Ceragon Networks Ltd (CRNT) 2010 Q4 法說會逐字稿

Welcome to the Ceragon Networks Ltd. fourth-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, the 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 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 of Ceragon reports filed with the SEC. Web users can visit Ceragon at www.Ceragon.com to read the complete forward-looking statement language. I will now turn the conference over to Mr. Ira Palti, President and CEO of Ceragon. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today. With me on the call is Tsipi Kagan, Ceragon's CFO. We are pleased to report a very strong finish to an excellent year. In Q4 we again achieved record revenue, higher gross margin, improved operating margin and book-to-bill of well above 1.

For the full year we exceeded our revenue growth target of 30% to 35% reporting 36% revenue growth to nearly $250 million. We reported over $20 million in operating profit, more than triple the amount we reported in 2009. As expected, order patterns are returning to normal in India and we are happy to say that our book-to-bill in Q4 was well over 1 including India. We are also happy to report that our book-to-bill ratio for the full year was above 1 as well.

We continue to see strong demand in all regions and expect subscriber growth and mobile data usage to drive capacity upgrade integration to next-generation technologies over the next several years. Two examples from last quarter are showing the above trends. We reported revenue from TELE2, our back-haul system support, TELE2 rapid network expansion aimed at providing basic services to more and more customers in outlying regions of Russia.

At the same time we also reported revenue from Hutchison 3, an important customer which serves one of our OEM partners. Hutchison is constantly replacing and upgrading their existing back-haul network in several European markets; upgrading them to an all IP architecture to serve a range of data services and high capacities most cost efficiently.

Moving forward a strong year ending and quarter puts us in an excellent position to focus and work on the integration of Nera customers, business and products. We are pleased with the progress we are making toward our strategic objective of becoming the number one wireless back-haul specialist, leading both in technology, cost and market presence.

We started first with the acquisition of Elxys Innovations in Q3 followed by the acquisition of Nera Networks earlier this month. Acquiring Elxys enables us to enhance our [radio] performance and further cost optimize our solution creating a rich feature set while reducing system cost.

The acquisition of Nera further strengthens our position because we can use the same technology enhancement with Nera long-haul products. As we said at the time of the announcement, Nera also provides immediate scale, geographic reach and project management capabilities which will accelerate our progress.

We are [maneuvering] quickly to create a single unified organization, product [assembly] and customer base. For example, less than a week after closing we have gathered 180 salespeople from both organizations together to create a single salesforce with a clear product roadmap. Already each salesperson knows their responsibilities and priorities, minimizing the uncertainty for customers.

Another indication of how rapidly we are moving on the integration is that Nera's network management system is already integrated with Ceragon and can manage our fiber IP10 system.

There is no doubt that we have a major execution challenge; however, all of the technical aspects are things we have already accomplished before within Ceragon. And we are encouraged by the initial feedback from both inside the organization and from customers. We are working to achieve a smooth integration followed by a substantial boost to our revenues and earnings power next year, starting from our strong Q4 base. Now I'll turn the call over to Tsipi.

Thank you, Ira. Revenues in Q4 reached an all-time high of $67 million which was above the high end of our guidance. GAAP net income was $3.8 million, or $0.10 per diluted share. Excluding stock-based compensation and charges related to the acquisition of Nera, non-GAAP net income in Q4 was $6.1 million, or $0.17 per diluted share.

The non-GAAP gross margin in Q4 increased to 37.1%, reflecting a variety of factors such as favorable mix and more premium features that carry higher prices. Non-GAAP operating expenses increased slightly to $18.5 million, representing 27.7% of revenues and cash and cash investments increased by $4.2 million to $81.5 million at December 31, 2010.

As for the geographic mix, EMEA was very strong this quarter, mainly due to strong business with a large customer in Africa and a continued expansion of Hutchison in Europe. The geographic breakdown of revenues appears in the press release.

