Ceragon Networks Ltd (CRNT) 2011 Q1 法說會逐字稿

Good day, everyone and welcome to the Ceragon Networks Limited first-quarter 2011 results conference call. Today's call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks and Ms. Tsipi Kagan, CFO of Ceragon Networks.

Today's call will include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and projections that involve a number of risks and uncertainties. There can be no assurance that future results will be achieved and actual results could differ materially from forecasts and estimates.

These are important factors that could cause actual results to differ materially from forecasts and estimates. Some of the factors that could significantly impact the forward-looking statements in this conference call include the risk that NERA and Ceragon businesses will not be integrated successfully; the risk that any synergies from the transaction may not fully realize or may take longer to realize than expected; disruption from the NERA transaction making it more difficult to maintain relationships with customers, employees or suppliers; the risk that NERA business might not perform as expected; and other risks and uncertainties, which are discussed in the greater detail in Ceragon's annual report on Form 20-F and Ceragon's other filings with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date on which they are made and Ceragon undertakes no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made. Ceragon public filings are available from the Securities and Exchange Commission website at www.SEC.gov or may be obtained on Ceragon's website at www.Ceragon.com.

During the question-and-answer session, please limit yourself to one question. We will poll for follow-up questions if time permits. I would now like to turn the call over to Mr. Ira Palti, President and CEO of Ceragon. Please go ahead, sir.

Thank you for joining us today. With me on the call is Tsipi Kagan, Ceragon's CFO. We are very pleased with Q1. We reported revenue of $100 million for the combined business. As you know, we closed the acquisition of NERA in January and we begun the integration process immediately and progressing very rapidly and nicely with it. Therefore, the analysis of Q1 results may be more complex than normal. So I will start with a few summary remarks and then we will go back and fill in both business and financial details.

First, business is good. In Q1, traditional Ceragon customers accounted for about 70% of revenues, meaning it was another record quarter for the call business. The contribution from NERA customers accounting for about 30% of revenues is not an accurate indication of the business dynamics due to the impact of timing of revenue recognition, which Tsipi will explain in a few minutes. Book-to-bill was above 1 with continued strong bookings from NERA customer base.

Second, we are executing well. We have already begun to see the benefits of the NERA acquisition and the integration process is on track as customers started the migration process. At the time of the acquisition, we set a goal of reaching the target operating model of mid-30%s growth margin and over a 10% operating margin based on the quarterly run rate of around $150 million by the end of 2012. We believe we are on track to achieve this goal. Our interim goal is to be halfway or close to halfway to this model in Q4 of this year.

With that high-level of summary in mind, I will try to give a little more color on some of the different areas. We are pleased with the progress we have made in the short amount of time migrating NERA customers to Ceragon fiber products. Four of the 10 largest customers are already ordering fiber products and we are actively engaged with the others.

Our belief that NERA assets are more valuable under Ceragon's stewardship is being validated. For example, NERA was close to losing a large customer when we made the acquisition. We were able to deliver the right products in the right timeframe it was needed and retain the customer. In addition, the combination is beginning to open doors with customers we have not worked with before. It is too soon to expect any significant number of new customers, but the pipeline of new business continues to grow. The message and being the number one specialist resonates very well with our joint customer base and new customers.

We moved swiftly to create a single global company. We divided the combine business into six regional units with clear account responsibilities and created two product solution groups -- short-haul focusing on the fiber line and long-haul focusing on the evolution line.

We still have a few places where we need to complete the transfer of responsibility within the groups, but the reorganization is essentially complete and we are moving forward as a unified organization.

As we have discussed before, after closing, we discovered the NERA operating expenses on a run rate basis proved to be higher than we thought and we compensated for this by being more aggressive with our pursuit of synergies and cost reduction in the combined business. And we are at an expense rate that we feel comfortable with. I will ask Tsipi to cover this and some of the other accounting issues at a high level and you can request a more granular explanation during the Q&A.

Before I turn the call over to Tsipi, I want to repeat three things. Business is good across the entire customer base. We are getting the business we are growing across the board and after only a few weeks, we already have evidence that the benefits of the deal are coming through. We didn't have a 10% customer this quarter and you can see from the breakout that we have achieved geographic diversification. We are particularly pleased with the progress in migrating customers because this is something they have to decide unlike OpEx. It is not under our complete control. We also exited goodwill on the front. The team completed the integration in a very short period of time.

