Ceragon Networks Ltd (CRNT) 2012 Q2 法說會逐字稿

Good day, everyone. Welcome to the Ceragon Networks Ltd. second-quarter 2012 results conference call. Today's call is being recorded and will be hosted by Mr. Ira Palti, President and CEO of Ceragon Networks, and Mr. Aviram Steinhart, CFO of Ceragon.

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 involved 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, and this includes the risk of significant expenses in connection with potential contingent tax liability associated with NERA's prior operations or facilities; the risk that the combined Ceragon and NERA business may not perform as expected; risks associated with increased working capital needs; and other risks and uncertainties which are discussed in 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 statement in order to reflect events or circumstances after the date any such statement is made. Ceragon's public filings are available from the Securities and Exchange Commission's website at www.sec.gov or may be obtained on Ceragon's website at www.ceragon.com.

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 Aviram Steinhart, our CFO. Even as the environment becomes more challenging, our results for Q2 are in line with our guidance and we continue to grow. Specifically, revenues reached a new all-time record. Gross margin continued to improve. We kept tight control of our operating expenses and we showed sequential improvement in profitability.

The improvement in orders that began in April has continued during Q2. Our book-to-bill was above 1, even with a record revenue quarter in an increasingly difficult market environment. We attribute this to our ability to penetrate into new accounts and gain more share in key growth regions, the breadth of our solution portfolio and the strength of our competitive position.

The one area which needs to be explained is our cash flow for the quarter. We used a lot of cash for working capital this quarter, mainly due to regional shifts and higher receivables from Q1 customers. Aviram will give you more details, but I wanted to emphasize that we have no concerns about collectibility.

This was required in order to grow in certain regions and penetrate certain key customers. While this adds to the challenge of managing effectively, we believe that it's only a temporary timing issue, and we expect to return to positive cash flow in Q4 and beyond.

Both our short- and long-haul business are performing according to expectations, and we continue to be pleased with our execution. We are now the clear number one in the long-haul market, having been in that position for the second quarter in a row. According to a recent report based on Q1 figures, Ceragon had 26% marketshare in long-haul, up from 20% in Q4.

During Q2 we saw continued strength in Africa and even more growth in Latin America, reflecting growing demand for our solutions and the result of our Q1 customer wins in both regions. This was combined with a very large order from an operator in India, via a longtime OEM customer of ours. This more than offset continued weaknesses in Europe and North America.

As we look ahead, like everyone else we see an overall environment that is quite challenging with pockets of strength and some specific opportunities. Taking this into account, the latest industry forecast indicates that the entire microwave backhaul market is likely to grow only a little next year. The 3% to 4% of growth is about half the previous growth forecast for the industry. If this is the case and we continue to execute as we have been, we will continue to outperform the industry.

As we have noted before, wireless operators continue to struggle with how to meet the capacity challenges caused by exploding data demand at a reasonable cost, both CapEx and OpEx, by conserving precious spectrum assets. Operators are under tremendous profitability pressure as data demand exceeds that of voice.

In this environment, combined with overall macroeconomic concerns, most network upgrades in the developed economies are happening more slowly than once expected, as operators experiment with different subscriber data plans, evaluate network sharing agreements, check new network architectures and test next-generation technologies such as LTE advanced.

LTE clearly represents a huge opportunity for us, but despite everything you hear about 4G, the reality is that it's still in the very early days on a global basis. As 4G LTE drives additional demand, operators will expect a lot more capabilities for the same price.

We assume that LTE base station will require to handle about 1 gigabit of traffic per site. This is why we are developing technologies that will allow operators to achieve such speeds and more, using compact ultra-high-capacity systems.

Looking forward our next-generation solutions will feature our own ASIC and radio chipsets, redefining deployment flexibility. We intend to change the rules of the game of microwave by enabling simple spectrum we use in a wide range of scenarios. This will result in two to four times more capacity in any given scenario and area.

Meanwhile, our near-term outlook varies by region. In general, we expect Europe will continue to be weak, but we think we can maintain about the same level of business we have currently by gradually gaining market share and by eventually penetrating more Tier 1 carriers in the region.

North America is also likely to remain fairly steady over the intermediate term. We have a long-term plan to increase our business in North America and we are in the process of building the right organization and implementing other initiatives that will take time to show results.