In 2010 we have strengthened our relationships with our OEM partners. This helped us win more business in all regions and to compete successfully in a number of large-scale projects. Our four OEMs accounted for 38% of total revenues in Q4, a further increase from 33% in Q3 reflecting the strength of these relationships. Two of our OEM partners were 10% customers in Q4. For the full year we had two 10% customers, a (inaudible) Indian operator and one of our OEM partners.

With our excellent growth in Q4 and a book-to-bill ratio over 1, we're entering 2011 with strong momentum in our base business. We are expecting a modest sequential increase in Ceragon's stand-alone revenues in Q1, even though Q1 tends to be seasonally weaker. Our Q1 results will also include Nera from the date of closing.

We are moving swiftly to integrate our operations into a single company with a unified geographic sales team and a unified product line. We intend to discuss our performance on a unified combined basis from Q1 onward.

As we noted at the time of acquisition, we will have to analyze each contract in order to forecast the timing of revenue recognition on Nera business. This is due to differences in applications of accounting principles in Nera's financial statements. We are working to complete this analysis as we speak with an aim of having a good picture by end of this quarter.

As we shared with you on the announcement date, Nera's revenues are around $40 million on a run rate basis with only two months of contribution in Q1. Nera currently has a gross margin of around 22% on a non-GAAP basis which would translate into blended gross margins in the low 30s for the combined company.

We also noted that Nera will add about $15 million of operating expenses for a full quarter before synergies which (inaudible) to make it $1 million to $1.5 million per quarter. We expect that these operating expense synergies can be realized fairly quickly, mostly by end of Q3.

The improvements on the cost of goods sold basis will take us two more quarters. Therefore we expect to see steady improvements in gross margin throughout the next eight quarters to reach our target model by end of 2012. At the quarterly revenue run rate of roughly $150 million and a return to mid 30s gross margin we will target an operating profit margin of over 10% by end of next year. This represents a substantial increase in revenues and earnings power for the combined business.

Our strong performance in Q4, expanding backlog, and excellent demand outlook support our confidence that we will be able to focus adequate attention on accomplishing the integration and operating improvements in a timely manner which will be the key to making acquisitions substantially accretive in 2012. Now we will be happy to take your calls.

(Operator Instructions). Mike Walkley.

Thank you very much. I was wondering if you could update us on your customer reaction post the acquisition for Nera. And also can you speak to the Latin American market and update us on the competitive dynamics there? I believe Ceragon had some solid wins recently and it's a very strong market for Nera. So who are your main competitors there and do you have any initial thoughts on your market share of the Latin America market? Thank you.

As Tsipi has said before, we are working on the numbers now, so I will not give marketshare or combined marketshare within any one of the specific markets. Latin America has been -- we had some nice wins on our side over the last few quarters and it's one of the strongest markets for Nera.

Feedback we are getting from customers in the field is that initial impressions are that we are moving ahead in the right -- in the correct manner with them to give them better value and a much stronger organization and we think it's a positive feedback.

Alex Henderson.

The book-to-bill significantly over 1 was a nice positive surprise in the quarter. I was a little worried about it coming in because of the issues associated with the spectrum licenses in India and a couple of other companies have seen some cancellations. Can you talk to whether you're saying any disruption due to the scandal around the spectrum license pricing and whether that's caused any reverberations through your results at all?

It didn't cause any reverberations on the results from the Indian market. Yes, we are hearing that from some of our customers. Most of our customers in India are the real large established operators in India which are not part of the scandals. We're hearing the noise like everyone else. But I don't think it's a major effect on our results.

So going back to that environment, obviously the red tape has finally come out. Can you characterize the book-to-bill in 4Q between geographies? I mean, if you take out the exceptional results in India which were coming off of three quarters of horrendously weak results because of the red tape issues, was the book-to-bill outside of India above 1? Can you (multiple speakers) give us any characterization?

I haven't calculated it for each and every specific region, but for all regions together, except India, book-to-bill was also above 1.

Okay, great. That's what I was looking for. Thank you very much.

Okay. It's not -- just as color, it's not that India came back in a huge number and it's there. It's back to business in India to the levels we are used to and it's also rest of the world we see strong business as well.

