Ceragon Networks Management Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 6.12 | About: Ceragon Networks (CRNT)

Ceragon Networks (NASDAQ:CRNT)

Q2 2012 Earnings Call

August 06, 2012 9:00 am ET

Executives

Ira Palti - Chief Executive Officer and President

Aviram Steinhart - Chief Financial Officer and Executive Vice President

Analysts

George Iwanyc - Oppenheimer & Co. Inc., Research Division

Daniel Meron - RBC Capital Markets, LLC, Research Division

Peter Misek - Jefferies & Company, Inc., Research Division

Matt Ramsay - Canaccord Genuity, Research Division

Blaine R. Carroll - Avian Securities, LLC, Research Division

Joseph Wolf - Barclays Capital, Research Division

Aalok K. Shah - D.A. Davidson & Co.

Brad Erickson

Operator

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 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 the significant expenses in connection with potential contingent tax liability associated with Nera's prior operations and 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.

Ira Palti

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 1 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 the long-haul business are performing according to expectations, and we continue to be pleased with our execution. We are now then the clear #1 in the long-haul market, having been in that position for the second quarter in a row. According to our recent reports, based on Q1 figures, Ceragon had 26% market share 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 region. This was combined with a very large order from an operator in India via long time 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 in some specific opportunities. Taking this into account, the latest industry forecast indicate 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 told 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 exceed that of voice. In this environment, combined with the 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, the value-add 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 heard about 4G, the reality is it is still in the very early days on a global basis. As 4G LTE drives additional demand, operator 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 feeds and more using compact, ultra-high capacity systems. Looking forward, our next generation solutions will feature our own A6 and radio chipsets, redefining deployment flexibility. We intend to change the rules of the game of microwave by enabling simple spectrum yields in a wide range of scenarios. This will result in 2 to 4 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 that 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're in the process of building the right organization and implementing other initiatives that will take time to show results.

In APAC, we depend on the small number of customers so that business tends to be lumpy according to the customers' deployment cycles, meaning, that we get nice-sized orders for 2 or 3 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, the improvement this quarter came selling into 1 customer, the largest operator in India, deploying LTE in several circles and doing the deal via 1 of our OEMs. This early LTE deployment is based on broadband services through dongles and portable routers. Overall, we expect improvement in India will continue to be gradual and dependent 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's a huge pressure for data, but the region will experience the smartphone growth curve only when there will be availability of low-cost smartphones and tablets. Meanwhile, competitive pressures to add infrastructure is waiting on the operators' business models. We expect both subscriber growth of 3G and competitive pressure to continue to be 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 pulled 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?

Aviram Steinhart

Thank you, Ira. Our second quarter revenue was $119.1 million, close to the mid-points 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 noncash charges and pre-acquisition indirect tax positions and $100,000 of stock-based compensation expenses. Excluding those item, 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 $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 expenses 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, it is 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 2 10% customers in Q2, a large Latin America group facilitated customers, and an India, Africa group of company, which was partially served [ph] 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 DSO at 132 days. While we are not happy about this, we are confident that we don't have any collectibility issues. This increase was largely anticipated because it relates to both original shift toward Latin America and Africa, as well as the shift toward multi-one customer 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 $14 million mainly as the 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 we present 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 result over the next few quarter. We are profitable and expected continue improvement, which mean 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 are 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 markets. But with expectations for overall growth moderating, we believe the $130 million revenue [ph] in Q4 may now be a little aggressive. We continue to expect gradual improvement in gross margin.

Our gross margin is most sensitive to changes in geographical mix and the trends we see ahead do not suggest an optimum risk. However, with the continued shift to a more cost-effective evolution of non-core product and our continuous design to cost efforts, we see 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 return to positive cash flow by the end of the year. Looking at 2013, assuming overall market growth are around 3% to 4%, and our continued ability to outperform the market, we would expect to grow about 5% to 10%, 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 profits.

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

Ira Palti

Thank you, Aviram. I'll close by saying that we are pleased by the trend in our bookings 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 timeline to achieve our goal of 10% non-GAAP operating margins continues to be achievable and is a 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'll outperform the overall market. Those numbers [ph] have been moderating lately, so reluctant to try to pinpoint the quarter at this time. We are confident in our relative strengths because we are well-positioned to gain additional share as the #1 wireless backhaul specialists for the most advanced product features, a smooth, upgrade pass, locally-based professional services games and the cost structure to compete effectively.

Now, we would be happy to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of George Iwanyc with Oppenheimer.

George Iwanyc - Oppenheimer & Co. Inc., Research Division

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?

