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Ceragon Networks Ltd. (NASDAQ:CRNT)

Q4 2012 Earnings Conference Call

February 14, 2013; 09:00 a.m. ET

Executives

Ira Palti - President & Chief Executive Officer

Aviram Steinhart - Chief Financial Officer

Analysts

George Iwanyc - Oppenheimer

Matt Ramsay - Canaccord Genuity

Jason North - Jefferies & Co.

Joseph Wolf - Barclays Capital

James Faucette - Pacific Crest

Daniel Meron - RBC Capital Markets

Operator

Good day everyone and welcome to the Ceragon Networks Limited, fourth quarter and full year 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 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 include the risk of significant expenses in connection with potential contingent tax liability associated with Nera’s prior operations on facilities, 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 and 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 would now turn the call over to Mr. Ira Palti, President and CEO of Ceragon. Please go ahead sir.

Ira Palti

Thank you for joining us today. With me on the call is Aviram Steinhart our CFO.

Our revenues in Q4 were consistent with our guidance and our operating expenses declined, showing the effects of the initiatives we implemented in Q4. As expected our operating cash flow improved dramatically and we have net positive cash flow of $13 million. We are also pleased to report that our book-to-bill ratio in the fourth quarter was above 1.

We see no significant changes in the market since our last call. The quarter-to-quarter shift and geographic mix relate to typical customer ordering cycles and the revenue recognition patterns, rather than a change in demand trends.

Near term we still expect macro economic uncertainty and difficult economics of adding capacity to hold back spending growth, but we see spending priorities shifting more in our favor over the next 12 months.

Telecom equipment is a healthy, but not end user business, especially in the current environment. But we are executing well and we have achieved a number of important goals. This achievement are not apparent in the financial results as we had to adjust results for the first three quarters of 2012, to reflect the impact of change in acceptance procedures with one of our large customers.

However from a business execution perspective, this achievements are very real and they position us for much better profitability in 2013, followed by return to growth and improved operating leverage. Therefore I’d like to go through some of the strategic business accomplishments of the past year.

We increased our market share in the long-haul business and became the clear number one. We successfully converted all the former Nera short haul customers to the Ceragon solution. As a proportion of the orders in our backlog shifted towards all Ceragon products our gross margin profile improved. Meanwhile, we also reduced the product cost for the long haul product line.

These two initiatives combined with our continued designed to cost program, enable us to achieve and sustain gross margin in the mid-30. In terms of the deals we are booking, we are already at the mid-30 level, however the lack in revenue reorganization means that this is not yet apparent in our financial statement.

Another major achievement of 2012, which is yet to become fully reflected is the addition of several new tier 1 customers and the strengthening relationship with several others.

First, purchasing decisions are not always centralized. Our challenge will be to continue expanding with these large customers region-by-region, country-by-country. This can take time, but we fully expect to continue expanding our presence with these large tier 1 customers.

Operators are spending more carefully than even before, recognizing that they simply can’t afford to keep adding capacity the same way they have in the past. According to their traditional model, keeping pace with capacity needs could require operators to [quarter serve] (ph) the CapEx investment at the time when they are looking substantial revenue to over the top services.

The substance decline in revenue per unit of bandwidth is making capital efficiency a must. This is one reason why telecom equipment CapEx isn’t growing more rapidly these days in this environment. Operators must look to equipment suppliers, the strategic partners will have the rake the linear relationship between cost and capacity.

Therefore operators are being forced to change the business model, increase the complexity and diversity of the networks and accelerate the adoption of new technology. This in turn creates a lot of buzz about network sharing, small sale, supermarket sales, cloud run, distributive architectures and WiFi offloading as fair grade solutions. Our view is that all this various technologies and business models will have a place. There is no single silver bullet solution to the wireless carriers dilemma.

We are referring to our vision for the next generation network as 3H Holistic HetNet Hauling. It means going beyond traditional back-haul in all direction; from supermarket sales, to small sales, with a combination of back-haul and front-haul solutions.

The term front-haul solutions referred to connectivity between the base station and remote radio-heads. When we discussed it and showing the 3H Vision with many of our customers and potential customers with excellent reception.