In APAC we depend on a small number of customers, so that business tends to be limply according to the customers' deployment cycles. Meaning that we get nice size orders for two or three quarters and then they pause for a quarter or more before they order again.

In India we are succeeding nicely and we are very well-positioned. But as I mentioned, improvement this quarter came selling into one customer, the largest operator in India, deploying LTE in several circles and doing the deal via one of our OEMs. This early LTE deployment is based on broadband services for dongles and portable routers. Overall we expect improvement in India will continue to be gradual and dependence on the re-auction of the 2G and 3G spectrum toward the end of the year.

We continue to see Africa as a source of future growth. There is a huge pressure for data, but the region will experience the smartphone growth curve only when there will be availability of low-cost smart phones and tablets. Meanwhile competitive pressures to add infrastructure is waiting on the operator's business models. We expect both subscriber growth for 3G and competitive pressure to continue to drive demand and we are well positioned to take advantage of it.

Latin America grew substantially for us again this quarter. We expect this growth to continue owing to our penetration of Tier 1 operators and the strong investment cycle in the region. For example, Brazil recently auctioned 2.5G spectrum to the largest carriers and a few smaller operators and imposed strict deployment requirements including coverage for the upcoming 2014 World Cup soccer championship and the 2016 Olympics.

So, to summarize, we had a good quarter in Q2. We are looking for additional modest sequential growth and by reaching our growth margin targets and holding operating expenses steady we continue to target improving bottom-line profitability and improved cash flow. Now I'd like to turn the call over to Aviram to discuss the financial results in more details. Aviram?

Thank you, Ira. Our second-quarter revenue was $119.1 million, close to the midpoint of our guidance. Our GAAP gross margin of 31.9% reflected about $1.6 million of inventory step-up; $300,000 of amortization of intangible assets; $200,000 of non-cash charges in pre-acquisition indirect tax positions; and $100,000 of stock-based compensation expenses. Excluding those items non-GAAP gross margin improved to 33.8% from 33.3% in Q1.

First-quarter GAAP operating expenses were $38.2 million, excluding $600,000 in amortization of intangibles and $1.2 million of stock-based compensation our non-GAAP operating expenses were $36.4 million, about even with Q1. As indicated previously, we are holding quarterly non-GAAP operating expenses at the $36 million to the $37 million range and expect to maintain this level for the balance of the year.

On a GAAP basis we reported an operating loss of $200,000. Our non-GAAP operating profit for the second quarter was $3.8 million or a 3.2% operating margin. We expect to continue to improve our operating margin as gross margin improves and we hold operating expenses steady.

Finance expense in Q2 was about $600,000 and tax expenses were about $200,000. On a GAAP basis we reported a net loss of $1 million or $0.03 per share; on a non-GAAP basis we reported a net profit in Q2 of $3 million or $0.08 per share.

The geographical breakout of revenue appears in the press release. On an absolute basis higher revenues in India and Latin America more than offset the weakness in Europe and North America. We had two 10% customers in Q2, a large Latin America group of affiliated customers and in India/Africa group of companies which was partially served by an OEM partner. Overall our OEM sales accounted for 21% of the total revenue.

Turning to the balance sheet. Trade receivables increased substantially to $174 million, putting DSOs at 132 days. While we are not happy about this, we are confident that we don't have any collectability issues. This increase was largely anticipated because it relates to both a regional shift toward Latin America and Africa as well as a shift toward more Tier 1 customers that have longer payment terms and practices. We are making strong efforts with working capital management, but there is only so much we can do in the short-term to lower DSOs.

Turning to our cash position, we had cash and cash equivalents totaling $44.8 million at June 13, 2012. Our operating cash flow was negative by $40 million mainly as a result of jumping receivables. At the end of the quarter we had about $45 million in debt, $23 million remaining on the long-term loan which was used to finance the acquisition of Nera and a similar amount that represents a combination of the current maturities of long-term loan and the $14.6 million we drew down from our credit facility during the quarter.

We have a total of $30 million in credit facilities which we have for some time and the majority of it is still unused. The reduction in our cash reserve is largely a timing issue that we'll sort over the next few quarter. We are profitable and expect continued improvement which means we expect to return to positive cash flow in Q4 and beyond. Meanwhile, we have our remaining credit facility available to handle our cash flow needs in Q3.

