This annual report includes certain statements that are intended to be, and are hereby identified as, “forward-looking statements”"forward-looking statements" for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events.
Not applicable.
Not applicable.
Selected Financial Data
The selected financial data set forth in the table below have been derived from our audited historical financial statements for each of the years from 20112012 to 2015.2016. The selected consolidated statement of operations data for the years 2013, 2014, 2015 and 2015,2016, and the selected consolidated balance sheet data at December 31, 20142015 and 2015,2016, have been derived from our audited consolidated financial statements set forth in Item 18. “FINANCIAL"FINANCIAL STATEMENTS.”" The selected consolidated statement of operations data for the years 20112012 and 20122013 and the selected consolidated balance sheet data at December 31, 2011, 2012, 2013 and 2013,2014, have been derived from our previously published audited consolidated financial statements, which are not included in this annual report. This selected financial data should be read in conjunction with our consolidated financial statements and are qualified entirely by reference to such consolidated financial statements. We prepare our consolidated financial statements in U.S. dollars and in accordance with United States Generally Accepted Accounting Principles (“("U.S. GAAP”GAAP"). You should read the consolidated financial data with the section of this annual report entitled Item 5. “OPERATING"OPERATING AND FINANCIAL REVIEW AND PROSPECTS”PROSPECTS" and our consolidated financial statements and the notes to those financial statements included elsewhere in this annual report.
| | Year ended December 31, | |
| | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | |
Consolidated Statement of Operations Data: | | (In thousands, except share and per share data) | |
| | | | | | | | | | | | | | | |
Revenues | | $ | 446,651 | | | $ | 361,772 | | | $ | 371,112 | | | $ | 349,435 | | | $ | 293,641 | |
Cost of revenues | | | 308,354 | | | | 249,543 | | | | 286,670 | | | | 246,487 | | | | 194,479 | |
Gross profit | | | 138,297 | | | | 112,229 | | | | 84,442 | | | | 102,948 | | | | 99,162 | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Research and development | | | 47,487 | | | | 42,962 | | | | 35,004 | | | | 22,930 | | | | 21,695 | |
Selling and marketing | | | 77,326 | | | | 67,743 | | | | 56,059 | | | | 40,816 | | | | 39,515 | |
General and administrative. | | | 27,519 | | | | 26,757 | | | | 23,657 | | | | 21,235 | | | | 20,380 | |
Restructuring costs | | | 4,608 | | | | 9,345 | | | | 6,816 | | | | 1,225 | | | | - | |
Goodwill impairment | | | -- | | | | -- | | | | 14,765 | | | | -- | | | | -- | |
Other income | | | -- | | | | (7,657 | ) | | | (19,827 | ) | | | (4,849 | ) | | | (1,921 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total operating expenses | | | | | | | | | | | 116,474 | | | | 81,357 | | | | 79,669 | |
Operating income (loss) | | | (18,643 | ) | | | (26,921 | ) | | | (32,032 | ) | | | 21,591 | | | | 19,493 | |
Financial expenses, net | | | (3,547 | ) | | | (14,018 | ) | | | (37,946 | ) | | | (14,738 | ) | | | (6,303 | ) |
Income (loss) before taxes | | | (22,190 | ) | | | (40,939 | ) | | | (69,978 | ) | | | 6,853 | | | | 13,190 | |
Tax on income | | | (1,201 | ) | | | (6,539 | ) | | | (6,501 | ) | | | (5,842 | ) | | | (1,761 | ) |
Net income (loss) | | | (23,391 | ) | | | (47,478 | ) | | | (76,479 | ) | | | 1,011 | | | | 11,429 | |
| | | | | | | | | | | | | | | | | | | | |
Basic net earnings (loss) per share | | $ | (0.64 | ) | | $ | (1.23 | ) | | $ | (1.22 | ) | | $ | 0.01 | | | $ | 0.15 | |
Diluted net earnings (loss) per share | | $ | (0.64 | ) | | $ | (1.23 | ) | | $ | (1.22 | ) | | $ | 0.01 | | | $ | 0.15 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average number of shares used in computing basic earnings (loss) per share | | | 36,457,989 | | | | 38,519,606 | | | | 62,518,602 | | | | 77,239,409 | | | | | |
Weighted average number of shares used in computing diluted earnings (loss) per share | | | | | | | | | | | | | | | | | | | 78,613,528 | |
| | Year ended December 31, | |
| | | | | | | | | | | | | | | |
| | (In thousands, except share and per share data) | |
Consolidated Statement of Operations Data: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 445,269 | | | $ | 446,651 | | | $ | 361,772 | | | $ | 371,112 | | | $ | 349,435 | |
Cost of revenues | | | 323,191 | | | | 308,354 | | | | 249,543 | | | | 286,670 | | | | 246,487 | |
Gross profit | | | 122,078 | | | | 138,297 | | | | 112,229 | | | | 84,442 | | | | 102,948 | |
| | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Research and development | | | 50,456 | | | | 47,487 | | | | 42,962 | | | | 35,004 | | | | 22,930 | |
Selling and marketing | | | 81,716 | | | | 77,326 | | | | 67,743 | | | | 56,059 | | | | 40,816 | |
General and administrative. | | | 26,524 | | | | 27,519 | | | | 26,757 | | | | 23,657 | | | | 21,235 | |
Restructuring costs | | | 7,834 | | | | 4,608 | | | | 9,345 | | | | 6,816 | | | | 1,225 | |
Goodwill impairment | | | -- | | | | -- | | | | -- | | | | 14,765 | | | | | |
Other income | | | -- | | | | -- | | | | (7,657 | ) | | | (19,827 | ) | | | (4,849 | ) |
Acquisition related cost | | | 4,919 | | | | -- | | | | -- | | | | -- | | | | -- | |
Total operating expenses | | | 171,449 | | | | 156,940 | | | | 139,150 | | | | 116,474 | | | | 81,357 | |
Operating income (loss) | | | (49,371 | ) | | | (18,643 | ) | | | (26,921 | ) | | | (32,032 | ) | | | 21,591 | |
Financial expenses, net | | | (2,024 | ) | | | (3,547 | ) | | | (14,018 | ) | | | (37,946 | ) | | | (14,738 | ) |
Income (loss) before taxes | | | (51,395 | ) | | | (22,190 | ) | | | (40,939 | ) | | | (69,978 | ) | | | 6,853 | |
Tax on income | | | (2,259 | ) | | | (1,201 | ) | | | (6,539 | ) | | | (6,501 | ) | | | (5,842 | ) |
Net income (loss) | | | (53,654 | ) | | | (23,391 | ) | | | (47,478 | ) | | | (76,479 | ) | | | 1,011 | |
| | | | | | | | | | | | | | | | | | | | |
Basic net earnings (loss) per share | | $ | (1.49 | ) | | $ | (0.64 | ) | | $ | (1.23 | ) | | $ | (1.22 | ) | | $ | 0.01 | |
Diluted net earnings (loss) per share | | $ | (1.49 | ) | | $ | (0.64 | ) | | $ | (1.23 | ) | | $ | (1.22 | ) | | $ | 0.01 | |
Weighted average number of shares used in computing basic earnings (loss) per share | | | 35,975,434 | | | | 36,457,989 | | | | 38,519,606 | | | | 62,518,602 | | | | 77,239,409 | |
Weighted average number of shares used in computing diluted earnings (loss) per share | | | 35,975,434 | | | | 36,457,989 | | | | 38,519,606 | | | | 62,518,602 | | | | 77,296,681 | |
| | At December 31 | |
| | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | |
| | (In thousands) | |
Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | |
Cash and cash equivalents, short and long term bank deposits, short and long term marketable securities | | $ | 51,589 | | | $ | 52,337 | | | $ | 42,371 | | | $ | 36,318 | | | $ | 36,338 | |
Working capital | | | 129,407 | | | | 106,765 | | | | 87,748 | | | | 81,957 | | | | 95,950 | |
Total assets | | | 393,596 | | | | 365,971 | | | | 341,873 | | | | 267,249 | | | | 244,225 | |
Total long term liabilities | | | 69,767 | | | | 52,498 | | | | 31,822 | | | | 19,915 | | | | 17,555 | |
Shareholders' equity | | | 143,709 | | | | 135,078 | | | | 104,552 | | | | 102,821 | | | | 116,164 | |
| | | At December 31 | |
| | | 2011 | | | | 2012 | | | | 2013 | | | | 2014 | | | | 2015 | |
| | | (In thousands) | |
Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, short and long term bank deposits, short and long term marketable securities | | $ | 49,531 | | | $ | 51,589 | | | $ | 52,337 | | | $ | 42,371 | | | $ | 36,318 | |
Working capital | | | 154,987 | | | | 129,407 | | | | 106,765 | | | | 87,748 | | | | 84,311 | |
Total assets | | | 411,158 | | | | 393,596 | | | | 365,971 | | | | 341,873 | | | | 265,332 | |
Total long term liabilities | | | 76,664 | | | | 69,767 | | | | 52,498 | | | | 31,822 | | | | 19,915 | |
Shareholders’ equity | | | 161,051 | | | | 143,709 | | | | 135,078 | | | | 104,552 | | | | 102,821 | |
Risk Factors
The following risk factors, among others, could affect our business, results of operations or financial condition and cause our actual results to differ materially from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and we assume no obligation to update this information. You should carefully consider the risks described below, in addition to the other information contained elsewhere in this annual report. The following risk factors are not the only risk factors that the Company faces. Additional unknown risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. Our business, financial condition and results of operations could be seriously harmed if any of the events underlying any of these risks or uncertainties actually occur. In thatsuch an event, the market price for our ordinary shares could decline.
Risks Relating to Our Business
In 2015We have been focusing on the "best-of-breed" segment of the wireless backhaul market, which we experiencedbelieve has the most profit potential. Focusing on one segment of the market has led to a decline in our revenues, and should such a decline in sales continue, this may negatively affect our business, financial condition and revenues. Ifresults of operations.
We mainly attribute our improvement in profitability to the continued implementation of our business strategy, a key element of which is the focus on the best-of-breed segment of the wireless backhaul market. However, focusing on this one market segment led to a decline continues,in our sales in 2016, and if such market segment or our share in it shrinks, our sales and revenues may decline even further and our results of operations and cash flow may be significantly and adversely impacted.
While our measures, taken at the end of 2014, to improve gross profit, reduce operating expenses and improve our working capital management, were the main drivers for the improved financial results in 2015, we have seen a decrease in our sales and revenue as compared with 2014 and 2013. If this trend continues, our results of operations and cash flow may be significantly adversely impacted.affected. In such a case, we may need to take additionalcost reduction measures, such as cut in costs, which may adversely impact our R&D, operations, marketing and sales activities and our ability to effectively compete in the market.
A significant portion of our business concentrates in certain geographic regions. Such concentration may negatively affect our business, financial condition and results of operations, should the amount of business coming from such regions decrease.
In general, concentration of business in specific geographic regions entails risks in case certain events occur in these regions, such as a slowdown in investments and expansion of communication networks due to the cyclical characteristic of the investment in this industry, as well as changes in local legislation, changes in governmental controls and regulations, including those specifically related to the communication industry, changes in tariffs and taxes, trade restrictions, a downturn in economic or financial conditions, an outbreak of hostilities, political or economic instability as well as any other extraordinary events having an adverse effect on the economy or business environment in this region, which will harm the operations of our customers in these regions, and result in a significant decline of business coming from that region. For example, in 2015 and 2016 we increased our business in terms of revenue compared to prior periods, coming from India to 30.3% and 27.3%, respectively and expect that our revenues from sale of products in India will continue to constitute a significant portion of our business in the future. We have experienced some of these risks in that region in previous years, and further realization of any of these or other risks could result in a material reduction in orders and could adversely affect our results of operations, including cash flow, and our financial condition.
It is difficult to predict our gross margin as it is exposed to significant fluctuations as a result of potential changes in the geographical mix of our revenues.