One last question along that line then. There was obviously a lot of weakness earlier in the year; you drew down backlog. How long do you think it takes to ramp that back to normal?

From an operational perspective are you asking about what -- being able to deliver?

No, I'm asking how long it takes the Indian market to recalibrate their order rates to reflect the fact that there were two or three quarters there where they were weak.

As we said I think in -- I understand. As we said in the prior, I think, call, we don't expect India to catch up in the sense of really recalibrating everything. I think businesses are back to normal based on the capacity and their ability in the Indian market to install and build new networks which is coming back to running rates of before the crisis.

I'll cede the floor, thanks.

Ittai Kidron.

Thanks and hi, guys. Congrats on good numbers. Ira, I wanted to talk about the gross margin progression through the year. And I understand, correct me if I'm wrong, like the biggest variable here is your ability to port your architecture to Nera's products. And so I want to understand why would this be a linear progression, as you talked about, if I remember correctly, versus more of a step function somewhere down the road -- there will be a big step up in gross margin?

The reason we talked about the linear progression around it is that, yes, we will be doing two things in parallel. One is we will be using our short-haul product set with some of Nera's customers where it makes sense to insert a new product into the process. And this is mostly a linear product as customers are coming online with fiber product lines for the short-haul and some customers of ours are coming up with evolution long-haul products online.

The second piece is, yes, that's more of a step function which will take a little bit longer is making sure that the evolution long-haul products use the same technologies and cost reduced. This will take a little bit longer. But linear has to do with the migrating of the customers to existing on-the-shelf product sets. It's not moving the products at the same time.

Very good. Good luck, guys.

And to that sector I think I also mentioned in the call, we already managed to integrate a network management system so we can work smoothly within the customer premises.

Great. Good luck, Guys.

Blaine Carroll.

Just staying with that previous question, on the salesforce meeting that you had -- I understand that the software is integrated, but is the Nera salesforce now selling the FibeAir products?

There is no more Nera salesforce, there's no more old Ceragon salesforce. There is one salesforce which sells all products blended based on both existing products and new products into the customers based on their needs and the value it creates for them.

Okay.

And I'm specifically answering this way because it's not only one way. We're taking the best of both worlds and technologies further down the road and offering it to the customer to create more value.

Okay. So the guys that speak Norwegian are selling these Ceragon products?

Maybe, but those are very few. You have to remember that most of the organization is Brazilian, Mexican, people from South Africa, people from Italy, people from other places. I don't know how many of those particular regions.

Fair enough. And then I guess is there any risk that as the Ceragon product goes into say one of Nera's existing customers, that they sort of pull back and say well, if I'm going to end up buying the FibeAir, maybe I'll look out there and see what other products there are and does it go out to an RFP. Is there any risk of losing the installed customer base in that situation?

A, there's always risk like that. B, it's a business we have been in and Nera has been and any one of the vendors have been in over the last few years. You have to remember that in the market and the dynamics of the market that we are in, the product lifecycles, even microwave, are shortening and around two to two and a half years now. So in any case Nera would have had to introduce a new product to the market.

We introduced the IP10 about two years ago. We will be introducing new products to the market within the next few years. So it's a cycle that goes with every one of the customers. I think a lot of it is having to do with the support, with the ability to integrate -- integrate the old and the new and those things are on the table and we're doing very well with the customers.

And we continue very strongly to support the customers with our existing product sets well into the future as well. Which brings value to them to stay with a Nera short-haul or a Ceragon long-haul product into the next few years. We will be supporting those customers with product availability as well.

Okay. And then, Tsipi, I don't know if it was last quarter or the quarter before, there were some payments that had to be made to the supply chain. I was wondering if you could, A, comment on if there are any issues in the supply chain. And then secondly, have those trade payables now come in line in the cash balance. And what was your cash flow from operations?