The timing of this transaction is also very good. We continue to believe that we are in the early stages of a period of very strong demand for our products driven by subscriber growth in emerging markets and exponential growth in mobile data worldwide. With the combined organization in place, we are very well-positioned to capitalize on the full range of global opportunities, and prove again and again that we are the number one micro-specialist out there. Now I would like to turn the call over to Tsipi and discuss the financials. Tsipi?

Thank you, Ira. Revenues in Q1 were $100.3 million, split about 70%/30% between Ceragon and NERA customer bases. As the migration continues, it will become virtually impossible to split revenues between Ceragon and NERA.

To provide a little more color on the top line, we estimate that revenues from the Ceragon customers were about 90% short-haul business and revenues from the NERA customer base were split about 50/50 between long-haul and short-haul.

The revenue contribution from the NERA customer base reflects less than a full quarter of revenues. NERA-related revenues in Q1 are also below the run rate of the business due to the timing of revenue recognition, a factor which will disappear over the next few quarters.

On a GAAP basis, we reported an operating loss of $20.3 million, which includes $7.8 million in restructuring charges representing compensation packages for the people leaving the Company, $4.9 million in transaction expenses, $4.3 million in expenses present for the cost of employees let go during the reorganization, but with salary continued to impact the quarter. We will have another smaller charge for this in our Q2 GAAP results. We also had $1.4 million in inventory step-up, $0.6 million of amortization of intangibles in connection with the acquisition and $1.4 million in stock-based compensation.

Excluding these charges, we had non-GAAP operating profit of $185,000. On a GAAP basis, we reported a net loss of $21.4 million, or $0.60 per share. Our non-GAAP net loss in Q1 was $857,000, or $0.02 per share.

The geographic breakout of revenues appear in the press release. We have moved to a six-region breakout and as you can see, the combined company has very balanced revenue geographically. On a combined basis, our OEMs together accounted for only 10% of total revenue compared to 25% of Ceragon's standalone revenue in 2010. We had no 10% customers in Q1.

The blended non-GAAP gross margin in Q1 was 32.4%. As Ira mentioned, this is about 1% higher than expected due to the reclassification of expenses from cost of goods sold to operating expenses. The reclassification related mainly to differences in customer location between NERA and Ceragon.

Non-GAAP operating expenses were $32.3 million. The level of operating expenses of NERA was our only real surprise as we proceeded through the integration. A planned cut that we thought had been implemented was still in planning stage at closing. We moved swiftly to take more aggressive steps to reduce blended operating expenses and we have been successful in taking expenses down to a level that we believe we can sustain for the rest of the year, about $35 million per quarter.

Operating cash flow for the quarter was about $2.5 million, excluding transaction-related costs. Cash and cash investments totaled $78 million at March 31, 2011. Q2 will be the first full quarter as the combined company. In Q2, we are expecting revenues in the range of $100 million to $110 million. We are updating the timing of our Q2 earnings release. As we began to look at the schedule, the timing of our vacation periods don't match those in Norway and we need to allow a bit longer for the closing to make sure we are not rushed. So the website has been updated to show the Q2 earnings release on August 8.

As Ira noted, we believe we are on track to reach our goal of over 10% operating margin by the end of 2012, assuming about $150 million in quarterly revenue. In the near term, we are working towards being halfway to our target quarterly operating model in Q4 of this year. Now we are happy to take your questions.

(Operator Instructions). Mike Walkley, Canaccord Genuity.

Great, thank you, good afternoon. A question from me, just on the gross margin structure, can you update us -- just it sounds like you already have four of NERA's top 10 customers moved over to your products. Can you just update us on progress with other customers and how that should impact your gross margins? And also just can you update us also on your long-haul products to your cost-reduced architecture and how that might affect gross margins over the course of the next several quarters? Thank you.

I think we mentioned that we are progressing to our long-term goal of the mid-30%s gross margin. We did not see yet the effects of the migration of the customer. Let's remember that the quarter was very short. We will start seeing that effect only in Q3 and really in Q4 as the gross margins start to come up as we see that because of timing of revenue recognition out there. But the orders and the bookings have already shifted as the time from one to the other and we are progressing with the others where I believe most of them will be migrating or will complete the migration by the end of Q3, sometime in the middle of Q4 where we move the majority of the customer base.