Looking ahead to Q3 we're expecting revenue to range between $117 million to $124 million reflecting our improved booking in Q2 and our expectations for gradual top-line growth despite the challenging environment. We expect our growth in the second half to continue to outperform the overall market, but we expect -- but with expectations for overall growth moderating, we believe the $130 million level in Q4 may now be a little aggressive.

We continue to expect gradual improvement in gross margin. Our gross margin is more sensitive to changes in geographical mix and the trends we see ahead do not suggest (inaudible). However, with the continued shift to more and more cost effective evolution of non-core product and our continuous design to cost efforts we expect that achieving and sustaining gross margin in the mid-30s is attainable.

With top-line growth and handling operating expenses steady we continue to target improving profitability and a return to positive cash flow by the end of the year.

Looking at 2013, assuming overall market growth of around 3% to 4%, and our continued ability to outperform the market, we would expect to grow about 5% to [8]% while achieving gross margin at the mid-30s and keeping OpEx flat at the current level. Assuming we meet those goals we expect this to translate into a substantial increase in our non-GAAP net profit. Now I would like to turn the call back to Ira.

Thank you, Aviram. I will close by saying that we are pleased by the trend in our booking and how we have been able to execute in the current environment. In a sense the jump in receivables is a relatively high quality problem because it reflects our success in penetrating Tier 1 customers and gaining share in key regions of the world.

The time line to achieve our goal of 10% non-GAAP operating margins continues to be achievable and is top-line driven, but depends on the macro environment, how quickly business returns to normal in India and Europe and other factors beyond our control.

We continue to expect we will outperform the overall market, but those [numbers] have been moderating lately, so we're reluctant to try to pinpoint the quarter at this time. We are confident in our relative strength because we are well positioned to gain additional share as the number one wireless backhaul specialist with the most advanced product features, a smooth upgrade path, locally-based professional services teams and a cost structure to compete effectively. Now we would be happy to take your questions. Operator?

(Operator Instructions). George Iwanyc, Oppenheimer.

Ira, when you look at your visibility, can you give us a sense of when the strong bookings that you're seeing right now are expected to be recognized? Is this a fourth-quarter or beginning of next year time frame?

I think we indicated on the call, the strong bookings are being recognized gradually over the next few quarters, some of it will be recognized in -- ready in the current quarter, which is Q3, then some of it into Q4 and some into Q1. We are basing on our continued ability to grow on the strong bookings, but we will see it as a gradual -- I do not expect that to be a major jump. But I expect to see gradual growth from quarter to quarter.

And from a regional standpoint, is it similar to the type of mix you are seeing right now with a heavier Latin America and Africa component?

Yes. It I think reflects almost the same mix that we see the revenues as well.

Okay, can you give us a sense of the mix of newer products and some older legacy in the outlook and is that fully reflected in the margin guidance that you've given?

It's not -- let's say it this way, what we are selling right now is only the new product and the cost reduced products. It is not fully reflected in the gross margins yet and I think that is why we still -- we are indicating we will reach the mid-30s over the next -- this next quarter and with gradual improvement to the mid-30s as we have been improving as the revenue recognition would be totally reflecting the new product sets.

Okay, thank you very much.

Daniel Meron, RBC Capital Markets.

First question -- it's so first question is on your dialogue with your customers right now relating both to the challenges in the business model and the macro -- I mean what is the sense that you're getting recently and how is that impacting some of their decision-making?

I think you alluded to that both on a regional basis. I just want to get a little bit more color on any specific data points around that that can provide us with a sense of how should we think about 2013 beyond next quarter, so --?

Okay. I think Aviram indicated a little bit the overall from the top-line perspective 2013, but I will reiterate the trends we are seeing with the operators. It depends on where the regions are, but I'll say in the emerging markets mostly we see huge pressure to increase in the networks. Okay, and all operators are struggling with how do they deliver in emerging markets more data, more data, more capacity.

In a lot of the places they do have issues with their business models. How do they generate profitability in those markets? But on the other hand, they are under competitive pressures. I think I mentioned Brazil and I think I left with someone this morning as most of us are right now looking at the current London Olympics. From a business perspective I am looking at 2016 Olympics in Brazil in parallel.