First of all, yes, we said in the previous quarter that we had to make payments to our suppliers to share the risk with them of buying inventory based on guidance that we gave them in the beginning of the year since we expected India to be strong during 2010. And therefore we had to pay those suppliers for some of the inventory that they already committed for.

We see that cash flow from operations this quarter is positive. It was $2.4 million and our total cash went up this quarter by $4.2 million. And we do expect it to come back even further more in Q1 and Q2 once we use even more of the inventory that we committed for. Because as Ira said when he spoke, that India is coming back. So we'll definitely see then a more positive cash flow.

Okay, great. Good luck going forward.

Amir Rozwadowski.

Thank you very much and good morning, Ira and Tsipi. Ira, one of the questions that I wanted to ask in terms of the growth (inaudible), it seems as though India has now come back and recovered. Some of your other geographies are also seeing some nice strength. Do you feel as though now the environment has approved such that from a market growth perspective 2011 could be better than 2010?

You see me hesitating, because what you're really asking me is for guidance for the complete year of 2011 which has to do both with Ceragon business and of the combined business. At this point we are still not ready to do that. As we evaluate and integrate the two organizations together and build up the numbers bottom up we'll know a little bit further down the road.

Although from an environment perspective that has nothing to say what our numbers -- will they be higher or just high or low from that perspective as we see a very strong environment out there, both needs coming from subscriber growth in certain regions, (inaudible) needs coming from upgrading to higher capacity and data capacities in other regions.

Great, that's very helpful. And then if we just shift gears. We've talked a bit about India here, but on the EMEA region side, what has been driving growth there? You had mentioned some of the specific carrier wins. Are you seeing particular strength within various pockets within the EMEA region?

We see strength all across the EMEA region. I think Tsipi mentioned some wins in Africa that we had. We had also some wins in Europe. Characteristically the deals we see in EMEA are smaller deals but more repetitive. We see every quarter with some of the operators deals a little bit more spread out. If you ask me to characterize the strength -- Russia, Eastern Europe, somewhat in Africa and we see also some pockets in Western Europe for our business at this point.

That's helpful. And then lastly, if I may, certainly last year at this time there were a number of challenges in the market, most notably what was going on with India. Given your book-to-bill, where it stands today, how would you characterize your visibility? Is it fair to say that it's improved or we have fairly healthy visibility at this point?

If I'm looking at coming out of the year and you would have said, okay, what's the visibility that I have for the Ceragon business -- yes, it's much better visibility. What about the Nera business? They also have visibility, but I can't characterize it versus last year because I was not there. So we have both organizations moving forward nicely.

Great. Thank you very much for the incremental color.

Daniel Meron.

Thank you (inaudible). Congratulations on (multiple speakers) results here. Good afternoon to you too, as well. I think it's been two or three weeks since the acquisition. Can you share with us a little bit more on what you guys started doing in the Nera acquisition and a few more things on what you intend to do over the next weeks or months? And what has been different coming into this and doing this integration versus the earlier plans you've got?

I think that the main goal that we had when we started the integration, and it's really a merger of the two companies into one operating company -- this will take time, it's not a one-day process. But we started and I think that the most important piece in any type of integration is bringing value to customers, bringing out there.

So we started out with almost the day out the door with a very strong sales meeting with all salespeople, discussing how do we together bring more value to the customers, how do we better serve the customers and the messages are to the customer, we started from there. And we'll continue through a lot of other activities throughout the Company, some of them being done in the next few weeks and some of them stretching out across the year. Whereas the well-defined plan on how do we do the merger integration of the two operations.

Okay, thank you. And as you look at the shift in the marketplace, are you seeing anything that we should think about as far as the competition and how it's aligning itself to the move that you've taken? Are you seeing some difference in the strategies from your competitors in the marketplace already or is it going to take a little bit longer until we see that?

We see two things. We see first the reactions from some of our competitors which I think will be focused internally enough, externally and try to take advantage of that. I understand their position but I think we're executing outbound and not inbound from that perspective. Longer term there might be some shifts in strategies within our competitors and that we'll have to wait and see.

