you will be, maybe not next quarter but say six months from now, a year from now as far as cash position?

I believe we will be positive, definitely with extra inventory and advanced payments will be utilized in the next three to six months. Once we get the orders that we were expecting from India we will utilize this extra inventory. We will continue to collect from customers so we expect to be positive on cash starting next year.

And just can you quantify it? How much percentagewise or some other way to try and get a number around it?

It really depends on the growth rate because you know from experience our growth also impacts on cash. But, so let's say normal growth rates, I think that we can be positive for a major portion of our profitability.

Okay, very good. Good luck. Thank you.

Larry Harris, CL King.

Thank you and congratulations. Good morning. Congratulations on the results for the quarter. Thank you, Tali, and look forward to working with Tsipi.

With respect to IP as a percentage of total sales, can you repeat that number? I didn't catch it.

Yes, IP -- revenues from IP-related products are two-thirds of the revenues.

Great. Thank you. And looking to 2011 with the normal timing differences between orders and when you can recognize revenues in India. You have, I guess, sort of a normal seasonality with the first quarter usually being towards the lower end and the fourth quarter perhaps being the strongest.

Could we see even a heightened effect in 2011 because of the timing of the placement of the India orders and when you will be able to recognize revenues?

As I said, recognizing revenues in India is highly project specific and usually spread out over a time. So the project effect on any fluctuations in orders in India really flattens it out and really removes the spikes. By the way, both up and down.

Understood, understood. Okay, thank you.

Alex Henderson, Miller Tabak.

Snuck in there again. So a couple of things I wanted to get some clarity on. The OEM increase, I would normally assume that OEM has a lower gross margin, not a higher gross margin. First off, am I thinking about that right?

And second, how should we think about that changing? I would assume that it's going to revert back towards its normal lower rate in future quarters so is that an offset on margins? How should we think about the shift there?

I think that you are reading correctly. OEM is a pressure on the margins. Along with that pressure we saw a little bit of increase in the gross margins, but we do have fluctuations of the OEM percentages over the different quarters. Some of them gives Tali a hard time in the ability to accurately predict the gross margins.

He always talks about the mix; it's part of the issue also of OEM out there. But on average I think that what happens is we have a lot of factors which cancel out each other or support each other out. So we can slowly see overall trends within the gross margin where it's going up a little bit during this year and we can expect for that to continue into next year.

Yes, I just was hoping that maybe you could help us with some of the mechanics. If the OEM piece is coming back in that should help your margins then? And what -- how much of an offset did you have here? You must have had a pretty good offset in terms shift to IP expanding margins.

I am just trying to understand what the mechanics are, what are the components that are raising the margin there and what is bringing it back in? If OEM is going to come down that should help your margins. I assume IP as a percentage is still increasing, yes?

IP as a percentage is still increasing. I think that if I look over the last quite a few quarters we have factors coming in and going out. For example, let's talk about -- usually we talked about the margin.

Number one factor is usually geography. You can see the increase in margins this year, although the geography we had a lot of India where it's usually much lower margins is still playing a very large portion of our business. OEM or channel go-to-market strategy is also a pressure with large OEMs sometimes being pressure on the margin. You can see also issues of amount of services that we have within the mix.

I think the parameters you pointed is net where we see -- with all the channels, all geographies where it's almost independent of the mix is that the product mix or not as much as the IP but the need for more data, more capacity, and putting pressure on our customers to order more feature rich and I would say higher licensing capabilities, which at the end pushed the gross margin up. And that is what we are seeing with on -- in all of that mix.

So it's a mix within the IP piece of more licenses per that is helping to drive margins?

Yes.

One other question on the OEM just to round it out. So OEMs also have lower sales and marketing costs as well. Do we see a commensurate increase in sales and marketing as that comes back in?

And do you expect to have to spend on sales and marketing to get into LatAm? And then I will cede the floor, thanks.

Okay. I think that what you are raising is correct but not in the model that we work with the OEMs. Yes, it's a little bit less on the sales and marketing but in general, because of our strategy, we work with the OEM hand-in-hand. We hold the hands and we walk with them into the customers, both -- by the way, I mentioned the customer in Brazil. We have our sales team on the ground working with their OEM sales team to really meet and exceed the customers' requirements and provide total solution out there.

Great, thank you.

At this time, gentlemen, there are no further questions in queue from the phone.

I would like to thank everyone for joining me on the call. I would like to welcome Tsipi again and welcome Tali again as part of the management team continuing to contribute to the Company.

Thank you, everyone, and looking forward to talking with you on one-on-one basis, the face-to-face over the next few days. Thank you.

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