And we see those pressures and it is true for Latin America and it is true for Africa and India and other places. I think that in the developed world, mainly in Europe and the US, yes, you have the macroeconomics on the one hand and on the other hand the operators are really testing the waters with LTE deployments at this point, okay. More in the US, less so in Europe.

Let's remember there is not a plurality of devices at this point, there is spectrum issue, there is frequency issues and we see a lot of people think all sorts of things with how do they really go into an LTE deployment. It is around the corner, it is around the corner then the next six months or 12 months depending on where we are starting more of LTE deployments out there.

While discussing all of this, everyone is under the question from our perspective, how do they bring more capacity, more capacity at a lower cost to each and every base station and many, many more base stations? That is an ongoing discussion which is very encouraging for us as we talk because I think we have the right product sets, both the current and future product sets, for the discussions with the operator -- with the different operators to fill in the needs.

Okay. That is helpful. And have you seen indications of slowdown in any way because of the macro very recently? I mean how is -- how are things trending as you see them now in the last several weeks or maybe a couple of -- last couple months?

If I look at the last couple of months, I didn't see a significant change and I don't think that we are large enough to gauge stuff on a weekly basis. And if I look over the last six months, yes, I see in Europe, a little bit in the US, I see some slowdowns in the other places. For example, I see in Latin America acceleration at this point and not a slowdown. Similar in Africa in some regions -- in other areas.

Okay, that is hopeful. And then last question, Aviram, regarding your cash position, I think the net cash position right now is around nil. How much do you have in your credit facility and what is the time line that you think you expect for the working capital to improve going forward and what is the DSO target?

And relating to that, what kind of cash arrangement should we expect in 2012 and 2013 given the slower ramp that we are seeing right now? And how do you -- how are you exactly going to improve the cash position in general?

First let me say the cash is (inaudible) $44.8 million, we grew out of the credit facility, $14.6 million, we still have roughly $16 million to draw from the existing credit facilities and we are working and probably have a good chance to increase even more the credit facilities over the next month or so. So in general $60 million roughly were not used up and $14 million were used up off the existing credit facility of 30.

Regarding cash flow, working capital and DSO. On the Q3 we still see not an easy quarter in terms of collection and we believe that we will be slightly negative operationally cash flow. But again, I want to be hesitant because there are several very large payments that are due over the last two weeks of the quarter, some of them when I'm saying it we put into focus, some of them we didn't put into focus.

So we can fluctuate a little bit to the positive or the negative depending on them paying exactly on those dates. Regarding DSO, I would say that we will stay probably over the next two quarters above the 130 days, but we expect Q4 to be cash flow positive.

Okay, thank you. Good luck.

Peter Misek, Jefferies.

Just a first clarification, we didn't hear the second half of the 2013 revenue guidance. It was 5% to what was on the high end?

We said that it will between 5% to 8%.

5% to 8%, thank you. And secondly on India, just want to get a sense of your timing in terms of if there is an auction end of this year how long do you think it will be before you see orders? And then how long after that before you would see revenue recognition? Thank you.

Like any of our customers, we do assume that India will see the re-auctioning of the 2G and 3G spectrum sometime towards the end of the year. Planning to guess at this point, orders based on India budget cycle sometime in Q2 of next year. And then put it at -- I don't know, 50, 30, 2010 over the next two quarters as things split over those quarters (inaudible).

Sorry, split over the last quarters the 2013 and beginning of 2014?

It's the beginning second quarter 2013 and moving out.

Okay. Great, thank you.

Mike Walkley, Canaccord Genuity.

Thank you very much for taking my questions, this is Matt Ramsey on for Mike. The first question I wanted to begin with you is kind of around the regional mix. I guess you had discussed the big increase in India in the quarter coming from a one-time order.

I guess my first question, did that order account for all of the increase, I guess the $8 million plus increase in the quarter? And would you give any color around the size of that particular order? And then I have some follow-ups on other regions.

Okay. First, let me re-clarify, it is another one-time order, it came mainly from one customer. No, it was not a single customer only in India but a large portion of the order came from India; we do have other orders from other customers in India as well as we move ahead.