Our revenues are derived from multiple regions, each of which may consist of a number of countries. Gross margin percentages may vary significantly between different regions and even among different countries within the same region. A significant change in the actual ratio of our revenues among the different regions/countries, whereby the actual ratio of revenues from a higher gross margin region/country exceeds our expectations, may cause our gross margin to significantly increase, while in case the actual ratio of revenues from a lower gross-margin region/country exceeds our expectations, may cause our gross-margin to significantly decrease.
A single customer and customer group represent a significant portion of our revenues, and if we were to lose this single customer or customer group or experience any material reduction in orders from this single customer or customer group, our revenues and operating results may be adversely affected.
In 2016 we had revenue from a single customer of approximately 16.6% of our total revenues. In 2015 we had revenue from a single customer group of affiliated companies that accounted for approximately 17.7% of our total revenues. In 2014 we had revenue from a single customer that accounted for approximately 16.1% of our total revenues. Our sales are generally made from standard purchase orders rather than long-term contracts. Accordingly, these large customers are not obligated to purchase a fixed amount of products or services over any period of time from us, and may terminate or reduce their purchases from us at any time without notice or penalty. We therefore have difficulty projecting future revenues from these customers. This could have, as in the past, an adverse effect on our reported revenues, profitability and cash flow. In addition, the loss of these customers or any material reduction in orders, in the absence of gaining new significant customers replacing them, could adversely affect different aspects of our results of operations, including cash flow and financial condition.
We face intense competition from other wireless backhaul equipment providers. If we fail to compete effectively, our business, financial condition and result of operations would be materially adversely affected.
The market for wireless backhaul equipment is rapidly evolving, highly competitive and subject to rapid change.
Our primary competitors include industry “generalists”companies such as Fujitsu Limited, Huawei Technologies Co., Ltd., L.M. Ericsson Telephone Company, NEC Corporation, Nokia and ZTE Corporation, commonly referred to as "generalists", each providing a vast wireless solutions portfolio, withwhich includes a wireless backhaul solution within their portfolio. These generalists may also compete with us on best-of-breed projects, in which operators invest resources and efforts to select the best wireless backhaul solution. In addition to these primary competitors, a number of smaller microwave communications equipment suppliers, including Aviat Networks Inc., DragonWave Inc., and SIAE Microelectronica S.p.A., offer or are developing products that compete with ourcompeting products.
Most of our principal competitors,In addition, the industry “generalists”,generalists are substantially larger than we areus and have longer operating historieshistory and greater financial, sales, service, marketing, distribution, technical, manufacturing and other resources than we have.resources. Moreover, the market for wireless backhaul equipment is goingexpected to go through significant consolidation. For example, five years ago we had five major wireless network equipment manufacturers, while today we have only three such major manufacturers. As these consolidations have increased the size and thus the competitive resources of these providers, whichThese generalists have greater name recognition, and a larger customer base, than we have, they may be able to respond more quickly to changes in customer requirements and evolving industry standards, as well asand have greater resources to invest in the development, promotion and sale of their products. Many of these "generalists",generalists also have well-established relationships with our current and potential customers and have extensive knowledge of our target markets, which may possibly give them additional competitive advantage.advantages. In addition, as these “generalists”generalists have begun to focus more on selling services and bundlebundling the entire network as a full-package offering, some of our customers, which seek best-of-breed solutions like ours, may be driven to purchase “bundled”"bundled" solutions from the “generalists”.generalists. Moreover, as these “generalists”generalists are usually financially stronger than us, some of these large competitors, especially those from China,they may be able to offer customers more significant financing packages and more attractive pricing, which are frequently expected by customers in certain regions, and may increase the attractivenessappeal of their products in comparison to ours.
Additionally, even where these “generalists”generalists resell Ceragon products as a part of their own portfolio – selling through resellersthem may negatively impact our margins and it means thatresult in our business success may dependpossibly depending on these competitors to some extent. For example the consolidation between Nokia and Alcatel-Lucent may negatively impact our sales should Nokia decide to decrease volume of sales of the Ceragon products, since today Nokia resells the Ceragon products in various markets.
Moreover, current and potential competitors may make strategic moves such as mergers, acquisitions or establishing cooperative relationships among themselves or with third parties that may allow them to increase their market share and competitive position.
We expect to face increasing competitive pressures in the future. If we are unable to compete effectively, our business, financial condition and results of operations would be materially adversely affected. For more information on the best-of-breed market, please refer to Item 4: INFORMATION ON THE COMPANY; B. Business Overview – "Wireless Backhaul; Short-haul, Long-haul and Small Cells Backhaul."
In previous yearsBetween 2011 and 2014, we incurred substantial losses and negative cash flows. Although we were profitable and generated cash from our operations induring 2015 and 2016, we cannot assure you that we will be able to maintain this improving trend and profitability or continue to have positive operating cash flows.
From 2011 through 2014, we incurred substantial net losses and a negative cash flow from operations. For example, in 20132014 we incurred a net loss of $47.5 million, a net loss of $76.5 million, in 2014, and negative cash flow from operations of $(29.5) million and $(32.3)$32.3 million. Our losses in 2013 and 2014, respectively. Our prior lossesperiods were impacted by decreases in revenues, decreased gross margins and the significant expenses costs and charges associated with prior organizational restructuring activities. In 2015 and 2016 we incurred a net income of $1.0 million and $11.4 million, respectively, and generated cash from operating activities of $16.1 million.million and $25.8 million, respectively. However, there is no assurance that we will be able to maintain or improve such results, which may require the improved results and may need to take further measures such as cuttingimplementation of additional costs in ordercost reduction measures. Our failure to maintain profitability or further improve our results. Thisto continue to have positive operating cash flows may impact our ability to compete in the market for the short and long term and impair our financial condition.
Fluctuating working capital needs may require additional or alternate cash resources. If we are unable to obtain such resources our ability to fund operations could be impaired.
We have experienced significant fluctuations in liquidity and in our working capital needs. Our working capital needs are primarily impacted by the volume of our business and its profitability, our payment terms with our vendors and customers and the level of inventory we need to maintain in order to meet our contractual obligations.
We believe that our cash resources can support our business plan for at least the next 12 months; nevertheless changes and fluctuations in the above elements may require additional cash. Should our cash needs increase, we may need to raise additional funds through public or private debt or equity offerings. If we are not able to raise other capital or borrow additional funds, we may not be able to fund our working capital and operational needs which would have a material adverse effect on our business, financial condition, results of operations and cash flow.
In addition, as our credit facility period ends at March 31, 2017, we will have to extend the credit facility agreement or replace it with another financing arrangements in order to support the operations beyond March 31, 2017. The inability of the syndicate of banks to extend our credit facility, including by reason of a non-approval by the Controller of Restricting Trade, whose approval is required, and our inability to extend this credit facility under terms applicable to our business plans or to find alternate sources for it, may have material adverse effect on our business, financial condition, results of operations and cash flow.
We could be adversely affected by our failure to comply with the covenants in our credit agreement or by the failure of any bank to provide us with credit under committed credit facilities.
We have a committed credit facility available for our use from a syndicate of fourseveral banks. Our credit agreement contains financial and other covenants requiring that we maintain, among other things, minimum shareholders’ equity value, a certain ratio between our shareholders’shareholders' equity and the total value of our assets on our balance sheet, a certain ratio between our net financial debt to each of our working capital and accounts receivable, and a minimum cash covenant. Any failure to comply with the covenants, including due to poor financial performance, may constitute a default under the credit agreementfacility and may require us to seek an amendment or waiver from the banks to avoid termination of their commitments and/or an immediate repayment of all outstanding amounts under the credit facilities, which would have a material adverse effect on our financial condition and ability to operate. In addition, the payment may be accelerated and the credit facility may be cancelled upon an event in which a current or future shareholder acquires control (as defined under Israelthe Israeli Securities Law) of us. For more information, Seeplease refer to Item 5. “OPERATING5: "OPERATING AND FINANCIAL REVIEW AND PROSPECTS; B. “LiquidityLiquidity and Capital Resources,” for a more detailed discussion.Resources."
In addition, the credit facility is provided by the syndication with each bank agreeing severally (and not jointly) to make its agreed portion of the credit loans to us in accordance with the terms of the credit loan agreement, which includes a framework for joint decision making powers by the banks. If one or more of the banks providing the committed credit facility were to default on its obligation to fund its commitment, the portion of the committed facility provided by such defaulting bank would not be available to us.
Due to the volume of our sales in emerging markets, we are susceptible to a number of political, economic and regulatory risks that could have a material adverse effect on our business, reputation, financial condition and results of operations.
A majority of our sales are made in countriesemerging economies in Latin America, India, Asia Pacific and Africa. For each of the years ended December 31, 20142015 and 2015,2016, sales in these regions accounted for approximately 73% and 71%, respectively, of our revenues. As a result, the occurrence of any international, political, regulatory or economic events in these regions could adversely affect our business and result in significant revenue shortfalls and collection risk. Any such revenue shortfalls and/or collection risk could have a material adverse effect on our business, financial condition and results of operations. For example, there have been substantial import controls intoin Argentina, under which we needrequire us to obtain approval from tax and customs authorities’ approvalsauthorities for importimporting activities. To date, we have been able to obtain all required approvals and in Argentina has begun to lift import controls, are just now being slowly lifted after the recent change in government, but we cannot assure you that more stringent requirements will not be imposed in the future. Due to the continued Venezuelan government policy that limits our customers’ ability to pay for imported goods in foreign currency, our revenue from Venezuela has decreased significantly in 2014.
In addition, we have recordedduring 2016 there has been significant economic deterioration in 2014 and 2015Africa, primarily in Nigeria. This resulted in a chargesignificant erosion of $20.5 million and $1.6 million respectively, to reflect a re-measurement of assets in Venezuela, primarily accounts receivables, which were denominated or linkedthe local currencies valuation relative to the U.S. dollars. During 2015 our equity was adversely impacted at an amountDollar, as well as foreign currency scarcity and to the adoption of $4.3 million assome new restrictions, which have created difficulties in collection, cash repatriation, and a resultgeneral slow-down of the erosion of the Brazilian currency against the U.S. dollar in this year.business activities. We have no assurance that current conditions will not further deteriorate, or that similar conditions will not occur in other developing countries, which might adversely affect our sales in these countries and/or our ability to collect and repatriate the proceeds from such sales in the future.
FollowingBelow are some of the risks and challenges that we face as a result of doing business internationally, several of which are more likely in the emerging markets than in other countries:
| · | unexpected changes in or enforcement of regulatory requirements, including security regulations relating to international terrorism and hacking concerns and regulations related to licensing and allocation processes; |
| ·· unexpected changes in or imposition of tax or customs levies; |
| ·· fluctuations in foreign currency exchange rates; |
| ·· restrictions on currency and cash repatriation; |
| ·· imposition of tariffs and other barriers and restrictions; |
| ·· burden of complying with a variety of foreign laws, including foreign import restrictions which may be applicable to our products; |
| ·· difficulties in protecting intellectual property; |
| ·· laws and business practices favoring local competitors; |
| ·· demand for high-volume purchases with discounted prices; |
| ·· collection delays and uncertainties; |
| ·· civil unrest, war and acts of terrorism; |
| ·· requirements to do business in local currency; and |
| ·· requirements to do manufacture or purchase locally;locally. |
Business practices in emerging markets may expose us to legal and business conduct regulatory risks.
In addition, localLocal business practices in jurisdictions in which we operate, and particularly in emerging markets, may be inconsistent with international regulatory requirements, such as anti-corruption and anti-bribery laws and regulations to which we are subject. It is possible that, notwithstanding our policies and in violation of our instructions, some of our employees, subcontractors, agents or partners may violate such legal and regulatory requirements, which may expose us to criminal or civil enforcement actions. If we fail to comply with such legal and regulatory requirements, our business and reputation may be harmed.
Our operating results may vary significantly from quarter to quarter and from our expectations for any specific period.