Ira Palti

Well, I think we indicated on the call, the front booking 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 of it, into Q1. We are basing on our continued ability to grow the strong bookings, but we'll 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.

George Iwanyc - Oppenheimer & Co. Inc., Research Division

Okay. And from a regional standpoint, is it similar to the type of niche you're seeing right now with heavier Latin America and Africa component?

Ira Palti

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

George Iwanyc - Oppenheimer & Co. Inc., Research Division

Okay. And 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?

Ira Palti

It's not. Let's say it this way. What we are selling right now is only the new products and the cost-reduced products. It's not fully reflected in the gross margin yet. And I think that's why we still -- we are indicating we'll reach the mid-30s over the next -- this and 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.

Operator

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

Daniel Meron - RBC Capital Markets, LLC, Research Division

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 in a regional basis. So I just want to get a little bit more color on any specific viewpoints from around that can provide us with a sense on how we should be thinking about 2013 beyond next quarter or so.

Ira Palti

Okay. I think, Aviram indicated a little bit, the overall, from the top line perspective 2013. But I'll 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 the networks. Okay. And all operator 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? And on the other hand, they are under competitive pressures. I think I mentioned Brazil, and I think I left with someone in this morning as most of us are right now looking at the current London Olympics. From a business perspective, I'm looking at 2016 Olympics in Brazil in parallel. And we see those pressures, and it's true for Latin America, and it's true for Africa and India and other places. I think that in the developed world, mainly in Europe and the U.S., yes, you have the macro economics 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 U.S., less so in Europe. Let's remember, there's not a plurality of devices at this point, there's spectrum issues, there's frequency issues. And we see a lot of people doing all sorts of things with how do they really go into an LTE deployment. It's around the corner. It's around the corner in the next 6 months or 12 months depending on where we'll start seeing 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. And that's 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 discussions with the different operators to fill in the needs.

Daniel Meron - RBC Capital Markets, LLC, Research Division

That's helpful. Are you seeing indications of slowdown in anyway because the of macro very recently. I mean, how are things trending as you see them now in the last several weeks? Or maybe a couple of -- last couple of months?

Ira Palti

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 the weekly basis. But if I look over the last 6 months, yes, I see in Europe, a little bit in the U.S., I see some slowdowns. In the other places, now, for example, I see in Latin America, acceleration at this point and not a slowdown. Similar in Africa and some region -- areas.

Daniel Meron - RBC Capital Markets, LLC, Research Division

Okay. That's helpful. And then last question, Aviram, regarding your cash position. I think that the net cash position right now is around nil. How much do you have in the credit facility? And what's the timeline that you think you expect for the working capital to improve going forward? And do you feel what's the DSO target? And relating to that, what kind of cash relationship do you expect in 2012 and 2013, given the slower ramp that we're seeing right now? And how do you -- how are exactly are going to improve the cash position in general?

Aviram Steinhart

Daniel, first, let me say, the cash is, as of today, it's $44.8 million. And we drew out of the credit facility, $14.6 million. We still have roughly $60 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 months or so. So, in general, $60 million roughly, we're not used up until now, and $14 million were used up out of the existing credit facility of [indiscernible]. 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 operational cash flow. But again, I want to be hesitant because there are several very large payment that aren't due the last 2 weeks of the quarter. Some of them -- and I'm saying, if we put in the focus, some of them, we put on the 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 would say, probably, over the next 2 quarters, above the 130 days, but we expect Q4 to be cash flow positive

Operator

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

Peter Misek - Jefferies & Company, Inc., Research Division

Yes. A quick -- 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?

Aviram Steinhart

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

Peter Misek - Jefferies & Company, Inc., Research Division

5% to 8%. And secondly, on India. Just want to get a sense of your timing in terms of, if there's an auction at the end of this year, how long do you think it will before you see orders, and then how long after that before you would see revenue recognition?

Ira Palti

Like any of our customers, we do assume that India will see re-auctioning on the 2G and 3G spectrum sometime towards the end of the year. So, I need to guess at this point, orders based, India, budget cycle, sometime in Q2 of next year. And then, put it at, I don't know, 50, 30, 20, 10 over the last next 2 quarters as things lit over those quarters in there.

Peter Misek - Jefferies & Company, Inc., Research Division

So spread over the last quarters to have 13 and beginning in 14?

Ira Palti

Yes. It's beginning second quarter '13 and moving out.

Operator

We'll go next to the line of Mike Walkley at Canaccord Genuity.

Matt Ramsay - Canaccord Genuity, Research Division

This is Matt Ramsay in for Mike. The first question I wanted to dig in 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 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.