You asked about the long-haul, the long-haul does play a role in there and this will take a little bit longer and will kick in its effects in the middle of 2012 because there, we have to do some cost reduction and redesigns to get the full benefit, which takes a little bit longer.

Okay, great. Thank you.

George Iwanyc, Oppenheimer.

Thank you for taking my question. Tsipi, when you talked about the $35 million OpEx run rate, is that what we should expect in the current quarter and how do you see that progressing over the rest of the year?

Okay, when I say $35 million, that's the running rate once we are done completely with the restructuring. Also this quarter, we presented the $32 million. If I would have normalized it to a full quarter, it would show $35 million in Q1. If we take out the $4.2 million that is basically the cost of employees that were already let go, but they are still on our payroll. So we are very comfortable with this OpEx level, but in Q2, we will still see some employees that were let go, but will impact the results. So the run rate is $35 million. If you're looking for this number on a GAAP basis, it will hit in, I believe, in the Q3, mainly into Q4. We will still have several millions in Q2.

And just to follow-up on the margin question, can you give us a sense of what the margin was from a core business standpoint and the new business standpoint -- the gross margin?

It was as we expected that, for the Ceragon side, the mid to high 30%s and for the NERA side, if we look at it on a normalized basis for the quarter, again, it was not a full quarter, it is around the 20%.

Okay, thank you.

Amir Rozwadowski, Barclays.

Thank you very much and hello, Ira. Good morning. I was wondering if we could talk a little bit about sort of the impact of revenue recognition here. It seems as though, if I am looking on a contribution basis, NERA, as you mentioned, contributed roughly $30 million this quarter. Is there any way you can provide us with some level of insight as to how that would be on a comparative basis to your prior expectations of $40 million contribution per quarter or what the impact of some of that revenue recognition was perhaps this quarter and with respect to your guidance next quarter?

First of all, when we said $40 million, we said for a full quarter running rate. So we did expect that it is going to be lower in Q1. We didn't know what is going to be the effect of the first 90 days, but clearly it was lower than we expected and that is again due to the, as you mentioned, the revenue recognition because a lot of NERA's revenues come from projects and we had to learn the business better to understand the timing of the revenue recognition because our approach and Ceragon were very conservative and we only recognize revenues once we receive the approval -- the acceptance from the customer, what we call the PAC.

So the rate of recognition at NERA is slower than at Ceragon and this is what we mean by the revenue recognition timing, something that we needed to understand better and know better to give better guidance for the future. So that is the main difference between the two ways of recognition, the way it was done in NERA and the way it is done in Ceragon.

Amir, just to give you a little bit more color on this, I think you're asking the question really looking forward. We believe that the differences will disappear by Q4 between the two timing and we will do the catch-up by Q4 where the running rate of the overall business is above $40 million. It is something close to a $50 million running rate overall, which we will start seeing in Q4 when the timing issues disappear.

Okay, so our expectation is that perhaps Q1 was the largest impact with revenue recognition timing and that should ease as we get to Q4 where there should be the catch-up in terms of overall recognition?

Yes. So don't expect a catch-up because I know some people tell me catch-up, I don't expect a catch-up. It is really a large shift, but the timing difference will disappear, so it will be on a normalized running rate.

So perhaps then from an underlying business perspective, how would you characterize sort of your bookings in some of those areas or the performance of the business if we were to exclude sort of revenue recognition impact?

Good. I think I mentioned on my call the overall book-to-bill was above 1 and we had strong bookings from the NERA customer base throughout the quarter.

Okay, thank you very much.

If I look at it from that perspective, the business was strong.

Okay. Thank you very much for the incremental color.

Alex Henderson, Miller Tabak.

Well, I thought I would give you a break off the NERA questions and just was hoping maybe you could give us some sense of what is going on in India and how the situation in that geography is changing, whether you have got any improved visibility and if you could give us any indication of whether the book-to-bill there is running above 1 yet would be great.