In Q4 we announced our first product as part of our 3H Vision, the fiber IP-20C. This is a disruptive breakthrough, premium solution for LTE and LTE advanced network that offered virtual fiber capabilities using standard license events.

The fiber IP-20C was based on multi-core technology. One way to think about this is to compare it to Intel’s pioneering steps for the PC going from single core to multi-core.

The IP-20C enables multi-gigabits capacity on the single channel, that sets a new standard for efficient user spectrum and improves operative total cost of ownership, addressing what I mentioned before about the need to break the CapEx bandwidth relationship.

By using 4x4 MIMO operators can reach four times the capacity of current solutions with the form factor exercise. They will enjoy the first mover advantage, because this product is based on our own prosperity chipset for Baseband and RSIC technologies. We believe commercial chips by others with the same capabilities will not be available any time soon.

We are insuring demos of this product with about 2000 customers and we expect to announce our first orders this quarter. But we anticipate seeing material revenue from this product only towards the end of the year. Like any disruptive revolution, this will begin slowly and build momentum.

I want to emphasize that this is a premium product that complements our existing portfolio. It doesn’t replace our existing products, because not every situation calls for the ultra high capacity that this product offers. Just as it took several years for back-haul to evolve from mostly low medium capacity to all high capacity, we believe that it will take several years for the market to evolve from high capacity to ultra high capacity.

We believe that we are very well positioned as a number one specialist to outperform the market long term for several reasons. There’s a well-established lead in technology with the best-cost position, assuming we continue to innovative, but it will be difficult to catch us. We have a complete portfolio of short and long haul solutions and the scale and geographic reach to provide the type of services required.

We are still as specialist and not focused of protecting a well-guarded relationship with operators. We believe that we are better equipped than the large integrated equipment providers to compete in the multi-vendor, best-of-grade, cap net environments that is developing.

Although top line growth may take a little bit longer to develop, we are confident that the achievements of 2012 will begin to become apparent in our results during 2013 and we will be able to deliver substantially better profitability as planned.

Now, I’d like to turn the call over to Aviram to discuss these methods in more detail from a financial perspective. Aviram

Aviram Steinhart

Thank you Ira. Before I go for the Q4 results, I would like to expand briefly the impact of the delay in revenue recognition for one customer that we announced of January 4. Adjustments are presented in the table and the handbook in this morning’s press release. Its fully adjusted comparative information is available in the slides on the financial report page in the Investor Relations section of our website. All comparative information we are giving is on as adjusted basis.

To recap what happened, in late December 2012 we learned that the major customer was requiring additional acceptance procedures and implementation for part of equipment it had purchased from us and was previously accepted.

After investigating the appropriate account improvement, we decided to differ a portion of the revenue previously recognized in 2012 related to this equipment and feel the additional acceptance procedure completed, currently expected during 2013.

The deferral impacts the revenue and the related cost commissions using the accounts receivable and accounts payable for the first three quarters of 2012, which have been adjusted accordingly. According to the account cause we were not able to differ all the costs associated with the $50 million of revenue that’s moved out of Q1, Q2 and Q3 for future periods. Therefore our gross margin was affected disproportionately and the deferral had the sense of taking away most of our [Nera copies] (ph) for 2012.

There will be very little discussion of 2013, because under the new procedures, actually the same amount of revenue being shifted from 2013 to 2015 will also shift from 2013 to 2014 and so on. So with this background on the adjustments, I will quickly go through the results for the quarter.

In the fourth quarter revenue was $106.8 million within the rate of our guidance. Our GAAP gross margin of 32.8% includes $300,000 of amortization of intangible assets, $100,000 of inventory step-up, $200,000 of restructuring charges, and minus $100,000 of charges in pre-acquisition of indirect tax positions. Excluding those items, non-GAAP gross margin was 33.3%, the same as Q3 on an adjusted basis.

Fourth quarter GAAP operating expenses were $42.1 million, excluding $500,000 in amortization of intangibles, $1.2 million of stock-based compensation and $6.5 million of restructuring charges. Our non-GAAP operating expenses were $33.8 million, compared to an adjusted $35.9 million in Q3, reflecting the cost reduction initiative in Q4.