Ira Palti

Okay. First, let me re-clarify. It's another one-time order. It came mainly from 1 customer. No, it was not a single customer only in India, but the 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's not a one-time. We are into Q3 and we still receiving orders from that as they grow and roll out for their deployments. So it's really that customer is rolling out throughout India are in the cycle of really ordering equipments, mainly for LTE and deploying LTE throughout India. Did that give a clarification?

Matt Ramsay - Canaccord Genuity, Research Division

No, that's helpful. Because it sounded before that it was a bit more one-time and it sounds much better now that it's maybe a recurring project that could go on for a bit. I have a couple...

Ira Palti

By the way, just to make sure, it's a recurring project. I don't expect the same size of the orders this quarter on next one. As all our customers, by the way, I think I mentioned. Customers go through cycles. They do a big order, and 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.

Matt Ramsay - Canaccord Genuity, Research Division

Okay. Great. Fair enough. And I wanted to ask, I guess, a similar regional trends question around Africa. You've 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 trends with your customers there or has anything changed?

Ira Palti

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

Matt Ramsay - Canaccord Genuity, Research Division

Okay. Great. And then Aviram, one question for you around OpEx. You've done a great job in keeping your OpEx levels flat and performing well in this tough environment and you've 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 higher or lower end of that revenue target range for 2013? Do you 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?

Aviram Steinhart

Yes, we -- if we'll need it, I think we'll 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, you will see a growth that we target in 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 profits. 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 now in OpEx. But if needed, there is room there that we can take it down if needed.

Operator

Next, we'll go to the line of Blaine Carroll with Avian Securities.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Ira, can you talk about the -- as much as you can about the opportunities that you have in some of the larger U.S. Tier 1 OEMs? 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'm wondering if you could talk about when it goes from being registered to orders to the potential for revenue in these situations?

Ira Palti

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

Blaine R. Carroll - Avian Securities, LLC, Research Division

So if I add those quarters up, what is it 2 or 3 quarters out, Ira, is when you start to get the orders and the revenue?

Ira Palti

No, you said it looked in July, so end of this quarter orders of something after that. Maybe, I still need to see the orders.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Okay. Now, T-Mobile has been very verbal about 37,000 sites that they're upgrading towards LTE. And just, getting back to the sites 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 you see the microwave being split up? It's is it going to be sole-sourced? Is it going to be dual-sourced? Is it going to be triple-sourced? How do you see that rolling out?

Ira Palti

Like all operators worldwide, we don't believe in a single source. It's always double source, okay? And part of the game that -- or part of our strategy worldwide, we try to be the #2 player in those deals to 1 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 refer, no. I'm treading a very, very delicate line here between customer confidentiality and our business confidentiality and others. The other piece is -- and which I'll give is that, typically, in the U.S. and that has nothing to do with the way T-Mobile is planning the business, overall market in the U.S. It's right now, I would say it's a land-line type is probably somewhere around or plan to be 90% of the business. Most of it over time, fiber, and 10% being microwave backhaul type of deployments. And again, I'm not touching T-Mobile on that. That's total U.S. market and total other deployments. That's typically what's happening in the U.S. Now, different operators, by the way, because of different geographies and different places have a little bit of a different mix, it's nothing now, but that's the overall market, long-term trends that we see.

Blaine R. Carroll - Avian Securities, LLC, Research Division

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

Ira Palti

I'll give 2 data points. At least at this point, the NSN DragonWave party line is exclusivity. And that's what they're conveying to customers are very hard to work with them. That's what they're 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 Tier, 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 part of that same story.

Blaine R. Carroll - Avian Securities, LLC, Research Division

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 at 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?

Aviram Steinhart

No, 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 meets 30% gross margin and keeping OpEx flat.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Mid-30% and OpEx flat. Flat on the current rate -- the current quarter multiplied by 4, or flat 2012, 2013?

Aviram Steinhart

No, flat the current quarter. This was flat the current quarter.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Flat on the current quarter. Okay. And then what type of payment terms are your customers looking for? The DSOs, we know they're 130 days. Are some of your customers looking for 6-month, 12-month type of payment terms?

Aviram Steinhart

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

Blaine R. Carroll - Avian Securities, LLC, Research Division

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

Aviram Steinhart

I think -- yes, I understand where you are coming from, but I'll answer this simply. We are not financing them, okay? When people talk about financing, they talk about 2, 3, 5-year types of terms. No, this is not the type of terms. But yes, they have better cash and that's why we don't think that there is a collectibility 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 firms, which are reflecting the cycles within the operators, between -- and they're balancing between the revenue streams and the CapEx and OpEx that they have on their business models. So it's not financing. We don't touch financing. I don't know how to do 5-year financing. That's not our business. But the business models are around those different terms.