I don't have in front of me the book-to-bill by region, but I think we are getting good business from India. Although if I look at the best region, whether it was their Q4, Q4 is usually a little bit weaker than other quarters, but I think that is nice progress in India as they are moving forward. I think our visibility is okay within our customer base there and they are all moving forward. They all are in the stage of deploying their 3G networks. To various degrees, some are faster, some are a little bit slower speeds, but they are progressing nicely because it is out there.

We do expect sometime during this year they will start the rollout of what they call broadband access. And I think all of them are looking at, from a color perspective, will they do a WiMAX broadband access. Although what we are hearing more and more, it will be an LTE broadband access type of deployment. And everyone is looking at exactly how to do that and how to achieve. So we will see from India the pressure on our equipment, not only from subscriber growth, but also from increasing data and capacity usage pressures, which we are hearing from the customers.

If I could just follow up on that. So there was obviously a lot of disruption last year in that geography as a result of a variety of government moves, and we don't need to rehash those, but there seem to have been some significant pent-up demand there. Are you seeing evidence if that's coming back into the marketplace at this juncture? How would you --?

I think the whole security issue is from last year and the government move is behind us. But as I think we said a few times on the call, I don't believe it generates a pent-up demand. It will simply resolve itself and generate an ongoing demand because there are other limitations in the ability to roll out the equipment and build the networks and do the financing for the networks. So I don't expect any peak or surge of pent-up demand. It is really business back to normal.

Thank you.

Peter Misek, Jefferies.

Thank you. Just a question on geographical breakdown and outlook for the second half. Can you walk us through, aside from India, areas that you see in terms of standout movements, in particular and anything in Asia-Pac would be very helpful and Europe?

I think in all regions that we see, we see business as usual. I don't see any pent-up or jumps in any one of those regions, at least not within our customer base at this point and nothing outside there. I think because all the regions are very finely distributed or the granularity is small with a lot of customers, it is sometimes a project with us, some customers sometimes does a project with other customers and a lot of it is having to do with deploying and moving forward. So my belief is that we will see continual growth in all regions without major jumps.

Have you seen any changes in RFP or RFQ activity? Have we sort of seen the same linearity we were seeing earlier in the year or late last year?

I think we see the same linearity. We haven't seen a jump in RFP activity or any of those in significant manner.

Perfect. Thank you.

Blaine Carroll, Hudson Securities.

Yes, thank you. Hi, Ira. Hi, Tsipi. A couple questions if I can. First of all, Ira, have you seen any changes in the competitive landscape? And I guess maybe if you look at the traditional NERA markets whether some of your competitors have gotten a little bit more aggressive in those markets trying to steal some of that revenue from you.

And then secondly financially for you, Tsipi, I think you talked about some of the NERA cost of goods sold moving down into OpEx. Gross margin was higher than what I had been looking for, but OpEx looks like it is a little bit higher. So I was wondering if you could quantify what that movement is out of COGS down to OpEx. Thank you.

Okay, I will start with the competitive landscape. Competitive landscape was always very competitive, very aggressive with tough competition out there. I did not see a change. It didn't become easier, but it didn't become harder. I think we need to handle much more and many more deals in a lot of the markets, but I haven't seen a change.

What I did see, by the way, because of that is that merging the two companies and really putting on the table the best portfolio out there, both short-haul and long-haul, and the size of the Company and our geographical reach is helping us in the competitive landscape because the message of being the number one specialist out there is resonating very well with both companies' customer bases and with new customers. And it does help us in places where we have not reached before.

I haven't seen the results yet because, at the end, this has to be translated into bookings and revenues and it is not there yet. But I think that the move is proving itself at least in the initial stages of opening doors, which were partially closed for us before. I will hand off to Tsipi on the cost of goods question.

So the approximate amount for the reclassification was $1 million and this was the 1% extra that I was talking about in gross margin, the $1 million over the $100 million of revenues.

I don't know if it was just my line, but you broke up and --.

Okay. So we reclassified roughly $1 million from COGS to OpEx and that contributed --.

Tsipi wait a second. I think Tsipi is breaking up. Use this phone. So Tsipi is breaking up. We will use -- I will turn it over to the speakerphone. Can you hear us better now?

Yes, it sounds like you are in a cave, but we can hear you better.