And it is not a one-time -- we are into Q3 and we're still receiving orders from that as they grow and run out through their deployments. So it is really that customer is rolling out throughout India are in the cycle of really ordering equipment mainly for LTE and deploying LTE throughout India. Does that give a clarification?

No, that is helpful, thanks, it sounded before that it was a bit more one time and it sounds much better now that it is maybe a recurring project that could go on for a bit. I have a couple -- one more question (multiple speakers).

By the way, just to make sure it is a recurring project, I don't expect the same size of the orders this quarter or next one as all our customers -- by the way I think I mentioned, customers go through cycles; they do a big order then it takes time for them to a little bit to swallow it up as we install it for them, we roll it out into the field, they build a network and then they go through the cycle again.

And I wanted to ask I guess a similar regional trends question around Africa. You have done very well in Africa traditionally and have a very strong market share there, and I was surprised to see sales down a bit sequentially from Q1. Could you talk a bit about the trends there? Is it a similar lumpy trend with your customers there or has anything changed?

Okay, I don't think anything changed, I think we are almost a little bit down from Q1 and it has to do with lumpiness around the customers.

Okay, great. And then Aviram, one question for you around OpEx, you have done a great job in keeping your OpEx level flat and performing well in this tough environment and you have given some color around your revenue guidance ranges for 2013.

I guess I wanted to understand a little bit more from you what kind of flexibility you have on the operating line. If you are at higher or lower ends of that revenue target range for 2013, do have areas that you could focus on to draw more out of the operating expenses to get kind of in that mid 30s range in the quarter to help on the leverage side? Thanks very much for my questions.

Yes, thank you. We -- if we need it I think we will have room to squeeze the operating expenses even further. At this point we think that we are the right OpEx structure, if you will. Model it and you will see growth that we target 5% to 8%.

Having a gross margin for the whole year of 35% and keeping OpEx flat you will see a very nice increase in the non-GAAP profit. So look at, model it and see that we don't see at this point a reason to squeeze more and have our plan executed as now in OpEx, but if needed -- there is room there that we can take it down if needed.

Okay, great. Thanks very much, guys, and good luck.

Blaine Carol, Avian Securities.

Ira, can you talk about the -- as much as you can about the opportunity that you have with some of the larger US Tier 1 OEMs? And if you look out at the SEC website, in July alone T-Mobile has registered over 2,000 links and they specify Ceragon equipment in those filings. So I wonder if you could talk about when it goes from being registered to orders to the potential for revenue in these situations?

I think you are doing an excellent analyst job at looking at details and, yes, that is on the website. We usually talk about the deals when I have the chickens on hand. At this point it is legislated as being Ceragon and I will leave it at that. Typically, by the way, in the US market it takes a quarter for legislating it, according to get the orders, another quarter to get the starting to see the revenue from it in general, okay.

So if I add those quarters up, what is it two or three quarters out, Ira, when you start to get the orders and the revenue?

Now you said it looked in July, so end of this quarter orders something after that, maybe. I still need to see the orders, you know.

Okay. Now T-Mobile has been very verbal about 37,000 sites that they are upgrading toward LTE. And just getting back to the fight that they -- or the links that they have registered, I think you have about 98%, 99% of the links that are registered. How is this going to be split up -- how do see the microwave being split up? Is it going to be sole sourced, is going to be dual sourced, is it going to be triple sourced? How do you see that rolling out?

Like all operators worldwide, we don't believe in a single source, it is always double source, okay. And part of the game that -- or part of our strategy worldwide, we try to be the number two player in those deals to one of the very large Tier 1 vendors inside the deals. I think it will be the same also in -- as a lot of the cases. Now I don't want to say now I'm trending a very, very delicate line here between customer confidentiality and our business confidentiality and others.

The other piece is, which I will give, is that typically in the US -- and that has nothing to do with the way T-Mobile is planning the business overall market in the US -- it's right now I would say land line type is probably somewhere around or plan to be 90% of the business, most of it over time, fiber and 10% being a microwave backhaul type of deployments. And again, I'm not touching T-Mobile on that, that is total US market and total other deployments. That is typically what is happening in the US.

Okay, great.