Our quarterly results are difficult to predict and may vary significantly from quarter to quarter, or from our expectations and guidance for any specific period. Most importantly, delays in product delivery or completion of related services can cause our revenues, net income and operating cash flow to fluctuatedeviate significantly from anticipated levels, especially as a large portion of our revenues are traditionally generated towards the end of each quarter. Factors such as geographical mix, delivery terms and timeline, product mix, related services mix and other deal terms may differ significantly from our predictionexpectations, and thus impact our revenue recognition timing, gross margins, costs and expenses, as well as cash flow from operations. In addition, the spending decisions of our customers regarding spending throughout the year may also create unpredictable fluctuations in the timing in which we receivedreceive orders and can recognize revenues, which may impact our quarterly results. Such unpredictable fluctuations could be very large in cases where these spending decisions are made by our largest customers or regarding significant deals.
The quarterly variation of our operating results may in turn create volatility in the market price for our shares.
We experience high-volatility in the supply needs of our customers, which from time to time lead to delivery pressures. If we fail to effectively cope with such volatility and growing supply demands of our customers, we may be unable to timely fulfill our customer commitments, which would adversely affect our business and results of operations.
The delivery requirements of our customers are unevenly spread throughout the year. In addition, we offer our customers a wide variety of products and configurations. Our inability to forecast the quantities or mix of the delivery demands for our products, may result in underestimating our material purchasing needs, as well as production capacity requirements. If we fail to effectively manage our deliveries to the customers in a timely manner, or otherwise fulfill our contractual obligations to them, or if we are unable to synchronize our supply chain and production process when rapidly increasing production, the cost of our material purchasing, manufacturing and logistics will increase and we may also be obligated to pay penalties to our customers for delays, all of which would adversely affect our business, financial results and our relationship with our customers.
We may encounter technical difficulties with our products, which could impair our ability to fulfill our commitments to our customers in a timely manner and negatively impact our business and results of operations.
During 2016 we faced some technical problems with our IP-20 Platform, which we are currently completing to resolve. If we continue to experience these or similar problems, this may cause delays in product delivery, increase our costs, adversely affect customer satisfaction and damage our results of operation. In addition, in our competitive market, we launch new versions of existing products and new products from time to time. New products and new versions of existing products are more prone to technical problems which, may, among other things, adversely affect our ramping up ability and ability to meet delivery commitments to our customers in a timely manner, and may cause us to incur additional manufacturing, development and repair costs. This may have a material adverse effect on our business and results of operation.
A decrease in industry growth or reduction in our customers’customers' revenue from increased regulation or new mobile services may cause operators’operators' investments in networks to slow, be delayed or stop, harmingwhich could harm our business.
We are exposed to changing network models that affect operator spending on infrastructure as well as trends in investment cycles of telecom operators and other service provider’s investment cycles.providers. The emergence of over-the-top services,"over-the-top services" - which make use of the operators’operators' network to deliver rich content to users but aredo not sharing theirgenerate revenue with theto operators - are causing operators to lose a substantial portion of their voice/SMS revenues. In addition, changes in regulatory requirements in certain jurisdictions around the world are allowing smaller operators to enter into, and compete in, the market, which may also reduce our customers’customers' pricing to their end-users further causing them to lose revenues. This is leading operators to spend more carefully on infrastructure upgrades and build-outs. Operators today are revising their old models because adding capacity to meet demand could force them to increase their current capital expense investments over the coming years. As a result, operators are looking for more cost-efficient solutions and network architecture, thatwhich will allow them to break the linearity of cost and capacity through more efficient use of existing infrastructure and assets. If operators fail to monetize new services, fail to introduce new business models or experience a decline in operator revenues or profitability, their willingness to invest further in their network systems may decrease, which will reduce their demand for our products and services and may have an adverse effect on our business, operating results and financial condition.
Global competition and current market conditions, including those specifically impacting the telecommunications industry, have resulted in downward pressure on the prices for our products, which could result in reduced revenues, gross margins, profitability and demand for our products and services.
Currently, weWe and other manufacturers of telecommunications equipment are experiencing, and are likely to continue to experience, increased downward price pressure, particularly as we increase our customer base to include more Tier 1 customers and continue to meet market demand in certain emerging markets and other less profitable countries. As a result, we may experience declining average sales prices for our products. Our future profitability will depend upon our ability to improve manufacturing efficiencies, to reduce costs of materials used in our products, and to continue to design to cost and introduce new lower-cost products and product enhancements. BecauseSince customers frequently negotiate supply arrangements far in advance of delivery dates, we may be required to commit to price reductions for our products before we are aware of how, or if, cost reductions can be obtained. Current or future price reduction commitments and any inability on our part to respond to increased price competition, in particular from tierTier 1 customers with higher volumes and stronger negotiating power, could harm our profitability, business, financial condition and results of operations. Alternatively, if we decide not to pursue some of the deals, our revenues might significantly decrease and harm our business and financial results. A Tier 1 customer is a telecom operator, which has national or multinational service coverage and that can reach every other network without purchasing network resources from other network communication providers.
In recent years, we have increased our sales in India, a region typically characterized as being price-sensitive, resulting in pressure on our profitability. For the years ended December 31,During 2013 and 2014, 7% and 2015, 24.8% and 30.3% of our revenues, respectively, were earned in India, respectively.while during 2015 and 2016, 30.3% and 27.3% of our revenues, respectively, were earned in India. We expect that our revenues from salessale of our products in India will continue to constitute a significant portion of our business in the future. In addition, we anticipate continued demand for our salesproducts and/or services in Latin America, a geographymarket which is characterized by strong downward pricing pressures.
Challenging global economic conditions could also have adverse, wide-ranging effects on demand for our products and services, as well as for the products of our customers.customers, which could result in reduced revenues, gross margins and profitability.
The telecommunications industry has experienced downturns in the past in which operators substantially reduced their capital spending on new equipment. Continued adverse economic conditions, which still exist in certain jurisdictions, including certain countries in Europe, Latin America and Africa, could cause network operators to postpone investments or initiate other cost-cutting initiatives to improve their financial position. Over the past several years, network operators have started to share parts of their network infrastructure through cooperation agreements rather than through legal consolidation, which may adversely affect demand for lower cost network equipment. Moreover, the level of demand by operators and other customers who buy our products and services can change quickly and can vary over short periods, including from month to month.
If the current global economic situation deteriorates, or if the uncertainty and variations in the telecommunications industry continues, our business could be negatively impacted, including in such areas asimpacted. For example, we could experience reduced demand for our products and services, slowed customer buying decisions, pricing pressures, possible withdrawal of global operators from some geographies in which they currently operate in and in which we sell and supplier or customer disruptions, ordisruptions. Furthermore, insolvency of certainsome of our key distributors, resellers, original equipment manufacturers (OEMs) and systems integrators, which could impair our distribution channels, whichchannels. Any of these contingencies could reduce our revenues or our ability to collect our accounts receivable, and have a material adverse effect on our financial condition and results of operations.
Some of our competitors can benefit from currency fluctuations as their costs and expenses are primarily denominated in currencies other than the U.S. dollar. In case the U.S. dollar strengthens against these currencies these competitors might offer their products and services for a lower price and take market share from us, which might adversely affect our business, result of operation and financial condition.8
If we fail to effectively managedevelop and market new products that keep pace with technological developments, the changing industry standards and our customers' needs, we may not be able to grow or sustain our business.
The market for our products is characterized by rapid technological advances, changing customer needs and evolving industry standards, as well as increasing pressures to make existing products more cost efficient. Accordingly, our success will depend, among other things, on our ability to develop and market new products or enhance our existing products in a timely manner to keep pace with developments in technology and customer requirements.
In addition, the wireless equipment industry is subject to rapid change in technological and industry standards. This rapid change, through official standards committees or widespread use by operators, could either render our products obsolete or require us to modify our products necessitating significant investment, both in time and cost, in new technologies, products and solutions. We cannot assure you that we will continue to successfully develop these components and bring them into full production with acceptable reliability, or that any development or production ramp-up will be completed in a timely or cost-effective manner.
We are continuously seeking to develop new products and enhance our existing products. In late 2013 we announced a significant new line of products (IP-20 Platform), which we continue to enhance with newer products and capabilities. Developing new products and product enhancements requires research and development resources. We may not be successful in enhancing our existing products or developing new products in response to technological advances or to satisfy increasingly sophisticated customer needs in a timely and cost-effective manner, which would have a material adverse effect on our ability to grow or maintain our business. Moreover, we cannot assure that new products being developed based on the IP-20 Platform will be accepted in the market or will result in profitable sales or that such products will not require additional quality assurance and defect-fixing processes.
Relying on third-party manufacturers, suppliers and service providers may disrupt the proper and timely management of deliveries of our products, we may be unable to timely fulfill our customer commitments, which would adversely affect our business and resultsa risk that is intensified in case of operations. Technical problems in our relatively new product line, may adversely affect our business.a single source supplier.
We outsource substantially alloutsource our manufacturing and logistics operations, and purchase ancillary equipment for our products, from contract and other independent manufacturersmanufacturers. Disruption in deliveries or in operations of these and other third parties. If we failparty suppliers or service providers, as a result - for example - of capacity constraints, production disruptions, price increases, force majeure events, decreased availability of raw materials or commodities, as well as quality control problems related to effectively manage and synchronize our deliveries fromcomponents, may all these sources to the customer in a timely manner, fail to forecast the mix or quantities of our products or underestimate our production requirements, which could interrupt manufacturing, we could incur additional costs, be subject to penalties and suffer from reduction in our business. If one or more of the contract and other independent manufacturers or othercause such third parties do not fullyto comply with their contractual obligations or experience delays, disruptions or component procurement problems,to us. This could have an adverse effect on our ability to deliver complete product ordersmeet our commitments to customers and could increase our operating costs.
In addition, although we believe that our contract manufacturers and logistics service providers have sufficient economic incentive to perform our manufacturing and logistics services requirements, the resources devoted to these activities are not within our control. We cannot assure you that manufacturing or logistics problems will not occur in the future due to insufficient resources devoted to our customers, or otherwise fulfill our contractual obligations to our customers, could be delayed or impaired. Thisrequirements by such manufacturers and logistics service providers.
These delays, disruptions, quality control problems, loss in capacity and problems in logistics processes could result in higher manufacturing costs, could cause damage to customer relationships or could resultdelays in deliveries of our payment of penaltiesproduct to our customers, which would adversely affectcould subject us to penalties payable to our business, financial results and customer relationships.
Since we launched our IP-20 platform, we face some technical problems that are typical to an introduction phasecustomers, increased warranty costs, possible cancellation of a new product. Such technical problems may cause delays in product delivery, which could result in additional costs and adversely affect customer satisfaction and our result of operation. In addition, in our competitive market, we are expected to launch new versions andorders, as well as newdamage our reputation. If any of these problems occur, we may be required to seek alternate manufacturers or logistics service providers and we may not be able to secure such alternate manufacturers or logistics service providers that meet our needs and standards in a timely and cost-effective manner. The above-mentioned risks are exacerbated in the case of raw materials or component parts that are purchased from a single-source supplier.
In addition, some of our contract manufacturers have granted us licenses with respect to certain technology, which is used in a number of our products. If we change contract manufacturers, we may be required to renegotiate these licenses or redesign some of our products, from timeeither of which could increase our cost of revenues and cause product delivery delays. Further, if we change manufacturers, during the transition period, we may be more likely to time, which again, are more prone to technicalface delays, disruptions, quality control problems thatand loss in capacity, and our sales, profits and customer relationships may delay our deliveries. Any such technical problem may adversely affect our ramping up ability and may causesuffer.
Our acquisition activities expose us to incur additional manufacturing costs or decrease our revenues,risks and may have a material adverse effect onliabilities, which could also result in integration problems and adversely affect our business.