On a GAAP basis we reported an operating loss of $7.1 million. Our non-GAAP operating profit for the fourth quarter was $1.8 million or a 1.7% operating margin. Finance expenses in Q4 was about $900,000 and tax expenses was about $400,000. On a GAAP basis we reported a net loss of $8.4 million or $0.23 per share. On a non-GAAP basis, we reported a net profit in Q4 of $400,000 or $0.01 per share.

The geographic breakup of revenue appears in the press release. APAC, where the revenue tends to be lumpy, increases from Q3 to Q4, mainly due to one large deal. This interest was more than offset by declines in India, Latin America and Africa. Latin America continues to be a strong growth engine and the sequential decline was basically taken, because Q3 was quite high and it relates to revenue recognition timing.

In general, India has now not opened up again and the quarterly pattern related to one major customer going through the typical ordinary pattern. Similarly we announced two very large deals in Africa in Q4, which are now underway and are expected to be completed over the next few quarters. This sort of lumpiness is normal. As Ira said, we are seeing no particular change geographically.

We had one 10% customer in Q4. Overall, the total OEM sales accounted for 5% of total revenue, a decline from Q3. This is the typical level overtime. In the comparison we expect one large order in Q2 and in Q3.

Turning to the balance sheet, trade receivable decreased to $149 million, putting DSO to 122 days, a substantial decline. Turning to our cash position, cash and cash equivalents increased to $51.6 million at year-end, that’s after the $10 million industry payments. As expected, we had a strong operating cash flow of $17.1 million.

At year-end we had about $43.8 million in debt. We have long-term debt of $26.8 million, including current maturities to be paid over certain quarters. We had short-term debt of $17 million, which we drew down from our $40 million short-term credit facilities. While we cannot rule out location and timing issues, we expect to improve our profitability during 2013; therefore we do not expect cash flow issues.

Looking ahead to Q1, we are expecting revenue to range between $95 million to $105 million. The sequential decline primarily is reflected in seasonal factors. There will be no change in overall demand. Our book-to-bill was above 1 in Q4, but our outlook for the year as a whole is unchanged.

We will see the full effect; the operating expenses initiatives implemented last quarter in Q2. We are targeting quarterly operating expenses of $32 million to $33 million. Third quarter split it roughly as follows: R&D of $10 million to $11 million a quarter, sales and marketing of $16 million to $17 million and G&A, $5 million to $6 million.

We continue to target the basic improvement in core stability this year and retain our goal of approaching 5% operating margin for the year and exceeding that level on a quarterly basis in the second half. We do believe it’s realistic to assume gross margin in the mid-30s for the next several quarters. We believe this is realistic because of the program to cost reviews, the long haul product that’s been completed, and the cost reduced products are walking through the backlog and will increasingly show up in the revenues.

As we indicated on our last call, we are confident that we will up, that we will resume top line growth of the fundamental growth divers in our business. We just don’t know exactly when this improvement will begin. We are set in our revenue assumptions for 2013 based on the average of the last four quarters of booking.

In the current environment, this is the best indicator that we have for the year ahead. Therefore for the purpose of managing the operations, we are assuming 2013 revenue in the range of $420 million to $440 million, basically the same assumption we talked about on the last call.

With the improvement in operating expenses, once revenue begins to ramp again, we will have substantial operating leverage up to $120 million a quarter, at which point we will have to start adding some OpEx to get to the next level.

Now, I would like to turn the call back to Ira.

Ira Palti

Thank you Aviram. During 2013 we expect to continue our efforts to further penetrate new tier 1 customers, execute on the 3H Holistic HetNet Hauling vision and gain traction with our new IP-20C product.

The sectors we mentioned on the last call to provide potential upside are still there, because season links pickup after the customers finalize the budget for the year, because of the share gains or mix changes we haven’t exceeded and we could see a certain and expected up-tick of the new product. The fact is we don’t have any reason to believe these are any more likely to help-in than before. So we are excluding them from our assumption.

Taking a little longer view, during the next few quarters we believe we are on the verge of the next major wave of change in the microwave hauling market. Just as the shift from low to high capacity, from PBM to IP has driven dramatic growth in our revenue over the past years, we expected the shift to HetNet architectures and ultra high capacity to buy growth over the next decade.