Then I will get back to the phone in a second and we will try connecting. Something on Tsipi's line went dead.

All right, the answer to your question is roughly $1 million. Is it okay now?

Yes, I can hear that.

Okay. Yes, so roughly $1 million were reclassified from COGS to OpEx and that represents the 1% extra on the gross margin that we saw this quarter, that $1 million over the $100 million of revenue.

Okay, very good. Thank you and nice job on the integration this quarter.

Thank you.

Matt Thornton, Avian Securities.

Good morning, Ira. Good morning, Tsipi. A quick question on OpEx. If I understood you correctly, you talked about a $35 million run rate in 1Q of which $4 million or so should start to come off by 3Q. So should we read that to mean, by 3Q, you will have an OpEx run rate of, call it, $31 million on a go-forward basis? I just want to make sure I am understanding that correctly.

Mike, this is Ira. Tsipi is dialing back in, so I will answer you. Okay? No, I think we will have somewhere between $34 million and $35 million OpEx, which we feel comfortable. That is after the reduction.

Okay, perfect. Okay, helpful.

Okay. That is not -- and we are comfortable with that number and that is after the reduction and not -- and the $4 million coming off is from a much higher base, from a $39 million base.

Okay, terrific. And then on the revenue guidance, Ira, obviously, it implies greater seasonality in the back half of the year. Is that all explained by revenue recognition or is there anything else in there that, again, gives us more of a second-half push this year?

I don't think it will be a second-half push. I think that we will grow gradually quarter-over-quarter between now and the end of the year. There might be fluctuations on the quarters, but at this plan, I don't see seasonality issues.

And what I was getting at -- obviously, 2Q guidance implies about a $5 million bump and to get to that $125 million in 4Q, you are talking about a $10 million bump in 3Q and 4Q. So I was just curious again if that is all rev rec or anything else (multiple speakers).

It is both rev rec and a little bit of growth in the underlying business.

Okay, terrific, terrific. And then, Ira, and I think you kind of alluded to this, but the book-to-bill came in above 1 in a seasonally weak quarter from an order standpoint. Was that above 1 across the legacy Ceragon business, as well as NERA or any color you can provide there?

As I said, we had very strong business, the ex- NERA customer base and because, if you remember, we came out of Q4 with very, very strong bookings in the Ceragon side, although we had very strong revenues with a little bit below 1 for the booking as well.

Perfect. And then just one final if I could, just some housekeeping. I am not sure if Tsipi has checked back in yet, but the below-the-line items that we talk about, tax rates and net financial expense, how can we think about that trending on a go-forward basis?

It is basically -- you can think about it as the same level as Q1. There is -- for each one of the companies, there is several hundred thousand dollars in tax expenses in the subsidiaries and also financial expenses for each one of the companies in Ceragon due to, of course, the loan that we took to finance the acquisition. So that is more or less the running rate for the year.

Terrific. Great, thanks, guys. I will [see] the floor.

Daniel Meron, RBC Capital Markets.

Thank you. Congrats on the good (multiple speakers) (technical difficulty). So congrats on the good operating execution here. First question for you, Ira, can you give us a sense on what you are seeing so far as far as what is the overall market growth and whether or not given I guess several months of operations along with NERA you think that you're incrementally gaining marketshare or just growing along with the markets. Can you just give us some either qualitative or quantitative measures around that?

I think that if I am looking at this point for -- we are now five months into the year, I think the main issue for us for the first five months was grow with the market. I don't think we have made our move yet into gaining marketshare. First of all, you walk in, you do a lot of integration, you clean the books, you put in a clean organization, which can go up to the market. It takes a huge effort to do that and meanwhile during that keep on executing and keep the eye on the ball and bringing in both the revenues and the bookings. I think the next move is also to start using that and that we will see towards the second half of the year and increasing our marketshare as well.

Okay. What is the benchmark that we should be all this year looking at as far as the market growth this year and which we should probably compare Ceragon to as we look into the performance?

I think this year, if I am looking at the benchmark for the market and we are looking at the analysis of the overall microwave market, people talk about a number of 7% to 12% depending on the analysts for the overall microwave market. Benchmark for Ceragon against that? By the end of the year, we should be almost double then where we were in Q4, but is that due to the acquisition, is that due to that we increased our marketshare? I think will be a little bit complicated because when you double your overall numbers and then you look at, okay, market growing 5% to 7%, very hard to compare. I think we are executing well within the market, maintaining our share and we will start growing it.