We derive a substantial portionFollowing the acquisition of Nera Network AS in 2011 (the "Nera Acquisition") and other smaller acquisitions, we have increased the size of our revenues from fixed-price projects, includingoperations and worldwide presence. While we intend to continue to explore potential merger or acquisition opportunities within our rollout projects, undermarket or in other markets, which we assume greatermay deem to be suitable for our business growth strategy, we are unable to predict whether or when any prospective acquisitions will be completed. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management's attention. The anticipated benefits and cost savings of such mergers and acquisitions or other restructuring may not be fully realized, or at all, or may take longer to realize than expected. Acquisitions involve numerous risks, any of which could harm our business, results of operations cash flow and financial risk if we fail to accurately estimatecondition as well as the costsprice of the projects.our ordinary shares.
We are engaged in supplying rollout projects, involving fixed-price contracts. We assume greater financial risks on fixed-price projects, which routinely involve the provision of installation and other services, versus equipment –only sales, which do not similarly require us to provide services or require customer acceptance certificates in order for us to recognize revenue. If we miscalculate the resources or time we need for these fixed-price projects, the costs of completing these projects may exceed our original estimates, which would negatively impact our financial condition and results of operations.
We have in the past undertaken restructuring activities, most recently in the fourth quarter of 2014, which may adversely impact our operations.
Since 2012, we implemented several restructuring activities in order to reduce operating costs and improve efficiency. The restructuring activities mainly included post termination costs, property and equipment write-offs in relation to activities that were terminated, as well as facilities-related expenses for warehouse and office closings and relocations.
We incurred restructuring charges of $9.3 million and $6.8 million, respectively, in 2013 and 2014. In the first quarter of 2015 we incurred charges of $1.2 million which were related to our 2014 restructuring activity.
We based our restructuring efforts on assumptions and plans regarding the appropriate cost structure of our businesses, taking into consideration, among other factors, our product mix and projected sales. These assumptions may not be correct as we continue to evaluate and transform our business in order to achieve desired cost savings in an increasingly competitive market. If we are required to carry out an additional restructuring plan, we may incur additional restructuring charge, which may have adverse impact on our results of operation as well as our ability to compete in the market for the short and long term. Further, we may have difficulty attracting and retaining personnel as a result of a perceived risk of future workforce reductions.
We face intense competition from other communications solutions that compete with our high-capacity point-to-point wireless products, which could reduce demand for our products and have a material adverse effect on ourbusiness and results of operations. In addition, we are dependent upon sales of our single family of products into the high-capacity point-to-point wireless backhaul market. Any reduction in demand for our products in this market would causeour revenues to decrease.decrease
Our products compete with other high-speed communications solutions, including fiber optic lines and other wireless technologies. Some of these technologies utilize existing installed infrastructure and have achieved significantly greater market acceptance and penetration than high-capacity point-to-point wireless technologies. Moreover, as more and more data demands are imposed on existing network frameworks and because of consolidation of fixed and mobile operators, operators may be more motivated to invest in more expensive high-speed fiber optic networks to meet current needs and remain competitive.
Some of the principal disadvantages of high capacity, point-to-point wireless technologies that may make other technologies more appealing include suboptimal operations in extreme weather conditions and limitations in connection with the need to establish line of sight between antennas.
In addition, customers may decide to use transmission frequencies for which we do not offer products.
Moreover, weWe develop and sell one family of products into the high-capacity point-to-point wireless backhaul market. As a result, we are more likely to be adversely affected by a reduction in demand for high-capacity point-to-point wireless backhaul products in comparison to companies that also sell multiple and diversified product lines and solutions to customers.
To the extent that these competing communications solutions reduce If technologies or market conditions change, resulting in a decreased demand for our high-capacity point-to-point wireless transmission products, there may bespecific technology, we could likely have a material adverse effect on our business, financial results and results of operations.financial condition as we attempt to address these issues.
Consolidation of our potential customer base could harm our business.
The increasing trend towardtowards mergers in the telecommunications industry has resulted in the consolidation of our potential customer base. In situations where an existing customer consolidates with another industry participant which uses a competitor’scompetitor's products, our sales to that existing customer could be reduced or eliminated completely to the extent that the consolidated entity decides to adopt the competing products. Further, consolidation of our potential customer base could result in purchasing decision delays as consolidating customers integrate their operations and could generally reduce our opportunities to win new customers, to the extent that the number of potential customers decreases. Moreover, some of our potential customers have agreed to share networks, which resultsresulting in lessa decreased requirement for network equipment and associated services, required and thus a decrease in the overall size of the market. Network operators have started to share parts of their network infrastructure through cooperation agreements rather than legal consolidations, which may adversely affect demand for network equipment and could harm our business and results of operations.
We rely on a limited number of contract manufacturers to manufactureface intense competition from other communications solutions that compete with our high-capacity point-to-point wireless products, which could reduce demand for our products and if they experience delays, disruptions, quality control problems orhave a loss in capacity, it could materially adversely affectmaterial adverse effect on our operating results.business and results of operations.
We outsource substantially all of our manufacturing processes, management of our logistic hubsOur products compete with other high-speed communications solutions, including fiber optic lines and supply of our antennas to a limited number of contract manufacturers and suppliers that are located in Israel, Ukraine, Malaysia, Singapore, the Philippines and Hungary. We do not have long-term contracts with anyother wireless technologies. Some of these contract manufacturers. From timetechnologies utilize existing installed infrastructure and have achieved significantly greater market acceptance and penetration than high-capacity point-to-point wireless technologies. Moreover, as more and more data demands are imposed on existing network frameworks, and due to time, we have experiencedconsolidation of fixed and may in the future experience delays in shipments from these contract manufacturers. As part of our continued effort to reduce costs and the restructuring announcement on December 15, 2014, on March 18, 2015 we signed a contract with a certain contract manufacturer to outsource our production facility in Slovakia. As part of this outsourcing, we transferred the production activity to the new manufacturer during 2015. As a result of this move, we may experience delays in shipment as well as quality issues, until ramp up and knowledge transfer is completed.
Although we believe that our contract manufacturers have sufficient economic incentive to perform our manufacturing, the resources devoted to these activities are not within our control, and we cannot assure you that manufacturing problems will not occur in the future. In addition, the operations of our contract manufacturers are not under our control, and may themselves in the future experience manufacturing problems, including inferior quality and insufficient quantities of components. These delays, disruptions, quality control problems and loss in capacity could result in delays in deliveries of our product to our customers, which could subject us to penalties payable to our customers, increased warranty costs and possible cancellation of orders. If our contract manufacturers experience financial, operational, manufacturing capacity or other difficulties, or shortages in components required for manufacturing, our supply may be disrupted and we may be required to seek alternate manufacturers. We may be unable to secure alternate manufacturers that meet our needs in a timely and cost-effective manner. In addition, some of our contract manufacturers have granted us licenses with respect to certain technology that is used in a number of our products. If we change contract manufacturers, we may be required to renegotiate these licenses or redesign some of our products, either of which could increase our cost of revenues and cause product delivery delays. If we change manufacturers, during the transition period, wemobile operators, operators may be more likelymotivated to face delays, disruptions, quality control problemsinvest in more expensive high-speed fiber optic networks to meet current needs and lossremain competitive.
Some of the principal disadvantages of high capacity, point-to-point wireless technologies that may make other technologies more appealing include suboptimal operations in capacity,extreme weather conditions and limitations in connection with the need to establish line of sight between antennas.
In addition, customers may decide to use transmission frequencies for which we do not offer products.
To the extent that these competing communications solutions reduce demand for our sales, profitshigh-capacity point-to-point wireless transmission products, there may be a material adverse effect on our business and customer relationships may suffer.results of operations.
Our international operations expose us to the risk of fluctuationfluctuations in currency exchange rates and restrictions related to foreign currency exchange controls.
Although we derive a significant portion of our revenues in U.S. dollars, a portion of our U.S. dollar revenues are derived from customers operating in local currencies which are different fromother than the U.S. dollar. Therefore, devaluation in the local currencies of our customers relative to the U.S. dollar could cause our customers to cancel or decrease orders or delay payment. In addition, part of our revenues from customers are in non-U.S. dollar currencies, therefore we are exposed to the risk of devaluation of such currencies relative to the dollar,payment, which could have a negative impact on our revenues and results of operations. We are also subject to other foreign currency risks including repatriation restrictions in certain countries, particularly in Latin America.America and in Africa. See also the risk of “"Due to the volume of our sales in emerging markets, we are susceptible to a number of political, economic and regulatory risks that could have a material adverse effect on our business, reputation, financial condition and results of operations” operations."
A substantial portion of our operating expenses are denominated in New Israeli Shekels ("NIS"), and to a lesser extent, other non-U.S. dollar currencies. Our NIS-denominated expenses consist principally of salaries and related costs and related personnel expenses. We anticipate that a portion of our expenses will continue to be denominated in NIS. In 2015,2016, the NIS continued to fluctuate in comparison to the U.S. dollar, with the NIS depreciatingappreciating by 0.3%1.4% against the U.S. dollar for that year.dollar. If the U.S. dollar weakens against the NIS in the future, there will be a negative impact on our results of operations.
In some cases, we are paid in non-U.S. dollar currencies or maintain monetary assets in non-U.S. dollar currencies, which could affect our reported results of operations. Also, our cash balances in certain countries, may be devaluated significantly, especially in cases where conversion to U.S. dollars and repatriation of these cash reserves is restricted or impossible, whichand therefore could have a material adverse effect on our financial condition. In addition, we have assets and liabilities that are denominated in non-U.S. dollar currencies. Therefore, significant fluctuation in these other currencies could have a significant effect on our results.
We use derivative financial instruments, such as foreign exchange forward contracts, to mitigate the risk of changes in foreign exchange rates on our balance sheet accounts and forecast cash flows. We do not use derivative financial instruments or other “hedging”"hedging" techniques to cover all of our potential exposure and may not purchase derivative instruments adequate enough to insulate ourselves from foreign currency exchange risks. In some countries, we are unable to use “hedging”"hedging" techniques to mitigate our risks because hedging options are not available for certain government restricted currencies. During 2015,2016, we incurred losses in the amount of $7.8$2.8 million as a result of exchange rate fluctuations that have not been fully offset in full by our hedging strategy. In addition, during 20152016 we also recorded chargesincome of $4.3$0.9 million toin the other comprehensive loss in our shareholders’shareholders' equity as a result of the erosionappreciation of the Brazilian currency against the U.S. dollar. The volatility in the foreign currency markets may make it challenging to hedge our foreign currency exposures effectively.
Furthermore, some of our competitors can benefit from currency fluctuations as their costs and expenses are primarily denominated in currencies other than the U.S. dollar. In case the U.S. dollar strengthens against these currencies these competitors might offer their products and services for a lower price and capture market share from us, which might adversely affect our business and negatively influence our results of operation and financial condition.
We are engaged in supplying installation or rollout projects for our customers. Such long-term projects have inherent additional risks. Problems in executing these rollout projects, including delays or failure in acceptance testing procedures and other items beyond our control, wouldcould have a material adverse effect on our results of operations.
We are engaged in supplying rollout projects, which typically include services such as installation and commissioning, involving fixed-price contracts. We assume greater financial risks on these fixed-price projects, versus equipment–only sales, which do not similarly require us to provide services and usually do not require customer acceptance certificates in order for us to recognize revenue. If we miscalculate the resources or time we need for these fixed-price projects, the costs of completing these projects may exceed our original estimates, which would negatively impact our financial condition and results of operations.
In a significant number of our projects, we are engaged in supplying our products as total rollout projects, which include installation and other services for our customers. In this context, we may act as the prime contractor and equipment supplier for network build-out projects, providing installation, supervision and commissioning services required for these projects, or we may provide such services and equipment for projects handled by system integrators. As we engage in more rollout projects, we expect to continue to routinely enter into contracts involving significant amounts to be paid by our customers over time and which often require us to deliver products and services representing an important portion of the contract price before receiving any significant payment from the customer. Once a purchase agreement has been executed, the timing and amount of revenue, if applicable, may remain difficult to predict. The completion of the installation and testing of the customer’scustomer's networks and the completion of all other suppliers’suppliers' network elements are subject to the customer’scustomer's timing and efforts, and other factors outside our control, such as site readiness for installation, availability of power and access to sites, which may prevent us from making predictions of revenue with any certainty. This could cause us to experience substantial period-to-period fluctuations in our results of operations and financial condition.