We’ve done a lot of work and we are very well positioned to capitalize on the markets as it shifts and as the changes are occurring.

Now, I would like to open the call for questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question will come from the line of George Iwanyc of Oppenheimer. Please go ahead.

George Iwanyc - Oppenheimer

Thank you for taking my questions. So just looking at the outlook for 2013, we see some shifting in priorities helping out later in the year. In the near term, are there any push outs or lengthening of sales cycles still happening?

Ira Palti

Morning George. In the near term we do not see any significant change in the demand patterns, okay. We do believe the demand patterns will stay about the same and that’s why we based our focus through the year on average booking from the last four quarters. We do not, in light of the typical rating conditions, no significant improvements for the first half of the year and when we look at the guidance for Q1, we took into account revenue recognition cycles and other parameters, which are local to the quarter and not based on the demand trends.

George Iwanyc – Oppenheimer

Okay, and then looking at the larger tier 1 customers that your looking at, is that creating an opportunity for larger contracts and larger commitments at the same time or are the order flows kind of staying at the same levels that you’ve seen over the last four quarters?

Ira Palti

Well, the tier 1 customers, yes, it creates an opportunity for larger orders and larger flow with the customers we have won already when we are there and with our new, this software technology and that is opening the doors for a lot of very interesting, at this point discussions, but as people are looking very extensively at network architectures and looking at what we call holistic HetNet hauling solutions for their new architectures, I think will open the door for us with a few more tier 1 operators.

George Iwanyc – Oppenheimer

And looking at ultra high capacity and markets, does that change the price point in any dramatic way or is this a shift that helps to stabilize or keeps ASP’s stable?

Ira Palti

The ultra high capacity at this point is a premium product with higher ASP’s, but we said during 2010 we don’t expect this to be a very large part of the mix. It will contribute to revenues in 2014, we believe in the range of 20% of the revenues. Not everything on top, but will provide some part of that growth, but at this point its positioned as a premium product, as a premium solution.

George Iwanyc – Oppenheimer

Okay, and one last question. With the small step down in spending this quarter, is that the safety about what we should expect for the next few quarters, unless there is a dramatic change with top line?

Aviram Steinhart

We started it and there should be a cost reduction as we mentioned in the last call. What your seeing is a direction of shift this quarter with some of the needs and going to Q1 and beyond, to deliver we believe the OpEx, focus the OpEx between $32 million to $33 million a quarter.

George Iwanyc – Oppenheimer

Great, thank you.

Operator

We’ll go next to the line of Mike Walkley of Canaccord Genuity. Please go ahead.

Matt Ramsay - Canaccord Genuity

Yes, thank you very much. This is Matt Ramsay on for Mike this morning over here. Thanks for taking our questions. I guess the first one, just about the revenue deferrals and push outs at leading customers there, it looks like the majority of the impact was kind of roughly $7 million in the first two quarters of 2012 and so its kind of a two quarter push out timeline on that level of revenue. Is that the right way to think about it?

And number two; maybe you could give an update Ira on the relationship with the customer. If anything’s changed since, better or worse since the last time you spoke. Thanks.

Ira Palti

I’ll start with the relationship and I’ll let Aviram answer the other half. Relationship is excellent with the customers. We are continuing to see significant order stream from that customer and has to do with internal procedures and change in acceptance procedures. The issue is more – our accounting piece knocks this side of the section where the equipment is online and running and delivering the service. It’s mainly a procedural issue internally and the relationship is excellent and just keeps expanding to the customer.

Aviram Steinhart

You got it, the adjustment. Yes, that’s correct. $7 million, a little bit more than $7 million in Q1, around $7 million in Q2, $1 million in Q3, overall $15 million. $2 million actually were reversed in Q4, so overall the shift between 2012 to 2013 are $30 million.

If you recall, on January we said that there will be between $11 million to $40 million shift. This is the $30 million that will shift. $50 million between Q1, Q2 and Q3. $2 million we recognize in Q4 and the rest basically we’ll move to 2014.