Reverse analyzing the numbers. I think that if we reach our halfway mark towards the end of the year, towards the long-term goals of $150 million and achieve the profitability there on the halfway mark, I think we have done well.

Okay, and just a couple of related follow-on questions. So I understand that the first half, you are looking to be in line; second half, you're looking to be slightly ahead of the market. Maybe you start getting incremental marketshare. What gives you the confidence that very early on in the year you think that you can get to the $125 million in revenue by the fourth quarter or somewhere around that? I do recognize that the second quarter may have some revenue recognition issues, but when you look out (multiple speakers).

I will go back to the reasoning around this whole merger, okay? Fourth-quarter running rate for Ceragon was $67 million. NERA running rate for last year when I took off all sorts of things, which we are not doing, was about $50 million a quarter. Combine the two, we are very close to the mark that we need to be. By fourth quarter, the timing differences will disappear. We will also grow the internal business. With the market, you don't need more than 5%, 10%. I think we will be at the halfway mark. Okay?

And that is the rationale. It is simple there. It is a lot of hard work to make sure that we have one integrated company going after the market and then growing the business. I think we are doing very nicely and on track there with the migration of the customers and I think I am happy.

Okay. And just the last follow-up here. As you mentioned, your migration and the upgrade cycle that you are seeing within the NERA customer base, can you give us a little bit more color? You referred to that earlier in your prepared comments. If you can provide us with maybe any additional detail that you can provide and how we are -- where we are with that process and are there any milestones which we should be looking at or is it just around incremental press releases or what have you?

I don't think we will be looking at milestones, but I will give more color. I think like any type of that type of migration, you play the 80/20 rule. 80/20 rule means take top 10 customers which usually bring in 60%, 70% of the revenues at the end of the day, you go in, you migrate those and you move forward. Out of those 10 customers, we think four already migrated, another five are on track in there and one, I think, we lost, but not because of migration issues. It would have been lost for other reasons, for also procurement issues on the table.

But I think that is very real and a very strong process out there and I think that customers are accepting very well that migration. The reason that we said only four because I count the customers being migrated when I see orders on hand from the new products in our discussions and discussions are growing very nicely with all of them.

Okay, very good. Thank you. Good luck.

Scott Searle, Merriman Capital.

Good afternoon. Just a point of clarification. Tsipi, as it relates to the $1 million in reclassified expenses from COGS into OpEx, is that just for the March quarter or is that permanent going forward how we should think about modeling things?

That is permanent going forward.

Okay. And Ira, not to split hairs, but in terms of looking at the $125 million by the fourth quarter and the $50 million roughly coming from NERA, it doesn't imply a huge growth off this, call it, roughly $70 million base for core Ceragon in the March quarter. Is that just conservativism. Should we not read too much into that?

I think we have been through that discussion a long time. No, it is not conservative. It is what we think the numbers will look like out there. At that point, by the way, we won't be able to split it between ex-NERA customers and ex-Ceragon customers or whatever. We will stop doing that on -- I think on the next conference call, I think we will mainly focus on how the business, integrated business looks like because, at that time, it will already be a total mix of the product set with all the customers. I haven't mentioned on the call, but we have two of the Ceragon customers, which migrated from Ceragon long-haul to evolution long-haul products by now, which is benefiting both sides.

Maybe just to follow up on that point, how is the cross-selling opportunity going from a long-haul standpoint?

There is a lot of cross-selling opportunities, although if I am looking at those numbers, I don't expect them to be very large for this year. We will start seeing some of those mainly next year.

Got you. And lastly, just Tsipi, on the balance sheet, a lot of moving parts this quarter, but can you take us through where you expect things to be when we are looking at accounts receivable and inventories? I'm sure you guys have scrubbed things pretty well, but are there any expectations of further charges on the balance sheet or otherwise? Thank you.

No, I think that in terms of the balance sheet, we are pretty stable and the levels that we see now for receivables for inventory that is what we are going to see also I believe moving forward. The balance sheet, the way it looks now is after the purchase price and location and it reflects the combined company now.