Different operators, by the way, because of different geographies and different places have a little bit of a different mix, it's nothing else. But that is the overall market long-term trends that we see.

Okay, great. And then NSN used to be an over 10% customer if you would go back a number of years ago. And has there been any opportunity there for you maybe with some of the disruption with DragonWave? And we know that it is not an exclusive with DragonWave, that NSN can get best-of-breed products. So anything different there, Ira, as far as activity or discussions or things of that nature?

I'll give two data points -- at least at this point the NSN DragonWave party line is exclusivity, okay. And that is what they are conveying to customers, are very hard to work with them. That is what they are targeting, but NSN I think has weakened dramatically in the microwave business over the last few quarters.

That market share has been taken up by us and others worldwide from them, which is indicating a much lower level of microwave sales at the DragonWave NSN payer I think, but they are giving their own guidance so you can use those numbers for what it is. And I think I told the story on this call, which is also a part of that same story.

Okay, very good. And then Aviram, I had a hard time hearing. You're talking about this 5% to 8% growth -- gross margins for the full year being in that mid-30% and good growth on a non-GAAP basis. Was that commentary related to the second half of this year or is that your 2013 commentary?

No, we said -- we said we gave the guidance for Q3 on the revenue and we said that we expect next year growth between 5% to 8%, having a full year made 30 mid-30 gross margin and keeping OpEx flat.

Okay, Mid-30%, OpEx flat. Flat on the current rate -- do we take the current quarter multiply it by 4 or flat 2012, 2013?

No, flat the current quarter, this is flat the current quarter.

Flats on the current quarter, okay. And then what type of payment terms are your customers looking for? With the DSOs being over that 130 days, are some of your customers looking for six month, 12 month type of payment terms?

Again, it various from customer to customer. I'm talking about the Tier 1's. But in general the Tier 1's on the Africa and Latin America pushing our DSO up. So if you have a DSO from 130 days you can assume that it is a little bit more than that.

Okay. And I guess I'm surprised on that; I noticed that the Tier 1 were better payers than -- because they have better capital and they are not looking for you to sort of finance the buildout for them. So I always thought that the Tier 1's had better payment terms for you than some of the lower Tier providers, is it because Africa and Latin America (multiple speakers)?

Yes, I understand where you are coming from, but I will answer differently. We are not financing them. When people talk about financing they talk about two, three, five year types of terms. No, this is not the type of terms. But -- yes they have better cash and that is why we don't think there is a collectability issue. But on the other hand they have better leverage, okay, than the smaller guys.

This leads to somewhere around the 130 plus types of terms, which are reflecting the cycles within the operators between -- and they're balancing between their revenue streams and the CapEx and the OpEx that they have on their business models. No, it's not financing, we don't touch financing, I don't know how to do five-year financing, that is not our business. But the business models are around those different terms.

And, Ira, I've asked too many questions, but let me just throw this one out. On the pricing environment, if they are getting longer payment terms does that give you a bargaining chip as far as maintaining pricing or maybe pricing not going down as much? And then I will pass it on, thanks.

No, not really. As I tell you, those are Tier 1's, they have a better leverage, it is large deals.

Okay, very good.

We still get them -- and we still get the margins that we want in the mid thirties.

Okay, thanks, guys.

Joseph Wolf, Park Place Barclays.

Just a question that -- you balance the (multiple speakers). If you take a look at the balance of the opportunity, which seems to be fairly reasonable given that macro, plus the macro, which I guess seems to be a European and North American flatness, but then tie it in to the cash, are there opportunities that you are not able to go after right now because of the capital constraints and the working capital utilization? And are you looking to -- is there any capacity to boost your credit lines or is that something that the Company is not thinking about right now?

As Ira mentioned, we are not doing long-term financing for customers. So when we are talking about payment terms that are a little bit pushing down the DSO you understand the range of the payments that we are giving. They are not doing financing for three years or two years or even a year. So basically we don't see a deal that we cannot participate and finance them with the $45 million plus the additional unutilized credit lines.

Regarding additional credit lines, yes, we are working on additional credit lines because basically the way that now we are playing in the court of the big players with the Tier 1's and fluctuation of the working capital as we have evolved in more than one [peers] will need for us to have the need for -- to grow or to return working capital as we are progressing with those Tier 1 customers.