In addition, typically in rollout projects, we are dependent on the customer to issue acceptance certificates to generate and recognize revenue. In such projects, we typically bear the risks of loss and damage to our products until the customer has issued an acceptance certificate upon successful completion of acceptance tests. Moreover, we are not always the prime integrator in these projects and in such cases, the acceptance may be delayed even further since it depends on the acceptance of other network elements which are not in our control. The early deployment of our products during a long-term project reduces our cash flow, as we generally collect a significant portion of the contract price after successful completion of an acceptance test. If our products are damaged or stolen, or if the network we install does not pass the acceptance tests or if the customer does not or will not issue an acceptance certificate, the end user or the system integrator as the case may be, could refuse to pay us any balance owed and we would incur substantial costs, including fees owed to our installation subcontractors, increased insurance premiums, transportation costs and expenses related to repairing or manufacturing the products. Moreover, in such a case, we may not be able to repossess the equipment, thus suffering additional losses.
If any of the above occurs, we may not be able to generate or recognize revenue and we may incur additional costs, any of which could materially adversely impact our results of operation and financial condition.
A single customerand customer grouprepresent a significant portion of our revenues, and if we were to lose this single customer or customer group or experience any material reduction in orders from this single customer or customer group, our revenues and operating results may be adversely affected.
In 2015 we had revenue from a single customer group of affiliated companies equaling 17.7% of our total revenues. In 2014 we had revenue from a single customer that accounted for approximately 16.1% of our total revenues. In 2013 we had revenues from a single customer group of affiliated companies that accounted for approximately 15.4% of our total revenues. Our sales are generally made from standard purchase orders rather than long-term contracts. Accordingly, these large customers are not obligated to purchase a fixed amount of products or services over any period of time from us and may terminate or reduce their purchases from us at any time without notice or penalty. We therefore have difficulty projecting future revenues from these customers. This could have, and has had, an adverse effect on our reported revenues, profitability and cash flow. In addition, the loss of these customers or any material reduction in orders could adversely affect different aspects of our results of operations, including cash flow, and financial condition.
Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements or a failure to meet our reporting obligations. This may cause investors to lose confidence in our reported financial information, which could result in the trading price of our common stockshares to decline.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including the chief executive officer (“CEO”Chief Executive Officer ("CEO") and the chief financial officer (“CFO”Chief Financial Officer ("CFO"), we carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2015,2016, using the criteria established in “Internal"Internal Control - Integrated Framework” (2013), issuedFramework" set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’sCompany's annual or interim financial statements will not be prevented or detected in a timely manner.
At the end of 2014, based on the Company’sCompany's evaluation, our management, including the CEO and CFO, has identified a material weakness related to our legal entity in Brazil, which accounted for approximately 10% of our total revenue for the year ended December 31, 2014, and approximately 9% of our total assets as of the year ended December 31, 2014, finding that we did not maintain effective controls over our financial reporting and closing procedures as of December 31, 2014. This material weakness resulted from the fact that our accounting and supervisory personnel in Brazil did not have adequate accounting experience to enforce compliance with all the procedures that had been defined to ensure appropriate financial reporting. This deficiency could result in a material misstatement of the annual or interim consolidated financial statements that may not be prevented or detected on a timely basis.
With the oversight of CEO and CFO, we took steps and plan to take additional measures to remediate the underlying causes of the material weakness and as a result, as of December 31, 2015 and 2016, we had no material weakness in our internal controls over our financial reporting. See also ITEM 15. “CONTROLS AND PROCEDURES.”
If we conclude in future periods that our internal controls over financial reporting are not effective, we may fail to meet our future reporting obligations on a timely basis, our financial statements may contain material misstatements, our operating results may be negatively impacted, and we may be subject to litigation and regulatory actions, causing investor perceptions to be adversely affected and potentially resulting in a decline in the market price of our common stock.shares. Even if we conclude that our internal controls over financial reporting are adequate, any internal control or procedure, no matter how well designed and operated, can only provide reasonable assurance of achieving desired control objectives and cannot prevent all mistakes or intentional misconduct or fraud.
Additional tax liabilities could materially adversely affect our results of operations and financial condition.
As a global corporation, we are subject to income and other taxes both in Israel and various foreign jurisdictions. Our domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Our tax expense includes estimates or additional tax, which may be incurred for tax exposures and reflects various estimates and assumptions, including assessments of our future earnings that could impact the valuation of our deferred tax assets. From time to time, we are subject to income and other tax audits, the timings of which are unpredictable. Our future results of operations could be adversely affected by changes in our effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in our overall profitability, changes in tax legislation and rates, changes in generally accepted accounting principles, changes in the valuation of deferred tax assessmentsassets and liabilities, the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures. While we believe we comply with applicable tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us withimpose additional taxes. Should we be assessed additional taxes, there could be a material adverse effect on our results of operations and financial condition.
Our business activities in multiple countries may also expose us to indirect as well as withholding taxes in those countries. Our inability to meet certain tax regulations related to indirect or withholding taxtaxes as well as different interpretations applied by the governing tax authorities to those regulations may expose us to additional tax payments and penalties whichpenalties. These would have a material adverse impact on our results of operations and financial condition.
Due to inaccurate forecasts, we may be exposed to inventory-related losses on inventories purchased by our contract manufacturers and other suppliers, or to increased expenses should unexpected production ramp up be required. In addition, part of our inventory may be written off, which would increase our cost of revenues.
Our contract manufacturers and other suppliers are required to purchase inventory based on manufacturing projections we provide to them. If the actual orders from our customers are lower than projected, or the mix of products ordered changes, or if we decide to change our product line and/or our product support strategy, our contract manufacturers or other suppliers will have excess inventory of raw materials or finished products, which we would be required to purchase, thus incurring additional costs and our gross profit and results of operations could be adversely affected. In addition, our inventory levels may be too high, and inventory may become obsolete or over-stated on our balance sheet. This would require us to write off inventory, which could adversely affect our results of operations.
Alternatively, if we underestimate our requirements and actual orders are significantly larger than our planned forecast, we may be required to accelerate production and purchase of supplies, which may result in additional costs of buying components at less attractive prices, paying expediting fees and express shipment costs, overtime and other manufacturing expenses and our gross margins and results of operations could be adversely affected.
We require our contract manufacturers and other suppliers from time to time to purchase more inventory than is immediately required, and, with respect to our contract manufacturers, to partially assemble components, in order to shorten our delivery time in case of an increase in demand for our products. In the absence of such increase inincreased demand, we may need to make advance payments or compensate our contract manufacturers or other suppliers, as needed. We also may purchase components or raw materials from time to time for use by our contract manufacturers in the manufacturing of our products.
Inventory of raw materials, work in-process or finished products located either at our warehouse or our customers’customers' sites as part of the network build-up may accumulate in the future, and we may encounter losses due to a variety of factors, including:
| · | | new generations of products replacing older ones, including changes in products because of technological advances and cost reduction measures; and |
| · | | the need of our contract manufacturers to order raw materials that have long lead times and our inability to estimate exact amounts and types of items thus needed, especially with regard to the frequencies in which the final products ordered will operate. |
Further, our inventory of finished products located either at our warehouse or our customers’customers' sites as part of a network build-up may accumulate if a customer were to cancel an order or refuse to physically accept delivery of our products, or in rollout projects, which include acceptance tests, refuse to accept the network. The rate of accumulation may increase in a period of economic downturn.
Our sales cycles in connection with competitive bids or to prospective customers are lengthy.
It typically takes from three to twelve months after we first begin discussions with a prospective customer before we receive an order from that customer, if an order is received at all. In some instances, we participate in competitive bids in tenders issued by our customers or prospective customers. These tender processes can continue for many months before a decision is made by the customer. In addition, even after the initial decision is made, wethere may be required for a lengthy and extensive testing and integration phase as well as a lengthyor contract negotiation phase before a final decision to purchase is made. In some cases, even if we have signed a contract and our products were tested and approved for usage, it could take a significant amount of time until customer places purchase orders, if at all. As a result, we are required to devote a substantial amount of time and resources to secure sales. In addition, the lengthy sales cycle results in greater uncertainty with respect to any particular sale, as events maythat impact customers' decisions occur during the salessuch cycle that impact customers’ decisions which,and in turn, increasesincrease the difficulty of forecasting our results of operations.
Our contract manufacturers obtain some of the components included in our products from a limited group of suppliers and, in some cases, single or sole source suppliers. The loss of or problems in any of these suppliers could cause us to experience production and shipment delays as well as additional costs, which may result in a substantial cost increase or loss of revenue.
Our contract manufacturers currently obtain key components from a limited number of suppliers. Some of these components are obtained from a single or sole source supplier. Our contract manufacturers’manufacturers' dependence on a single or sole source supplier, or on a limited number of suppliers, subjects us to the following risks:
| · | The component suppliers may experience shortages in components and interrupt or delay their shipments to our contract manufacturers. Consequently, these shortages could delay the manufacture of our products and shipments to our customers, which could result in penalties or cancellation of orders for our products. |
| · | The component suppliers could discontinue the manufacture or supply of components used in our systems. In such an event, our contract manufacturers or we may be unable to develop alternative sources for the components necessary to manufacture our products, which could force us to redesign our products or we may need to buy a large stock of the component into inventory before it is discontinued. Any such redesign of our products would likely interrupt the manufacturing process and could cause delays in our product shipments. Moreover, a significant modification in our product design may increase our manufacturing costs and bring about lower gross margins. |
| · | The component suppliers may increase component prices significantly at any time and with immediate effect, particularly if demand for certain components increases dramatically in the global market. These price increases would increase component procurement costs and could significantly reduce our gross margins and profitability. |
If we do not succeed in developing and marketing new products that keep pace with technological developments, changing industry standards and our customers’ needs, we may not be able to grow or sustain our business.
The market for our products is characterized by rapid technological advances, changing customer needs and evolving industry standards, as well as increasing pressures to make existing products more cost efficient. Accordingly, our success will depend, among other things, on our ability to develop and market new products or enhance our existing products in a timely manner to keep pace with developments in technology, and customer requirements.
In addition, the wireless equipment industry is subject to rapid change in technological and industry standards. This rapid change, through official standards committees or widespread use by operators, could either render our products obsolete or require us to modify our products resulting in significant investment, both in time and cost, in new technologies, products and solutions. We cannot assure you that we will continue to successfully develop these components and bring them into full production with acceptable reliability, or that any development or production ramp-up will be completed in a timely or cost-effective manner.
We are continuously seeking to develop new products and enhance our existing products. In late 2013 we announced a significant new line of products (IP-20 Platform) which we continue to enhance with newer products and capabilities. Developing new products and product enhancements requires research and development resources. We may not be successful in enhancing our existing products or developing new products in response to technological advances or to satisfy increasingly sophisticated customer needs in a timely and cost-effective manner, which would have a material adverse effect on our ability to grow or maintain our business. Moreover, we cannot assure that new products being developed on the basis of the IP-20 Platform will be accepted in the market or will result in profitable sales or that such products will not require additional quality assurance and defect fixing processes.
Our past acquisition activities expose us to risks and liabilities.
The Nera Acquisition was our first acquisition involving significant international operations. In acquiring Nera we undertook a number of identified contingent liabilities of Nera, such as various known litigations with third parties, and other contingent exposures with customers, suppliers and employees, all of which could accumulate to a substantial amount. In addition, we may be exposed to potential tax liabilities worldwide, with governmental authorities, which could result in a substantial cost. We also undertook certain exposures for penalties and other financial risks posed by a few of Nera’sNera's customers in the event of a default by us due to commercial or political circumstances, which may not be under our control. We assessed these contingent liabilities in the purchase price allocation.