Matt Ramsay - Canaccord Genuity

Great, thank you for the additional color there. And I guess one more long-term kind of question for us. Ira I though it was very interesting that you talked about that you kind of front-haul opportunity, as the industry kind of moves to LTE Advanced and heterogeneous networks.

I’m just wondering if you could give us some overall commentary on your views of the timing and the growth of that market, maybe the time that it presents to Ceragon, maybe the applicability of the small cells to macro cells, maybe what percentage of the global, something around the global macro cell base. It actually has small cell applicability and what that kind mean for you guys going forwards, because it sounds like some pretty exciting new product.

Ira Palti

If we look forward, we expect and we can see the stocking, the kinds of changes into the (inaudible) networks access to solutions.

What we see worldwide right now is all sorts of experimental deployments and experimental trials and with those types of organized networks with different operators, my belief is that we’ll start seeing significant roll-outs towards the end of this year or really beginning of next year.

Also from a geographical perspective, this is more applicable at this point to the U.S. and Europe, unless to U.S., Europe, Japan, Korea less to the developing markets as the pressure for LTE Advance builds for delivering a lot more data and a lot more bandwidth in U.S. and Europe and we have a very interesting discussion around those with a lot of the tier 1 operators in those markets.

Matt Ramsay - Canaccord Genuity

Great. Thank you very much for taking our questions. We look forward to seeing you in Barcelona.

Ira Palti

Thank you.

Operator

We will go next to the line of Peter Misek with Jefferies.

Jason North - Jefferies & Co.

Hi, this is Jason North for Peter. Can you talk a little bit more of our share in terms of India. You said that was picking up now and what kind of the prospects are there throughout the year.

Ira Palti

Hey, I think with the comments we made about India is at this point its not picking up, and also the regulatory environment there has changed significantly over the last year. We did have and we continue to deploy very large quantities of go-to-one customer in India, but not all operators in India at this point are rolling out as quickly as the net customer. And the interesting part is that it’s a customer who is using LTE technologies ruling them out extensively throughout India; probably the second largest LTE network worldwide, mainly for delivering broadband services, data services in the mobile world.

Jason North - Jefferies & Co.

Okay, the accounts receivable came down significantly. How do you see that proceeding? Is that going to stabilize around these levels or how is that going to work?

Aviram Steinhart

Yes, the accounts receivable reached $149 million, a significant reduction from previous quarters. We had a very strong collection, which put the DSO down at 122 days. Going forward we should I believe stabilize around this level. There will be fluctuation between quarters, but I think this is the level we should look at going forward, this is around the level we should look at going forward, around the 120 to 130 basis outstanding.

Jason North - Jefferies & Co.

Sorry, was it 122, 130 you said.

Aviram Steinhart

Yes.

Jason North - Jefferies & Co.

Okay great. Thank you.

Operator

Thank you. We’ll go next to line of Joseph Wolf with Barclays Capital.

Joseph Wolf - Barclays Capital

Hi, thanks. Just as a follow up on the new product developments, you mentioned about the geographies and where it will go. I’m wondering, if we think about the spending and that 120 comment, if there is a pick up that’s in there, the 120 you will have to start rehiring.

How does that layer into the development of new products and the discussions that you’re having with your customers about what they are looking to do in this current environment. Are you seeing a delay with an interest towards new or is it just an ultimate delay. I’m wondering how they are balancing the plans going forward, given the lack of real spending.

Aviram Steinhart

At this point we reduced expenses, expenses to this $32 million to $33 million level. We factored in the new products and the new requirement, the spending changes in there. We do not expect that level of expenditures, including R&D to change in any from the current decreased level, anywhere significantly before you reach the $120 million level of revenues.

I think the challenge is always and that is really keep up the priorities, and we do shift priorities internally to see how the people mature in their understanding on how to deploy our holistic net holding solutions and the whole set of products. We are shifting priorities in the way we would release additional products into the market.

Joseph Wolf - Barclays Capital

Can you give us a percentage of that quarterly spend, which has kind of been refocused to the new product development.

Aviram Steinhart

If you look at our R&D spending, it’s almost at this point 75% is new product development.

Joseph Wolf - Barclays Capital

Okay, which will imply that all the cost; you mentioned all the cost reductions are out there, so most of your development is now future focused.