Okay. Thank you, Ira. Good luck.

Matt Thorn (sic).

A couple quick questions. India -- I know you gave -- you talked about some backlog. What was India's percentage of revenues this quarter? I think it was 33% last quarter if I remember. Hello?

I'm letting Tsipi -- it's the same as last quarter. I'm letting Tsipi pick up the number, the exact one there. I would've told you one-third which is the number I usually use. I have thirds, half, quarters when it was about the same, 33%.

So about the same? Okay, terrific. And can you remind us -- EMEA, I think if I remember a couple quarters back it was split almost one-third, one-third, one-third between Western Europe, Eastern Europe and EMEA. How does that stand currently exiting the year?

If I split it right now it's probably -- I would say this quarter is Africa, and the rest is split half and half between Eastern and Western Europe with this quarter.

I'm sorry, so that was one quarter Africa and what were the other two, Ira?

One quarter is Africa and the rest of the three quarters is about half and half between Eastern and Western Europe. Okay, and I don't have the exact number in front of me, that's why I'm using those numbers. But remembering from -- I looked -- in my head I counted the big customers and it's about the same.

Okay, perfect. No, that's very helpful. And just coming back to gross margin, I know this is always a tough subject. But I think in the base business the prior commentary had been that you guys were doing about a 36% run rate through the first three quarters of the year and you thought 2011 for the base Ceragon business could be about on par with that. If we isolate core Ceragon product, is that still a fair kind of run rate assumption, that 36% number?

Yes, it's a fair assumption for the Ceragon products.

Okay, terrific. And then just one if I could. Coming back to Nera, we've talked about the revenue run rate, I think Tsipi had talked about the $40 million. And I think if I remember on the call earlier this month backlog had grown throughout the course of the year. Can you talk a little bit about backlog? Did we exit the year above the revenue run rate? Maybe talk a little bit to the backlog of the Nera side of the business.

In fact, what we said is we have to analyze the backlog, that's what we're doing now. In fact, what we have to go is analyze contract by contract to understand the exact number. So we said roughly $40 million based on the run rate that we signed our financials. But their financial principals are different than ours, so the backlog is something that we still need to finalize and we'll have a better picture by the end of the quarter.

Perfect.

So we did not refer to that.

Okay, terrific. Maybe I could ask a different question then. In the Nera acquisition, I know a lot of the rationale behind it. But I guess were there any thoughts or any targeted Tier 1 opportunities that this deal would allow you to pursue? Again, in the long-haul piece of the puzzle, the services piece of the puzzle, did you have any particular Tier 1 opportunities in mind in consummating this relationship?

No, not specific ones. Although I think being the number one specialist out there will give us a better go at some of the Tier 1 opportunities we are not being at at this point and it's opening doors for us.

Terrific, thanks. Congrats on the great quarter, take care.

Larry Harris.

Yes, thank you. Good morning. I have a few questions. One, what was the percentage of sales that were IP this past quarter? And just a rough sense of the combined revenues that might be IP including Nera going forward roughly?

As for Ceragon this quarter, about 80% was IP versus non-IP. And regarding Nera, we believe that it's going to be the same ratio.

Fantastic. And you mentioned a couple of times that you're going to have to review the accounting for Nera. Sometimes when companies undertake acquisitions there's a deferred revenue component where the sales just simply are not recognized. Is there a deferred revenue component to this acquisition?

In fact what we said on the call is that there is a component of deferred revenues but the impact is that we'll have to do what we call inventory step up. That the component of the deferred revenues -- it means that they shipped the inventory but did not recognize the revenue yet. So for this part the cost of goods sold will be the same as the amount of sales. So the effect will be on the gross margins but not on the top line.

Good, okay. And then finally, just thinking about LTE. Here in the states we've had Verizon and AT&T move forward on that. It does appear that their initial back-haul deployments will be largely fiber. What are your general thoughts? Do you think there will be a microwave opportunity in a year or two that you might bid for?