However, our assessment of such contingent liabilities may not have been accurate and we may be exposed to actual payments, which may be significantly higher than we assessed. If we are required to make any actual payment on such potential tax liabilities, this could result in the Nera Acquisition being substantially more expensive than originally estimated and could materially adversely affect our results of operations, cash flow and financial condition.
Our acquisition activities expose us to risks and liabilities, which could also result in integration problems and adversely affect our business.
Following the Nera Acquisition and other smaller acquisitions, we have increased the size of our operations and worldwide presence. We intend to continue to explore potential merger or acquisition opportunities. We are unable to predict whether or when any prospective acquisitions will be completed. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’s attention. The anticipated benefits and cost savings of such mergers and acquisitions or other restructuring may not be realized fully, or at all, or may take longer to realize than expected. Acquisitions involve numerous risks any of which could harm our business, results of operations or the price of our ordinary shares.
We sell other manufacturers’ products as an original equipment manufacturer, or OEM, which subjects us to various risks that may cause our revenues to decline.
We sell a limited number of products on an OEM basis through relationships with a number of manufacturers. Some of these OEM products enable us to offer a complete solution to some of our customers. These manufacturers have chosen to sell a portion of their products through us in order to take advantage of our reputation and sales channels. The sale of these OEM products by us depends in part on the quality of these products, the ability of these manufacturers to deliver their products to us on time and their ability to provide both presale and post-sale support. Sales of OEM products by us expose our business to a number of risks, each of which could result in a reduction in the sales of our products. We face the risks of termination of these relationships, technical and financial problems these companies might encounter or the promotion of their products through other channels and turning them into competitors rather than partners. In addition, failure by our OEM manufacturers to deliver their products or discontinue production of their products may cause difficulty to, and may have an adverse effect on, our business. If any of these risks materialize, we may not be able to develop alternative sources for these OEM products, which may cause us to lose certain customers or a part of their business which would cause our revenues to decline.
If we fail to obtain regulatory approval for our products, or if sufficient radio frequency spectrum is not allocated for use by our products, our ability to market our products may be restricted.
Radio communications are subject to regulation in most jurisdictions and to various international treaties relating to wireless communications equipment and the use of radio frequencies. Generally, our products must conform to a variety of regulatory requirements and international treaties established to avoid interference among users of transmission frequencies and to permit interconnection of telecommunications equipment. Any delays in compliance with respect to our future products could delay the introduction of those products. Also, these regulatory requirements may change from time to time, which could affect the design and marketing of our products as well as the competition we face from other suppliers’ products.suppliers' products, which may not be affected as much from such changes. Delays in allocation of new spectrum for use with wireless backhaul communications, such as the E and V bands in various countries, at prices which are competitive for our customers, for use with wireless backhaul communications, may also adversely affect the marketing and sales of our products.
In addition, in most jurisdictions in which we operate, users of our products are generally required to either have a license to operate and provide communications services in the applicable radio frequency or must acquire the right to do so from another license holder. Consequently, our ability to market our products is affected by the allocation of the radio frequency spectrum by governmental authorities, which may be by auction or other regulatory selection. These governmental authorities may not allocate sufficient radio frequency spectrum for use by our products. We may not be successful in obtaining regulatory approval for our products from these authorities and as we develop new products either our products or some of the regulations will need to change to take full advantage of the new product capabilities in some geographies. Historically, in many developed countries, the lack of available radio frequency spectrum has inhibited the growth of wireless telecommunications networks. If sufficient radio spectrum is not allocated for use by our products, our ability to market our products may be restricted which would have a materially adverse effect on our business, financial condition and results of operations. Additionally, regulatory decisions allocating spectrum for use in wireless backhaul at frequencies used by our competitors’competitors' products could increase the competition we face.
Other areas of regulation and governmental restrictions, including tariffs on imports and technology controls on exports or regulations related to licensing and allocation processes, could adversely affect our operations and financial results.
Our products are used in critical communications networks, which may subject us to significant liability claims.
BecauseSince our products are used in critical communications networks, we may be subject to significant liability claims if our products do not work properly. The provisions in ourterms of agreements with our customers that are intended to limit our exposure todo not always provide sufficient protection from liability claims may not preclude all potential claims. In addition, any insurance policies we have may not adequately limitcover our exposure with respect to such claims. We warrant to our current customers that our products will operate in accordance with our product specifications. Ifspecifications, but if our products fail to conform to these specifications, our customers could require us to remedy the failure or could assert claims for damages. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Any such claims, whethersuccessful or not, successful, would be costly and time-consuming to defend, and could divert management’smanagement's attention and seriously damage our reputation and our business.
Our international wireless backhaul operations subject us to environmental, health and other laws and potential liabilities thatvarious regulations. Liabilities for failure to comply with these regulations could materially impact our business, results of operations and financial condition.
Due to the nature of our global operations, we must comply with certain international and domestic laws, regulations and restrictions, which may expose our business to risks including the following:
| o | Pursuant to Section 1502 of the Dodd-Frank Act, as a United States publicly-traded company we are required to disclose use or potential use of certain minerals and their derivatives, including tantalum, tin, gold and tungsten, that are mined from the Democratic Republic of Congo and adjoining countries and deemed conflict minerals. These requirements necessitate due diligence efforts to assess whether such minerals are used in our products in order to make the relevant required annual disclosures. We timely file our conflict minerals reports. Yet, there are, and will be, ongoing costs associated with complying with these disclosure requirements, we may face reputational challenges that could impact future sales if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to verify with sufficient accuracy the origins of all conflict minerals used in our products. |
| o | Our business is subject to numerous laws and regulations designed to protect the environment, including with respect to discharges management of hazardous substances. Although we believe that we have compliedcomply with these requirements and that such compliance hasdoes not hadhave a material adverse effect on our results of operations, financial condition or cash flows, the failure to comply with current or future environmental requirements could expose the companyCompany to criminal, civil and administrative charges, duecharges. Due to the nature of our business and environmental risks, we cannot provide assurance that any such material liability will not arise in the future. |
| o | Our wireless communications products emit electromagnetic radiation. While we are currently unaware of any negative effects associated with our products, there has been publicity in recent years, regarding the potentially negative direct and indirect health and safety effects of electromagnetic emissions from wireless telephones and other wireless equipment sources, including allegations that these emissions may cause cancer. Health and safety issues related to our products may arise that could lead to litigation or other actions against us or to additional regulation of our products. Weproducts, and we may be required to modify our technology and may not be ablewithout the ability to do so. Even if these concerns prove to be baseless, the resulting negative publicity could affect our ability to market these products and, in turn, could harm our business and results of operations. Claims against other wireless equipment suppliers or wireless service providers could adversely affect the demand for our backhaul solutions. |
Breaches of network or information technology security could have an adverse effect on our business.
Cyber-attacks or other breaches of network or IT security may cause equipment failures or disrupt our systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber-attacks, malware, computer viruses and other means of unauthorized access. While we maintain insurance coverage for some of these events, the potential liabilities associated with these events could exceed the insurance coverage we maintain. Our inability to operate our facilities as a result of such events, even for a limited period of time, may result in significant expenses or loss of market share to our competitors. In addition, a failure to protect the privacy of customer or employee confidential data against breaches of network or IT security could result in damage to our reputation.
Maintaining the security of our products, computers and networks is a critical issue for us and our customers. Security researchers, criminal hackers and other third parties regularly develop new techniques to penetrate computer and network security measures. In addition, hackers also develop and deploy viruses, worms and other malicious software programs, some of which may be specifically designed to attack our products, systems, computers or networks. Additionally, external parties may attempt to fraudulently induce our employees or users of our products to disclose sensitive information in order to gain access to our data or our customers' data. These potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary information or sensitive, personal or confidential data about us, our employees or our customers, including the potential loss or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our employees, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability or fines for us, damage our brand and reputation or otherwise harm our business.
We sell other manufacturers' products as an original equipment manufacturer, or OEM, which subjects us to various risks that may cause our revenues to decline.
We sell a limited number of products on an OEM basis through relationships with a number of manufacturers. Our sale of OEM products exposes us to the risk that these manufacturers might terminate their relationships with us, experience technical and financial problems, decide to promote their products through other channels, fail to deliver their products or discontinue production of their products. If we cannot develop alternative sources for OEM products, we could lose certain customers and our revenues could decline.
If we are unable to protect our intellectual property rights, our competitive position may be harmed.
Our ability to compete will depend, in part, on our ability to obtain and enforce intellectual property protection for our technology internationally. We currently rely upon a combination of trade secret, trademark and copyright laws, as well as contractual rights, to protect our intellectual property. In connection with the Nera Acquisition, we acquired certain patents and patent applications. However, our patent portfolio may still not be as extensive as those of our competitors. As a result, we may have limited ability to assert any patent rights in negotiations with, or in counterclaiming against, competitors who assert intellectual property rights against us.
We also enter into confidentiality, non-competition and invention assignment agreements with our employees and contractors engaged in our research and development activities, and enter into non-disclosure agreements with our suppliers and certain customers so as to limit access to and disclosure of our proprietary information. We cannot assure you that any steps taken by us will be adequate to deter misappropriation or impede independent third-party development of similar technologies. Moreover, under current law, we may not be able to enforce the non-competition agreements with our employees to their fullest extent.
We cannot assure you that the protection provided to our intellectual property by the laws and courts of foreign nations will be substantially similar to the remedies available under U.S. law. Furthermore, we cannot assure you that third parties will not assert infringement claims against us based on foreign intellectual property rights and laws that are different from those established in the United States. Any such failure or inability to obtain or maintain adequate protection of our intellectual property rights, for any reason, could have a material adverse effect on our business, results of operations and financial condition.
Defending against intellectual property infringement claims could be expensive and could disrupt our business.
The wireless equipment industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in often protracted and expensive litigation. We have been exposed to infringement allegations in the past. Wepast, and we may in the future be notified that we or our vendors, allegedly infringe certain patent or other intellectual property rights of others. Any such litigation or claim could result in substantial costs and diversion of resources. In the event of an adverse result of any such litigation, we could be required to pay substantial damages (including potentially treble damages and attorney’sattorney's fees should a court find such infringement willful), or to cease the use and licensing of allegedly infringing technology and the sale of allegedly infringing products (including those we purchase from third parties). We may be forced to expend significant resources to develop non-infringing technology, obtain licenses for the infringing technology or replace infringing third party equipment. We cannot assure you that we would be successful in developing such non-infringing technology, that any license for the infringing technology would be available to us on commercially reasonable terms, if at all, or that we will find suitable substitute for infringing third party equipment.
If we fail to attract and retain qualified personnel, our business, operations and product development efforts may be materially adversely affected.
Our products require sophisticated research and development, marketing and sales, and technical customer support. Our success depends on our ability to attract, train and retain qualified personnel in all these professional areas while also taking into consideration varying geographical needs and cultures. We compete with other companies for personnel in all of these areas, both in terms of profession and geography, and we may not be able to hire sufficient personnel to achieve our goals or support the anticipated growth in our business. The market for the highly-trained personnel we require globally is competitive, due to the limited number of people available with the necessary technical skills and understanding of our products and technology. If we fail to attract and retain qualified personnel due to compensation or other factors, our business, operations and product development efforts would suffer.
Risks Related to Our CommonOrdinary Shares
IfHolders of our ordinary shares who are U.S. residents may be required to pay additional U.S. income taxes if we are characterizedclassified as a passivepersonal foreign investment company our U.S. shareholders may suffer adverse tax consequences, including higher tax rates and potentially punitive interest charges on certain distributions and on the proceeds of share sales.