Aviram Steinhart

Its, yes, most of it is future focused, yes.

Joseph Wolf - Barclays Capital

Alright, great. And just any specifics or any geographies that we should be picking up on as your commentary, as you look out for 2013 areas. It seems like you are pretty conservative about the whole sector, but is there anywhere specific we could focus on where you could be surprised at the outset of this point.

Ira Palti

We believe that Latin America and Africa are still growth engines for us. Yes, there is lumpiness between quarters on the revenue recognition, but if I’m looking at trends within those growth and our increasing customer base and booking trends, I think those two will be over the year on an aggregate basis, some of the growth engines that we’ll have.

Joseph Wolf - Barclays Capital

Just one final question; if that’s the growth engine, you mentioned where the prioritization is for the new products in the more developed markets. How does your product develop handle the fact that these growth engines are the ones for the newer stuff that we deployed last.

Ira Palti

I think we have in the current generation of the product, is that we got a regrouped competitive product out there, which keeps us in the business. Yes, we are still investing in the current generation of product and small improvement and meeting the requirements.

But I think that I mentioned for example on the call that we gained significant position as the number one long-haul provider worldwide. Its in those markets was our excellent evolution of long-haul product line and we will keep investing in those products, but I think it’s the right percent of investment if you keep winning the business within the Latin America and Africa, and my expectation is that further down the road the wealth is in these new technologies.

Joseph Wolf - Barclays Capital

Great, thank you Ira.

Ira Palti

Thank you.

Operator

We’ll go next to the line of James Faucette of Pacific Crest.

James Faucette - Pacific Crest

Thank you very much. I just wanted to ask Ira, I just heard your comments related to how carriers are being more careful with their investment. How are you seeing that impact the change or impact in change where you fit into and where Ceragon products fit into the priorities.

You mentioned you think there is some shift to Ceragon. We are just trying to understand that I guess in the past we’ve seen carriers build out back-haul networks in advance of LTE builds, but I just don’t understand, are they building that out entirely before the year or how you are seeing changes there. Thank you.

Ira Palti

First, I have not seen carriers build back-haul networks in advance of deploying LTE in most places around the world. I think what we are seeing is the people as they roll out new networks, they adjust and build the capacity and the back hauling and in the front hauling solutions is they roll out the new networks and new capacities.

So really riding almost hand in hand with deployments of new base stations, new capacities with base stations and new architectures in most places around the world, and with the people shifting to biggest networks, some of it is less related to us, like things like WiFi offload coverage within buildings, but also if you look at them deploying they need to aggregate tons of sales, pull them in, pull them in from a lot of places into very high capacities and then also to situation where our new technology will help them pull in as a hold in requirements to those locations.

James Faucette - Pacific Crest

Great, and then when you talk about the shifting priorities then from carriers, as it relates to back haul, I mean can you expand a little bit on that and how you expect that to impact Ceragon, particularly with the new products that you launched.

Ira Palti

We are seeing some diffident shifts, which all of them have to do with higher capacities and its really breaking the barrier between capacity and bandwidth.

I think that the operators are looking for all sorts of solutions which will help them deliver a lot more bandwidth to where the different types of cellular base stations are and aggregate their rules and the solutions we are coming out with and the IP-20C is just the beginning.

There is all sorts of solutions that will enable them to do exactly that or a little bit of a different CapEx spend and a gradual CapEx spend, and also simplifying a lot of the instillation issues. Its really trying to allow them to bring in more bandwidth to more base stations.

James Faucette - Pacific Crest

Great, thanks very much.

Ira Palti

Thank you James.

Operator

Thank you. (Operator Instructions). And we’ll go to the line of (inaudible). Please go ahead.

Unidentified Participant

Hi. First of all, good luck to you in 2013. Second of all, can you give a sense, 2012 was already a tough year for the industry and can you give a sense relative to 2012, whether or not you expect the overall industry to see or at least your customer base to see growth.

Ira Palti

Overall for 2013 I think that we indicated both for us and the customer base, that we are basing our guidance for 2013 as $420 million to $440 million. The same average running rate that we saw in the bookings within 2012, which really says we expect the market not to grow in our 2013. We expect that our factors which can leave the second half or beginning of 2014 for additional growth.