The answer is yes and I think we indicated a few times over -- in the last year when this came up, is yes, initial opportunities is a lot of fiber because it's in the center of cities and highly densely populated areas. If you move out, yes, there will be microwave opportunities as well.

Right. Okay, thank you.

Ilya Grozovsky.

I just had a question about the linearity in the fourth quarter. If you could kind of give us a little bit of color on that and also talk about the days sales outstanding, they seem to have popped up a little bit here over the past couple quarters and where you see them going? Thank you.

Okay I'll refer to the linearity, Tsipi will give you the DSOs. Quarters are usually for us very typically not totally linear, it's more like 40% in the -- 30% in the first months, another 30 in the second month, 40% in the last one. It might shift a little bit others. Similar -- Q4 was very similar from that perspective to most of our quarters from part of the behavior. I don't see any changes in the quarter's linearity. Tsipi, DSO?

Yes, so you're right, DSO this quarter went up from about 100 days in Q3 to 118 days in Q4. The main reason is, in fact, one big customer -- we don't have any collectability issues, but with big customers, sometimes they pay according to their schedule and not exactly according to the due dates. So I believe that DSOs will stay the same level. And they did go up -- we discussed it in Q3-- because payment terms have changed. But specifically for this quarter it went up because of one specific customer. So we should expect it to be around 100 days.

Okay great. And then just a final question. So you're saying that the Nera run rate is $40 million and you're going to basically have about two-thirds of that in the first quarter. So should we be looking at -- I just want to understand your words carefully. Is that $40 million -- is that what you anticipate adding to the first quarter or are you anticipating two-thirds of $40 million?

We anticipate to add about two-thirds of $40 million even though it's not -- revenues are always linear between the months, but roughly that should be the figure you should use in your model -- part of the $40 million, because $40 million is for the full quarter.

Okay. And is there any unusual seasonality in the Nera business that you've seen or is it typical?

At this point it's typical we think.

Okay, thank you very much.

Kevin Dede.

Congrats on a really nice quarter. Ira, can you just give me a little more insight on the network management system that you've integrated? Exactly what functions are those?

There are some that have to do with adding elements into a network management system so it can control them, it can monitor them, it can show the alarms on them, it can count the inventory on them.

Okay, so that's a -- I mean, excuse my ignorance here, but that's a product view -- or it's a Ceragon back office view?

What do you mean?

I guess I'm just a little unclear as to whether or not it's a product that you're delivering or a system that you're using.

It's a product we're delivering.

Very good, okay, okay. Thanks.

It's a product we are delivering, it's a product being used by the customers, it's online at a lot of the Nera customers, okay? We do not provide the network management service like at this point.

Right, got you. Okay, thanks. And the book-to-bill seems to be driven by what's going on in India. But I was hoping you'd give us a little more insight on what you're seeing from your OEMs outside of the ones that have --.

No, (multiple speakers) it's not been driven just by India book-to-bill. In India and in the rest of the world, at least in all regions, was above 1 -- well above 1.

Okay.

It's being driven by strong business in all regions.

Okay. How would you view your manufacturing capacity utilization? Are you going to be able to handle the short-haul requirements that you'll need within your CMs in Israel?

A, we have our CMs both in Israel and abroad which have been online for the last year and a half. And we have I think enough capacity and capability to support almost any quantity at this point. You have to remember that our technologies are such that using a standard CM we can ramp up very, very quickly at this point.

Because it's all taken place, correct?

It's all taken place.

Okay. And are Nera's manufacturing facilities at that standard?

No, they are not. One of the advantages we bring to the table is our operational capacities and capabilities both in the product and the things that we do which enable to ramp up both of the businesses and the integrated business very quickly.

Okay. Can you give us some insight on what Nera saw from a revenue perspective in the fourth quarter? Or when you think that might be made public?

That will be made public probably over the next few weeks, probably will be as part of the help at publishing the results. I'm not sure of the exact date yet, but I know they usually publish something like half into the quarter. So it's probably over the next few weeks. I don't have the exact details yet. And then you'll see also Q4 for the Nera business.