Thank you.

Larry Harris, CL King.

Yes, thank you. A couple of questions. One with respect to cash flow, $17.1 million in charges this quarter. How much of that was say cash-related versus maybe a non-cash item and should there be a say for severance or other items a cash flow impact here in the June or other quarters?

All right, so if you look at the breakdown of the $17 million, so there is $8 million of restructuring charges that impact it. We will see the cash affect once we go forward because that is something that took place at the end of the quarter. The transaction expenses of roughly $5 million, most of them already affected the quarter, roughly $4 million and the $4.3 million that represented the cost of employees let go, that is part of the operating expenses in the quarter and therefore, there are cash expenses during the quarter and affected it during Q1.

Great. And then just on the gross margins, I guess if I am reading it correctly that you are seeing good progress in terms of the NERA customers moving to the Ceragon platform, but in terms of a meaningful impact that we will see in companywide gross margin, it is the third quarter and more so the fourth quarter, is that a correct read?

That is a correct read, yes.

Okay, all right, thank you.

Ilya Grozovsky, Morgan Joseph.

Thanks. It's Ilya Grozovsky. Good morning, Ira. So I have two questions. I'm having a tough time reconciling the guidance you are giving for the second quarter. You guys didn't have a full quarter of NERA in the first quarter and you did $100 million and now you are getting a full quarter of NERA and your -- the midpoint here is about $105 million. Can you just sort of take me through how you are getting to that number? I would think it would be higher just based on the fact that you have a full quarter of NERA in there.

We do have a full quarter of NERA in there. We did make a very large jump in the Ceragon side of the revenues this quarter, which I expect to stay stable and timing issues will feel effective this quarter on a lot of the revenue recognition issues. So that is why we gave the guidance of $100 million and $110 million.

Okay. And on the revenue recognition issues, and I guess, Tsipi, maybe you can answer this, but are they going to get incrementally better or are they going to stay the way it is right now in terms of the issues and then in the third or fourth quarter, they just get better or does it get better incrementally?

It will get better, I would say, in a pretty linear way throughout the quarters and in Q4, we will see that again -- we'll feel the real running rate of NERA's business revenues. But we'll see the effect in Q2 and Q4, Q3 and of course, in Q4.

And you had mentioned before that the timing issues at some point will disappear in Q4 completely. If it is based on the fact that their business is more project-oriented and that just causes a different accounting treatment, why would they ever disappear completely?

Because once we get to the running rate, so also in Ceragon, we have revenue recognition in terms of project, but the run rate at the end of the day reflects the run rate of the business. So we feel by Q4, after we sort of clean the path in terms of revenue recognition, it will reflect the ongoing run rate of the business. And some projects will be delayed, some projects will be recognized and --.

I will give you the color differently. Booking in Q1, which was good, will be recognized in Q4. We can't recognize it in Q1, so we are creating a delay. So it is a shift. So we will have bookings in Q1, which go into Q4 and a booking of -- we do not have a booking of Q3 of last year coming into Q1 and Q2 of this year, okay, because of revenue recognition issues. Once we are running on the running rate basis, it is a timing issue, which created the shift.

Got it, okay. Thank you very much.

James Faucette, Pacific Crest Securities.

Hi, this is [Brad Erickson] for James. Can you guys just talk -- good morning, how are you guys? Can you talk about how much incremental spend you are seeing from the carriers relative to some of the growth metrics you guys are throwing out in terms of benchmarks, I think 7% to 12% and then for you guys, 5% to 10% and somewhere at the midpoint? How much of that are you seeing kind of particularly in the US as carriers upgrade their networks to 4G?

We see incremental spend in the US by this point not significant. There is a lot of talk in the US about a lot of things of incremental spend, not as much in the microwave space. In the microwave space, let's remember, a lot of that incremental spend on the CapEx in the US, a lot of it is fiber at this point, core of metropolitan areas. Less so on the microwave business. Although there is a lot of talk about stuff in the US, I haven't seen that materializing yet and probably will materialize slower than people expect.

So is any of that built into expectations in a meaningful way at some point in the future?