Unidentified Participant

Second half of 2013 or 2014.

Ira Palti

No second half and towards the end of 2013, beginning of 2014.

Unidentified Participant

Got you. And then on the competitive landscape, are you seeing any changes and could you just stack up again the larger players that are selling microwave back-haul within their overall solution and the independent players. Maybe just talk about what you are seeing with respect to the changes in any of the top two or three competitors that existed a year ago.

Ira Palti

I think we are maintaining our number one specialist position out there, where we have three generalists ahead of us Huawei Ericsson and MEC being the larger players within the market. I think we are maintaining that overall number four, but number one specialist position in the number of shipments and the way we deliver worldwide within the market.

If you are asking about changes within the mix, not really. The only place where we are seeing some weakening from the reports is MSN, a little bit weakening within the markets and we are always gaining a little bit in the mix between the top three.

We do not see a shift between which is underlying questions our there, between the generalist selling and end-to-end solutions versus a specialist where we service best of grades. The market over the last year and also this year, the notation forward, the stage about 50/50 between the two nodes of selling.

Operator

We’ll go next to the line of Daniel Meron with RBC Capital Markets.

Daniel Meron - RBC Capital Markets

Thank you. Hi everyone. So I might have missed it earlier and I wanted to know, you guys referred to the ultra high capacity. Is there a way to quantify the additional growth that we should be seeing in your business? Is that going to accelerate your growth rate?

Ira Palti

As I said on the call, we do not expect the new implying capacity products or some of those solutions to effect significantly on 2013, both growth and we do expect those products to be at the rage of 10% to 20% of our revenue in 2014. About half of that probably will be growth on top of the 2013 run rate.

Daniel Meron - RBC Capital Markets

Okay, and as far as the impact on the gross margin, I mean is someone trying to look at just how should we think about Ceragon with a new product. Does that change the margin profile, the growth profile, etc. (Multiple Speakers) are going to be positive, but we shouldn’t expect the whole new Ceragon with much higher margins or much higher growth rates.

Aviram Steinhart

Hi Daniel. As Ira mentioned, when you give the model for 2013 the assumption regarding the new products in terms of contribution on to the revenue is not signification. 2014 will be more significant. The profile margin this quarter gets higher, but the impact is not significant in 2014 as the revenue is significant.

Daniel Meron - RBC Capital Markets

What I’m asking is 2014. I understand this is not going to be a 2013 story. I’m trying to get a reason 2014 and what we should expect then beyond this criteria. Thank you.

Ira Palti

I think that as I said, we expect to keep on growing into 2014 and resume growth in 2014, and as the given growth has also been hearing with numbers, what we believe will reach our target within 2014 in some place and for operating or increasing the operating margin from the average of this year 5% to be higher.

You are asking also on the gross margin profile of the new products, we do believe that they will affect the gross margin, but at this point I don’t know how much exactly. A little bit of pushing the gross margins up by 5% we think or towards the 2014 timeframe.

No, it will not be a whole new Ceragon with 50% gross margins and hoping that the market with the telecom equipment and the business we are in is that type of a market.

Daniel Meron - RBC Capital Markets

Okay, thanks. That’s very helpful Ira and maybe if you can refer to the cash duration that you expect in 2013? You guys did a great job in the fourth quarter in lowering your receivables. How should we think about some of these metrics once we go into the New Year? Thanks.

Ira Palti

We look at 2013 to be close to the year with relatively good flex revenue. The way to look, the way DSO stays at the same level and the profit is around 5%, this is the level of cash we should generate during the year.

Daniel Meron - RBC Capital Markets

Okay, that’s very helpful. Thank you. Good luck.

Operator

Thank you gentlemen. That does conclude your Q&A portion of the call. I will turn it back to the speakers.

Ira Palti

I’d like to thank you all for joining us today. I would like also to invite all of you. We will be in Barcelona for the Mobile World Congress to join us at our booth. We will be demoing some of the new products at the booth and we would love to continue a more detailed discussions with each and every one of you. Thank you very much for joining us.

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Source: Ceragon Networks' CEO Discusses Q4 2012 Results - Earnings Call Transcript

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