Great. And can you just refresh our memory on what aspect of their business you're not taking or plan on shutting down immediately? Granted that given the Nera run rate is higher than what you guys are suggesting you'll take.

I think we indicated on the call two weeks ago -- it's less than two weeks ago -- that we will not be taking on the Middle East and Northern Africa business. This is not our business, so we have taken down in making our calculation what the running rate is.

Alright, okay. Okay, well congrats again, nice job. And congrats on getting that sales integration done. Just on that alone you're a step ahead of some of the other examples in this. So congrats on that.

Thank you.

Aalok Shah.

A quick couple of questions. Ira, can you give us a sense of how you view the North American market right now and what you think the opportunities are in 2011 for you there?

I don't know if the American market is a strong market. There are opportunities; we see ourselves growing within that market. Although, as I think and some -- one of the other people on the call indicated, we do not expect the initial rollout of LTE to affect strong sales, but we see expansion in a lot of the markets. People are expanding capacities and needing microwave backhaul and we see a steady growth to the business.

One of the customers here that's doing WiMAX in North America -- do you have any commentary as to where your position is now with them?

One of the customers, i.e. Clearwire?

Yes.

We've been working with them, but I think that their focus at this point is not network expansion.

Okay. And then last question for me is in terms of the mix between your service provider business and private networking business, can you give us a sense of how that looked in Q4 and how you think it will look post the Nera acquisition?

In this quarter it was 90% from service providers and roughly 10% from private networks and it's been pretty consistent throughout the year for Ceragon.

And my expectation as we move forward, probably what you call a private sector will grow a little bit more because one of the strengths that the Nera Bergen team brings into the table is a lot of applications, for example, on offshore drilling platforms, TV broadcasting and other types of applications which require long-haul. So my expectation -- we'll see a little bit of an increase probably in the non-mobile segment when we look at the mix.

Great, thank you so much.

James Faucette.

Thanks. Just a couple of questions. First, just a follow-up question. Could you just repeat again what your commentary was related to the first quarter and how we should think about that on a sequential basis?

And then my second question is -- at least if my memory serves me, it seems like you are running at a very high level of OEM-related sales, at least relative to the past. And at the same time you're obviously running very good margins.

So I'm just wondering how we should think about those OEM channels going forward -- if we're running at abnormally high levels or are these new levels that we should expect and is there room for even further expansion? Thank you.

I will start with the Q1 revenue. So as we indicated in the call, we expect that Ceragon on a stand-alone basis will have a slight increase in revenues in Q1, even though Q1 is usually seasonally weaker. And regarding the Nera acquisition, the run rate for Nera -- approximately $40 million a quarter.

And since in Q1 we'll not in fact realize all the $40 million because we're taking roughly two months of revenues, it's going to be roughly two-thirds of the $40 million. So you can add up the Ceragon standalone to roughly I would say $30 million of revenue from Nera.

Scott Searle.

Maybe just to follow up on the prior question. The gross margin outlook for core Ceragon this year, kind of given the mix from OEM, I thought you (inaudible) the questions earlier in the call, [they indicated] 36% as a range. Is that how we should be thinking about Ceragon pre-Nera for the course of 2011? And then I had a couple of follow-ups.

Yes, the 36% is the Ceragon standalone gross margin expected in 2011.

Okay. And to go over to the gross margins on the Nera front, I just want to clarify. So when you talk about the initial improvements being related to selling Ceragon short-haul product, is that basically a swap-out for -- I guess it's the Evolution Series, or is that a cross-selling opportunity as it relates to the Nera customer base?

A, part of it is selling instead of the Evolution short-haul products, not instead of the Evolution long-haul products. A lot of it is also cross-selling opportunities. So it's both of those within markets based on customer preference and their push forward.

And Ira, maybe just a follow-up. Is there a qualification period then that we should expect a lag? I mean, how quickly can you start to be selling Ceragon products and recognizing revenue on that? Will we see that in the first quarter I guess is the question, or is it going to take a little bit longer just given qualification in the salesforce (multiple speakers)?