We do not believe that for 2015 we were a passive foreign investment company, or PFIC,("PFIC") for U.S. federal income tax purposes. Non-U.S. corporations
There is a risk that we may be classified as a PFIC. Our treatment as a PFIC could result in a reduction in the after-tax return for U.S. holders of our ordinary shares and may cause a reduction in the value of our shares. For U.S. federal income tax purposes, we will generally be characterizedclassified as a PFIC for any taxable year if after applying certain look through rules, eitherin which either: (1) 75% or more of such corporation’sour gross income is passive income, or (2) at least 50% of the average value (determined on a quarterly basis) of all such corporation’sour total assets for the taxable year produce or are held for the production of or produce, passive income. IfBased on our analysis of our income, assets, activities and market capitalization, we are characterized asdo not believe that we were a PFIC our U.S. shareholders may suffer adverse tax consequences, including having gains realized onfor the sale of our ordinary shares treated as ordinary income, rather than capital gain income, and having potentially punitive interest charges apply. Similar rules apply to distributions that are “excess distributions.”
It is possibletaxable year ended December 31, 2016. However, there can be no assurance that the United States Internal Revenue Service could attempt to treat us as("IRS") will not challenge our analysis or our conclusion regarding our PFIC status. There is also a risk that we were a PFIC for one or more prior taxable years or that we will be a PFIC in future years, including 2017. If we were a PFIC during any prior years, U.S. shareholders who acquired or held our ordinary shares during such years will generally be subject to the 2015 year or prior tax years.PFIC rules. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of our future income, assets, activities and market capitalization, including fluctuations in the price of our ordinary shares, which are relevant to this determination. Accordingly, there canIf we were determined to be no assurance that we will not become a PFIC in 2016 or in subsequent years. for U.S. federal income tax purposes, highly complex rules would apply to U.S. holders owning our ordinary shares and such U.S. holders could suffer adverse U.S. tax consequences.
For a discussion of the rules relating to passive foreign investment companies and related tax consequences,more information, please see the section of this prospectus supplement entitled “U.S.Item 10. ADDITIONAL INFORMATION – E. Taxation - "U.S. Federal Income Tax Considerations”Considerations" – “Tax"Tax Consequences if we areWe Are a Passive Foreign Investment Company.”"
The price of our ordinary shares is subject to volatility. Such volatility could limit investors' ability to sell our shares at a profit, could limit our ability to successfully raise funds and may expose us to class actions against the Company and its senior executives.
The stock market in general, and the market price of our ordinary shares in particular, are subject to fluctuation. As a result, changes in our share price may be unrelated to our operating performance. The price of our ordinary shares has experienced volatility in the past and may continue to do so in the future.future, which may make it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. In the two yeartwo-year period ended December 31, 2015,2016, the price of our ordinary shares has ranged from a high of $3.84$2.94 per share to a low of $0.88 per share. On December 31, 20142015 and 2015,2016, the closing priceprices of our ordinary shares was $1.01were $1.21 per share and $1.21$2.62 per share, respectively. TheA variety of factors may affect the market price of our ordinary shares, is and will continue to be subject to a number of factors, including:
| • | announcement of corporate transactions or other events impacting our revenues; |
| • · | announcements of technological innovations by us or by others; |
| • · | customer orders or new products or contracts; |
| • | competitors’competitors' positions and other events related to this market; |
| • · | changes in the Company’sCompany's estimations regarding forward looking forward statements and/or announcement of actual results that vary significantly from such estimations; |
| · | announcement of corporate transactions or other events impacting our revenues; |
| • · | changes in financial estimates by securities analysts; |
| • · | our earnings releases and the earnings releases of our competitors; |
| • · | other announcements, whether by the Company or others, referring to the Company’sCompany's financial condition, results of operations and changes in strategy; |
| • · | the general state of the securities markets (with a particular emphasis on the technology and Israeli sectors thereof); and |
| • · | the general state of the credit markets, the current volatility of which could have an adverse effect on our investments.investments; and |
| · | global macroeconomic developments. |
These factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares and may result in substantial losses byto our investors.
In addition to the volatility of the market price of our shares, the stock market in general and the market for technology companies in particular, havehas been highly volatile and at times thinly traded. These broad market and industry factors may seriously harm the market price of our ordinary shares, regardless of our operating performance. Investors may not be able to resell their shares following periods of volatility.
Further, as a result of the volatility of our stock price, we could be subject, and are currently subject, to securities litigation, which could result in substantial costs and divert management's attention and Company resources from business. On January 6, 2015 the Company was served with a motion to approve a purported class action, naming the Company, its Chief Executive OfficerCEO and its directors as defendants. The motion was filed with the District Court of Tel-Aviv. The purported class action is based on Israeli law and alleges breaches of duties by making false and misleading statements in the Company’sCompany's SEC filings and public statements.statements during the period between July and October 2014. The plaintiff seeks specified compensatory damages in a sum of up to $75,000,000, as well as attorneys' fees and costs (see below in Item 8. "FINANCIAL INFORMATION"). Although the Company believes it has a strong defense against these allegations and that the District Court should deny the motion to approve the class action, there is no assurance that the Company’sCompany's position will be accepted by the District Court. In such case the Company may have to divert attention of its executives to deal with this class action as well as incur damages and expenses that may be beyond its insurance coverage for such cases, which causeFurthermore, there is a risk that this litigation will divert the time and energy of lossthe Company's executives and lead to damages and expenditures that may not be covered by insurance. This may adversely affect itsthe Company's financial condition and results of operations.
We may need to raise additional funds in the future; to the extent any such funding will be based on sales under shelf registration statements, our existing shareholders will experience dilution of their shareholdings.
On August 15, 2012, we filed a shelf registration statement on Form F-3 with the SEC under which we were able to offer and sell from time to time, in one or more offerings, our ordinary shares, rights, warrants, debt securities and units comprising any combination of these securities, having an aggregate offering price of up to $150 million (the "2012 Shelf"). Under the 2012 Shelf, we raised $37.4 million in November 2013 by selling 14,000,000 of our ordinary shares at a price of $2.40 per share, and raised $41.5 million in July 2014 by selling 21,250,000 ordinary shares at a price of $2.00 per share. Since the effectiveness of the 2012 Shelf expired in September 2015, we are planning to file a new shelf registration statement on Form F-3 with the SEC, immediately following the filing of this annual report. While there is no assurance that we will sell any shares, including shares underlying securities convertible into, exchangeable for, or exercisable for shares, under such new shelf registration statement, any such sales in the future will result in dilution to existing shareholders.
Due to the size of their shareholdings, Yehuda and Zohar Zisapel have influence over matters requiring shareholder approval.
As of March 16, 2016,28, 2017, Zohar Zisapel, our Chairman of the Board of Directors, beneficially owned, directly or indirectly, 13.9% of our outstanding ordinary shares and Yehuda Zisapel and Nava Zisapel beneficially owned, directly or indirectly, 4.61% of our outstanding ordinary shares; and Zohar Zisapel, our Chairman, beneficially owned, directly or indirectly, 13.9% of our outstanding ordinary shares. Such percentages include options which are exercisable within 60 days of March 16, 2016.28, 2017. Yehuda and Zohar Zisapel, who are brothers, do not have a voting agreement. Regardless, these shareholders may influence the outcome of various actions that require shareholder approval. Yehuda and Nava Zisapel have an agreement which provides for certain coordination in respect of sales of shares of Ceragon as well as for tag along rights with respect to off-market sales of Ceragon.
Our ordinary shares are traded on more than one market and this may result in price variations.
In addition to being traded on the Nasdaq Global Select Market, our ordinary shares are traded on the TASE.Tel Aviv Stock Exchange ("TASE"). Trading in our ordinary shares on these markets taketakes place in different currencies (U.S. dollars on Nasdaq and NIS on the TASE), and at different times (resulting from different time zones, trading days and public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the price of our ordinary shares on one market could cause a decrease in the trading price of our ordinary shares on the other market.
AsBeing a foreign private issuer we are permitted to followexempts us from certain home country corporate governance practices, instead of applicable SEC and Nasdaq Rules,requirements, which may result in less protection than is afforded to investors under rules applicable to domestic issuers.
We are a "foreign private issuer" within the meaning of rules promulgated by the SEC. As a foreign private issuersuch, we are exempt from certain provisions applicable to U.S. public companies, including:
| · | The rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q and immediate reports on Form 8-K; |
| · | The sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of securities registered under the Exchange Act; |
| · | The provisions of regulation FD aimed at preventing issuers from making selective disclosures of material information; and |
| · | The sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profit realized from any "short-swing" trading transaction (a purchase and sale, or sale and purchase, of the issuer's equity securities within less than six months). |
In addition, we are permitted to follow certain home country corporate governance practices and lawlaws instead of those rules and practices otherwise required by Nasdaq for domestic issuers. For instance, we have relied on the foreign private issuer exemptionissuers, including with respect to shareholder approval requirementsof equity-based incentive plans for equity issuancesour employees and equity-based compensation plans and with respect to the Nasdaq requirement to have a formal charter for the compensation committee; See “Item 16G. Corporate Governance”.
our Compensation Committee. Following our home country corporate governance practices as opposed to the requirements that
would otherwise apply to a USU.S. company listed on the Nasdaq may provide less protection to investors than is afforded to investorsaccorded under the Nasdaq Listing Rules applicable to domestic issuers. For more information regarding specific exemptions we chose to adopt, please see "Item 16G. Corporate Governance."
We are subject to regulations related to "conflict minerals," which could adversely impact our business.
Pursuant to Section 1502 of the Dodd-Frank Act, as a United States publicly-traded company we are required to disclose use or potential use of certain minerals and their derivatives, including tantalum, tin, gold and tungsten, that are mined from the Democratic Republic of Congo and adjoining countries and deemed conflict minerals. These requirements necessitate due diligence efforts to assess whether such minerals are used in our products in order to make the relevant required annual disclosures. We timely file our conflict minerals reports. While there are, and will be, ongoing costs associated with complying with these disclosure requirements, we may face reputational challenges that could impact future sales if we determine that certain products of ours contain minerals not determined to be conflict free, or if we are unable to verify with sufficient accuracy the origins of all conflict minerals potentially used in our products.
Risks Related to Operations in Israel
Conditions in the Middle East and in Israel may adversely affect our operations.
Our headquarters, a substantial part of our research and development facilities and some of our contract manufacturers’manufacturers' facilities are located in Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly influence our operations. Specifically, we could be adversely affected by:
| · | Hostilities involving Israel; |
| · | The interruption or curtailment of trade between Israel and its present trading partners; |
| · | A downturn in the economic or financial condition ofconditions in Israel; and |
| · | A full or partial mobilization of the reserve forces of the Israeli army;army. |
Since its establishment in 1948, Israel has been subject to a number of armed conflicts that have taken place between it and its Arab neighbors. While Israel has entered into peace agreements with both Egypt and Jordan, Israel has no peace arrangements with any other neighboring countries. Furthermore, all efforts to improve Israel's relationship with the Palestinian Authority have failed to result in a permanent solution, and there have been numerous periods of hostility in recent years.
Furthermore,The uncertainty maintained in the region intensified in 2016 with the continuation of the civil war and state of chaos in Syria, adjacent to Israel's northern border, which followed the violent uprisings against the regimes experienced in recent years in someother Arab countries in the Middle East and North Africa, including insuch as Egypt Syria and Jordan, which also border Israel, and theIsrael. The significant increase of hostile activities of ISIS, the Islamic State of Iraq and the Levant, in Syria adjacent to Israel's northern border, and in the Sinai Peninsula, adjacentalso contributes to Israel's southern border, all maintain a level of uncertaintythe tension in the region.
Despite the multiparty agreement reached between Iran and world powers, reports of its continuing nuclear development program have further heightened the antipathy In addition, relations between Israel and Iran.
In the last twenty years there has been a significant deterioration in Israel’s relationshipIran continue to be seriously strained, especially with the Palestinian Authorityregard to Iran's nuclear program and a related increase in violence, including continued hostilities relatedalso due to the Gaza Strip, whichfact that Iran is controlled byperceived as having strong influence among extremist organizations in the Hamas militant group. Efforts to resolve the problem have failed to result in a permanent solution. Further, since the beginning of 2015, we have been experiencing a wave of individual attacks against Israeli citizens, carried out by Palestinian individuals mostly from areas controlled by the Palestinian Authority, but also from Eastern Jerusalem and other parts of Israel. In 2014 Israel experienced another round of armed conflict withregion, such as Hamas in the Gaza, Strip, with missiles reaching the southHezbollah in Lebanon, and center region of the country.various rebel military groups in Syria.