It is built into expectations in the future, but not in a meaningful way. It is not the one and go. Let's remember, our business and that is showing in the numbers out here. We have six regions, almost all of them about the same size, geographically distributed within those regions. None of them are one customer specific; it is being split. We do not have a 10% customer. So none of the -- our assumption is customer XYZ going to spend $100 million with us over the next two years. I really hope we will have some of those, but that is not the way we run the business.

Geographically distributed, customer distributed, all of them are spending, all of them are spending at different times in different geographical regions within that in different and small pieces and incremental pieces and you go and you compete for each and every one of those incremental pieces worldwide. And that is where being the number one specialist with the geographic distribution that we have at this point helped us a lot.

Helpful. Thank you.

Aalok Shah, D.A. Davidson.

Hi, guys, sorry, just a couple quick questions. After you look at kind of the adjustments on the long-haul equipment side, do you think it is possible that we see further stepdown in your R&D budget going forward or you are pretty much saying this $35 million OpEx is now pretty much set in stone for the next few quarters?

I think we are comfortable with the OpEx level of somewhere between $34 million and $35 million. And I think that OpEx level will stay with us at least for this year as we move forward.

I know you have said no 10% customer this quarter and I realize that is because of the revenue base is now larger, but can you give us a sense of how the relationships are with the major OEMs at this point?

We have -- 10% of our business came from OEMs, which is a little bit lower than in previous quarters, but that is having again -- that's working with the OEMs. We work with them on specific deals and specific customers and I think the relations are strong and continuing with all of them as we move forward. It has also opened the door with some of them for additional productlines, the long-haul, which would then provide to them, which we expect over time also to take an effect.

Last question, Ira. Does NERA open up the opportunity for additional new OEM relationships? I know you said expand, but is there additional new ones potentially?

We are looking for additional OEM opportunities all the time talking with a lot of people. It does open up some opportunities for the volution long-haul product with some of the other system vendors. We are -- as we said, part of the strategy of the company is also use the system vendors as OEM partners of ours and we are pursuing all opportunities all the time.

Great, thank you so much.

Kevin Dede, Brigantine Advisors.

Basically two lines of questions for you, Ira. The first one on -- maybe a little more insight on the manufacturing side. Have you completely discontinued the short-haul NERA product? Have you seen any implications of capacity or supply out of Japan? Can you just give us a little more color on manufacturing?

And then the second side is sort of strategic on product development. I am curious -- I mean given that you have got a lot of balls in the air, I am wondering -- I know Mike already asked you about the long-haul product migration, but maybe you can give me a little insight on where you are in the overall strategy of product development and the changes that you see and OEM base station development and where you think you're going to take your productline.

Okay, a ton of questions; I will start one by one. Manufacturing. We have as part of one organization integrated our operations across the board, purchasing and operations and supply chain into a single organization with this functioning. We do continue to produce the evolution productline with the set of EMS manufacture it had and the internal manufacturing and the fiber productlines for the EMS that we have.

No, we do not stop producing the evolution short-haul yet because we are migrating customers and they still, some of them, buy that product and we have commitments and we are meeting all commitments to the customers as we move forward. It will take time to ramp that down as the customer do the migration and it is the same manufacturing site, which does the evolution long-haul, which we plan to both upgrade and continue selling into the future. That is on the manufacturing side.

You asked a little bit about the productlines that I will give you colors. We split the organization into two solution groups, one focusing on the fiber short-haul product, which is progressing very nicely and one on the evolution long-haul, which is also working on that product and produce the next generation of long-haul products in time.

Okay. And just I apologize for not maybe --.

Okay and you asked one more about Japan issues. Yes, we are monitoring the situation in Japan. At this point, we don't think it affects us.

Great.

We will be talking (multiple speakers) in Japan and I don't think it is an issue on the table. It does need monitoring and we are doing what we need on it.

Great, thanks for the color. I appreciate it.

With that, speakers, I would like to turn the conference back over to you for any closing statements.

Okay, thank you for joining us today. It is a little bit of a long conference call, which we dived into a lot of details. You are all welcome to continue the discussion with myself and Tsipi if you have any further questions. I know it has been a little bit of a complex quarter because there is a lot of integration going on, which we feel is on track. The business continues to be good, so we talked about on that and be glad to talk with each one of you both on the phone and face-to-face over the coming few weeks. Thank you very much, everyone.

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