I think that the model that we put out 10 days ago I think or 11 days ago was it will take us time to migrate to both technologies and product sets which are as cost-effective as we are today. And some of the operational parameters that we have will take us eight quarters. And the first approximation at this point, we assume the gross margin will go up slowly over that period until sometime towards the end of 2012. It's not a one-day process, I don't expect I will see any of those help in the first quarter.

And Ira, maybe just a follow-up (multiple speakers).

There is always a qualification period, there's the customers, we work with the customers -- (multiple speakers). We don't force anything on the channel.

Is there a rough mix we should think about in terms of the composition of Nera's revenue stream of short-haul versus non-short-haul? Was it 10% of the mix or 20% of the mix to help us synthesize some of the math?

Again, it's [your] numbers, (inaudible) half and half.

Half-and-half? Okay. And then maybe just a follow-up on the second improvement from a gross margin standpoint at Nera, the step function up from an architectural shift. When should we start to see the first milestones related to that and P&L impact?

Early 2012.

Okay. And lastly, I'm not sure if you mentioned this earlier in the call, Ira, but back on India. I think we went back to the summertime period, you probably would've indicated India was probably flattish in 2011. I think then sentiment started to become more optimistic as we finally started to get the licenses awarded and the operators starting to spend a little bit of money are starting to place orders.

Now the waters have become a little bit muddy. I know you're not giving guidance for the year, but in the context of India -- is India going to be a solid growth market for Ceragon in 2011? Is it 10%, 20% kind of growth or can you give us some framework on how to think of it? I know there are a lot of moving parts still.

A lot of moving parts, so yes, it will be a solid market, yes, we'll see now. Compared to 2010, yes, it will be a very solid growth. Compared to 2009, probably from a booking perspective similar number and growth as well.

Great. Thank you very much.

[Jason North].

Yes, guys. Sorry, it's Peter Misek. Just a question. I guess more of the same, but trying to understand bookings for this coming year, RFP/RFQ activity. I guess I'm perplexed that the carriers can allow some of these loads to continue on their networks, that they can push forward without the necessary CapEx that we think they need, especially in some of the more congested areas.

Can you walk through -- and I know you've probably said this in the past, but can you walk through some of the things that you think can push the carriers over the edge? Whether it's IRR paybacks, any kind of arguments that you can help us understand sort of the conversion ratio this year? Thank you.

Okay, I think that you are mainly referring to the US carriers. And I think that the phenomenon we're seeing with the US carriers, they are under huge pressure because of the increased load on the networks. But I think I said it before, our expectation is that, at least initially over the next let's say 18 months or 24 months, most of the CapEx spending with those carriers will go to fiber.

Because most of the pressure and the load that they have is in the center of highly densely populated areas and in those areas the reasonable approach is really just pull fiber because (inaudible) where they have base stations they have the ducts, they have the valves and very, very close by they have the fiber points.

You will see in the US market a lot more microwave further down the road as some of those rollouts will start going in from the center of the cities to more of the suburbs on the outskirts of cities and people need to build those networks.

To what extent does the managed services phenomenon have any impact if at all on you? I mean, some of these carriers are talking about potentially offloading CapEx and converting it into OpEx. Is that something that helps or hurts you?

It's a parameter that we see worldwide, and not just in the US, of managed services. Usually what happens is with some of those people split out and do give up managed services but keep with them the ability to choose the equipment. In some places the vendor gets both pieces. And in some places that's the reason we do a lot of OEM deals is we go into those deals proving OEM partners which do the managed services. On the average at this point I think it's neutral.

Thank you.

At this time there are no further questions from the phone lines.

Okay, thank you very much for everyone listening on the call with us today. A small comment to everyone listening on the call -- I think at some point the Safe Harbor statement at the beginning was mixed. It had some additional language about the Nera transaction. We'll put that Safe Harbor with the call -- or on our website for review. Thank you very much, everyone, and hope to see you soon face to face.