So we are increasing a little bit the credit facilities for the working capital, we sometimes utilize them, as we prepare in advance for this quarter with the $30 million credit facility we want to have it larger, but again utilizing as a need in the working capital -- increase or decrease.

In terms of just your view on the balance sheet, how far would you stress that? It sounds like right now if you add up the lines you've got about a zero net cash balance. Would you go into some sort of leverage ratio that you would be comfortable with in terms of the debt you take on for the short-term?

Again since it is a temporary move and shift between balance sheet items which is cash and AR, I think comfortably as in taking more short-term credit facility to finance working capital.

Okay, great. Thank you, guys.

Aalok Shah, Davidson.

Just a couple quick questions. On LTE, do you think it makes it more difficult for some of your competitors to compete in LTE, and especially some of your peers currently? And also, do you think that the pricing and margins will start to improve around LTE?

I think we are making life difficult on the competitors and environment at the LTE with some of the solutions we are putting on the table. I think there is a competitive pressure and as the market evolves around technologies and solutions there. I see moves also by some of our competitors, both small and large, around it.

It is a dynamic market. I think we have an advantage, but it is a very, very dynamic market within the different products. Better pricing, it all depends on what do you call better pricing. I think the interesting part is that, as I said, there is a high competitive pressure on both CapEx and OpEx around the LTE environment and I expect to continue seeing pressures around pricing or at least what I would call equivalent pricing for same capabilities.

And we will keep on seeing pricing, but I think we have the right cost structure to work with that and maintain and even increase a little bit the margins.

And now with, you've had Nera now I think 18 months since the closing of the deal. Have you -- do you think you have done all the cost cutting you can out of Nera? And is there anything more you can do on that end of things to try and improve the profitability even further on the cost cut side? And then maybe you can give us a sense of what the mix is between long-haul and short-haul, I would appreciate it.

I think we mentioned on the call and Aviram mentioned on the call already we do expect the gross margins to continue trending up to the mid to plus 30s. Part of it is what you call squeezing some of the Nera costs still out, which has to do with both new long-haul products and the trail of some of the older short-haul products, which are still a little bit in the revenue mix. This will trend up.

I think we indicated, on the other hand, we are comfortable with our OpEx level, we are keeping it flat. Which means that we think we squeezed out what we wanted out of the combined operation to a level which we feel comfortable with supporting us both in the current need and for our future growth towards supporting our growth for most of next year.

Okay, thank you.

Brad Erickson, Pacific Crest Securities.

I just had a follow up from the prepared remarks. You mentioned that Q4 appeared somewhat aggressive versus what you guys had originally been thinking. Can you kind of talk about -- you've obviously mentioned a lot of regional drivers and demand trends as you can best see them at this point. But can you kind of talk about what was the biggest driver of the change in that commentary for Q4 from your perspective?

I think that is the major driver and I think I started out with is that the overall macro environment of the headwinds, and I think if you look at any of the telecom market around us, people are very, very cautious. Although we still book to bill above 1, we still have the best booking ever and we still have the best revenue ever, I think we need to be cautious in the way we look forward because of the market trends.

We think we will grow faster than the market. We have the market this year as growing very little. I think we discussed regional changes, gaining market share in certain regions, taking all of those into account and throwing it into a big box, shaking it up, taking all the numbers, plugging into a very large (inaudible) and walking back the numbers I feel that we do expect to continue growing but reaching the 130 is -- looks at this point as being at the aggressive range of our target and possibilities.

Although it is not a zero possibility, it is on the aggressive range. And as we usually talk, and sometimes people tell me, I am -- am I conservative, I'm over conservative, there is a mechanism that we do internally saying, okay, this is our best estimate. And our best estimates at this point is below that number for Q4.

All right, that's helpful. Thank you.

Thank you. And there are no further questions in queue. I will turn it back to our speakers.

Okay, I would like to thank everyone for being with us on the call this morning. And we are open to further questions over tonight, the next few days as we meet and as we travel around the world on and meeting all of you face-to-face. Thank you very much and, for those on the, because we started on the northern side, a lot of you will be having of summer vacations, so have fun. And for those on the southern side of the hemisphere, it is probably a lot of rain right now. So we will see you soon again.

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