Blaine R. Carroll - Avian Securities, LLC, Research Division

Okay. I've asked too many questions, but let me just throw this one out of. On the pricing environment, they're getting longer payment terms, does that give you a bargaining chip as far as maintaining pricing and maybe pricing not going down as much. And then, I'll pass it on.

Ira Palti

No, not really. As I tell you, those are Tier 1s, they have a better leverage. It's large deals. Still get them, and we still get the margins that we want in the mid-30s.

Operator

Next question comes from the line of Joseph Wolf with Barclays.

Joseph Wolf - Barclays Capital, Research Division

Just a question that -- you're balance [indiscernible]. If you take a look at the balance of the opportunity, which seems to be fairly reasonable given the macro, plus the macro, which I guess, seems to be European and North American flatness. But then, tie it into the cash, are there opportunities that you're not able to go after right now because of the capital constraint 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?

Aviram Steinhart

As Ira mentioned, we are not doing long-term financing to customers. So when we are talking about payment terms that are a little bit pushing down the DSOs, you understand the range of the payment term that we are giving them. We're not doing financing for 3 years or 2 years or even 1 year. So basically, we don't see a deal that we cannot participate in finance time 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, in the court of the big players, with the Tier 1s, and fluctuation of the working capitals, as we evolve, more and more peers will need for us to have the need for -- to draw 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 needed in the working capital, increase or decrease.

Joseph Wolf - Barclays Capital, Research Division

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 0 net cash balance. Would you go into some sort of leverage ratio that you be comfortable with in terms of the debt you take on for the short term?

Aviram Steinhart

Yes, and since it's a temporary move and shift between balance sheet items which is cash and AR, obviously, comfortable, yes, in taking more short-term credit facility to finance working capital.

Operator

We'll go next to the line of Aalok Shah with Davidson.

Aalok K. Shah - D.A. Davidson & Co.

Ira, just a couple of 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?

Ira Palti

I think we are making life difficult on the competitive environment in the LTE with some of the solutions we are putting on the table. I think there's 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's a dynamic market. I think we have an advantage. But it's 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, as I said, 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 will keep on seeing pricing but I think we have the right cost structure to go for that and maintain and even increase a little bit, the margins.

Aalok K. Shah - D.A. Davidson & Co.

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

Ira Palti

I think we mentioned on the call, Aviram mentioned on the call already, we do expect the gross margins to continue trending up to the mid-30s. Part of it is what you call, squeezing some of the Nera cost still out, which has to do with both new long-haul products and the trail of some of the older short-haul product, 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.

Operator

And we'll go to the line of Brad Erickson with Pacific Crest Securities.

Brad Erickson

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 that was the biggest driver of the change in that commentary for Q4 from your perspective?

Ira Palti

I think that the major driver, and I think I started out with, is that the overall macro environment and the headwinds. And I think if you look at any of the of the telecom market around us, people are very, very cautious. Although we saw book-to-bill above 1, we saw the best booking ever and we saw the best revenue ever. I think we need to be cautious in the way we look forward because of the market trends. We used to think we will grow faster than the market. Within the market, this year is growing very little. I think we discussed regional changes, gaining market share in different regions. Taking all those in account, throwing into a big box, shaking it up, taking all the numbers, plugging into very large Excel and working back the numbers. Fair that we do expect to continue growing, but reaching the 130 is, looks at this point, of being at the aggressive range of our targets and possibilities. Although it's not a 0 possibility, it's on the aggressive range. And as we usually talk, and sometimes people around tell me, I'm -- am I conservative? I'm over conservative. There's a mechanism that we do internally saying, "Okay, this is our best estimate." And our best estimate to this point is below that number for Q4.

Operator

And there are no further questions in queue. I'll turn it back to our speakers.

Ira Palti

Okay. I'd 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 and meeting all of you face-to-face. Thank you very much. And for those, because we started on the northern side, glad we will having summer vacations or have some. And for those on the southern side of the hemisphere, it's probably a lot of rain right now. So we'll see you soon again.

Operator

Thank you. And ladies and gentlemen, today's conference will be available for replay after 11:00 a.m. Eastern time today, running through September 6 at midnight. You may access the AT&T Executive TeleConference replay system at any time by dialing 1 (800) 475-6701 or (320) 365-3844, entering the access code of 252653. That does conclude your conference for today. Thank you for your participation. You may now disconnect.

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