All of the above, as well as further deterioration of relations with the Palestinian Authority, Hamas or countries in the Middle East, raise a concern as to the stability in the region, which may affect the political and security situation in Israel and therefore could adversely affect our business, financial condition and results of operations.
Deterioration of relations with the Palestinian Authority has already started disrupting some of Israel's trading activities;Furthermore, certain countries, as well as variouscertain companies and organizations, primarily in the Middle East, but also in Malaysia and Indonesia, continue to participate in a boycott of Israeli companiesfirms and others that dodoing business with Israel.Israel and Israeli companies. The boycott, restrictive laws, policies or practices directed towards Israel or Israeli businesses could, individually or in the aggregate, have a material adverse effect on our business for example, opportunities that we cannot pursue, or from which we will be precluded. Further deterioration of our relations with the Palestinian Authority, Hamas or countries in the Middle East could expand the disruption of international trading activities in Israel, may materially and negatively affect our business conditions and could harm our results of operations.future.
In addition, our business may be disturbed by the obligation of personnel to perform military service; in general, our Israeli employees are subject to an obligation to perform reserve military service every once in a while,periodically, until they reach the age of 45 (or older, for reservists with certain occupations). In the event of a military conflict, these employees may be called to active duty for longer periods of time. In response to the increase in violence and terrorist activity in the past few years, there have been periods of significant call-ups for military reservists, and it is possible that there will be additional military reserve duty call-ups in the future. In case of further regional instability such employees, who may include one or more of our key employees, may be absent for extended periods of time which may materially adversely affect our business.
We can give no assurance that the political and security situation in Israel, as well as the economic situation, will not have a material impact on our business in the future.
We have received Israeli government grants for research and development expenditures, thatwhich restrict our ability to manufacture products and transfer technologies or know howknow-how outside of Israel.
We have received grants from the Industrial Research and Development AdministrationIsrael Innovation Authority (formerly and more commonly known as the Office of Chief Scientist – "OCS") for the financing of a significant portion of our research and development expenditures in Israel. Even following full repayment of any OCS grants, and unless otherwise agreed by the applicable authority of the OCS, we must nevertheless continue to comply with the requirements of the Encouragement of Industrial Research and Development Law, 1984 and regulations promulgated there under (the "R&D Law").
Among other requirements of the R&D Law, including the obligation to pay royalties to the OCS, the R&D Law requires that the manufacture of products, which incorporate know howknow-how developed with OCS funds, be carried out in Israel, unless the OCS provides its approval for manufacture outside of Israel. This approval, if obtained, may be subject to various conditions, including the repayment of increased royalties. Transfer of the know-how developed with OCS funds and any right derived there from to third parties is generally prohibited, unless approved by the research committee of the OCS, in special cases, subject to the receipt by the OCS of certain payments. These restrictions and requirements for payment may impair our ability to sell our technology assets or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel, and to reduce the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know how developed with OCS funding (such as a merger or similar transaction), by any amounts that we are required to pay to the OCS.
For information regarding the above-mentioned and other restrictions imposed by the R&D Law, please see Item 4. “INFORMATION"INFORMATION ON THE COMPANY- B. Business Overview - The Industrial Research and Development Administration,Israel Innovation Authority, formerly – the Israeli Office of Chief Scientist.”"
The tax benefits to which we are currently entitled from our approved enterprise program and our beneficiary enterprise program, require us to satisfy specified conditions, which, if we fail to meet, would deny us from these benefits in the future; further,future. Further, if such tax benefits are reduced or eliminated in the future, we may be required to pay increased taxes.
The Company has capital investment programs that have been granted approved enterprise status (“by the Israeli government ("Approved Programs”Programs"), and a program under beneficiary enterprise status pursuant to theIsrael's Law for the Encouragement of Capital Investments, 1959 (“("Beneficiary Program”Program"). When we begin to generate taxable income from these approved or beneficiary enterprise programs, the portion of our income derived from these programs will be tax exempt from tax for a period of two years, and will be subject to a reduced tax for an additional eight years thereafter, depending on the percentage of our share capital held by non-Israelis. The benefits available to an approved enterprise program are dependent upon the fulfillment of conditions stipulated under applicable law and in the certificate of approval. If we fail to comply with these conditions, in whole or in part, we may be required to pay additional taxes for the period in which we benefited from the tax exemption or reduced tax rates and would likely be denied these benefits in the future. The amount by which our taxes would increase will depend on the difference between the then applicablethen-applicable tax rate for regular enterprises and the rate of tax, if any, that we would otherwise pay as an approved enterprise or beneficiary enterprise, and the amount of any taxable income that we may earn in the future.
In addition, the Israeli government may reduce, or eliminate in the future, tax benefits available to approved or beneficiary enterprise programs. Our approvedApproved and beneficiary programBeneficiary Program and the resulting tax benefits may not continue in the future at their current levels or at any level, and the legislation regarding Preferred Enterprise may not be applicable to us or may not fully compensate us for such change. The termination or reduction of these tax benefits would likely increase our tax liability. The amount, if any, by which our tax liability would increase will depend upon the rate of any tax increase, the amount of any tax benefit reduction and the amount of any taxable income that we may earn in the future. For a description of legislation on “Preferredregarding "Preferred Enterprise" see Item 10. “ADDITIONAL"ADDITIONAL INFORMATION; Taxation; Tax Benefits under the 2011 Amendment”".
It may be difficult to enforce a U.S. judgment against us or our officers and directors, or to assert U.S. securities laws claims in Israel.
We are incorporated under the laws of the State of Israel. Service of process upon our directors and officers, almost all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and investments, and almost all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of our directors and officers may not be collectible within the United States.
Additionally, it may be difficult to enforce civil liabilities under U.S. securities law in original actions instituted in Israel;Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear such a claim, it is not certain whetherif Israeli law or U.S. law will be applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact by an expert witness, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses these matters.the matters described above.
Your rights and responsibilities as a shareholdershareholder will be be governed by Israeli law which differs in some respects from the rights and responsibilities of shareholders of U.S. companies.
Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our Articles of Association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in United States-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to a company’scompany's articles of association, an increase of a company’scompany's authorized share capital, a merger of a company and approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders’shareholders' vote or to appoint or prevent the appointment of an office holder in a company, or has another power with respect to a company, has a duty to act in fairness towards such company. Israeli law does not define the substance of this duty of fairness and there is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of U.S. corporations.
Provisions of Israeli law may delay, prevent or make undesirable an acquisition of all or significant portion of our shares or assets.
Israeli corporate law regulates mergers and requires that a tender offer be effected when certain thresholds of percentage ownership of voting power in a company are exceeded (subject to certain conditions); See “Item 10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION - Mergers and Acquisitions under Israeli Law.” Further, Israeli tax considerations may make potential transactions undesirable to us, or to some of our shareholders, if the country of residence of such shareholder does not have a tax treaty with Israel (thus not granting relief from payment of Israeli taxes). With respect to mergers, Israeli tax law provides tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction, during which certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred. See Item 6. “DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES –"Item 10.B. - Mergers and Acquisitions under Israeli Law”. For more information regarding such required approvals please see Item 4. “INFORMATION ON THE COMPANY - B. Business Overview - The Industrial Research and Development Administration, formerly – the Israeli Office of Chief Scientist.”"
In addition, in accordance with the Restrictive Trade Practices Law, 1988, and the R&D Law, approvals regarding a change in control (such as a merger or similar transaction) may be required in certain circumstances. For more information regarding such required approvals please see Item 4. "INFORMATION ON THE COMPANY - B. Business Overview - The Israel Innovation Authority, formerly – the Israeli Office of Chief Scientist."
These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us or for our shareholders to elect different individuals to our boardBoard of directors,Directors, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares.
ITEM 4.INFORMATION ON THE COMPANY
A. History and Development of the Company
We were incorporated under the laws of the State of Israel on July 23, 1996 as Giganet Ltd. We changed our name to Ceragon Networks Ltd. on September 6, 2000. We operate under the Israeli Companies Law. OurLaw, and our registered office is located at 24 Raoul Wallenberg Street, Tel Aviv, Israel 69719, Israel and the telephone number is 972-3-543-1000.+972-3-543-1000. Our web address is www.ceragon.com. Information contained on our website does not constitute a part of this annual report.
Our agent for service of process in the United States is Ceragon Networks, Inc., our wholly owned U.S. subsidiary and North American headquarters, located at Overlook at Great Notch, 150 Clove Road, 9th Floor, Little Falls, NJ 07424.
B. Business Overview
We are the number oneleading wireless backhaul specialist company in terms of unit shipments and global distribution of our business, providing innovative wireless backhaul solutions to global wireless backhaul markets. We provide wireless backhaul solutions that enable cellular operators and other wireless service providers to deliver voice, data and other multimedia services, enabling smart-phone applications such as Internet browsing, social networking applications, image sharing, music and video applications. We also provide our solutions for wireless backhaul to other vertical markets such as public safety, utilities and oil and gas offshore drilling platforms. Our wireless backhaul solutions use microwave and millimeter-wave radio technologies to transfer large amounts of telecommunication traffic between wireless 4G, 3G and other cellular base station technologies (distributed, or centralized with dispersed remote radio heads) and the core of the service provider’sprovider's network. We are also a member of industry consortiums of companies, which attempt to better define future technologies in ICT (Information and Communication Technologies) markets, such as Open Networking Foundation (ONF), Metro Ethernet Forum (MEF), European Telecommunications Standards Institute (ETSI) and others.
In addition to providing our solutions, we also offer our customers a comprehensive set of turn-key professional services, including:including advanced network and radio planning, site survey, solutions development, network rollout, maintenance, training and more.training. Our services include utilization of powerful project management tools in order tothat streamline deployments of complex wireless networks, thereby reducing time and costs associated with network set-up and allowing a faster time-to-revenue. Our experienced teams can deploy hundreds of wireless backhaul links every week, and our rollout project track record includes hundreds of thousands of links already installed and in operationoperational with a variety of industry-leading operators.
Designed for Internet Protocol (IP) network configurations, including risk-free migration from legacy to next-generation backhaul networks, our solutions provide fiber-like connectivity for next generation Ethernet/Internet Protocol, or IP-based, networks; for legacy circuit-switched, or SONET/SDH, networks and for hybrid networks that combine IP and circuit-switching technologies. Our solutions support all wireless access technologies, including LTE-Advanced, LTE, HSPA, EV-DO, CDMA, W-CDMA, WiFi and GSM. These solutions allow wireless service providers to cost-effectively and seamlessly evolve their networks from circuit-switched and hybrid concepts to all-IP packet-based concepts, thereby meeting the increasing demand of a growing number of subscribers and the increasing needs for mobile multimedia services. Our products also serve evolving network architectures including all-IP long haul networks.
We also provide our solutions to other non-carrier vertical markets such as oil and gas companies, public safety organizations, businesses and public institutions, broadcasters, energy utilities and others that operate their own private communications networks. Our solutions are deployed by more than 460 service providers of all sizes, as well as in hundreds of private networks, in more than 130 countries.
In March 2013, we received $113.7 million of credit facilities which replaced all of the Company’sCompany's existing credit facilities, including the agreement with Bank Hapoalim B.M. entered into in 2011 (the “Bank"Bank Hapoalim Agreement”Agreement") and other short term credit facilities with other banks. In October 2013 and again in April 2014, we obtained the bank syndicate's temporary consent for temporary less restrictive financial covenants. Most of the less restrictive financial covenants were in effect until October 1, 2014, except for one less restrictive financial covenant, which was in effect until March 31, 2015. After each date, the respective original covenants again apply. On March 31, 2015 we signed an additional amendment with the banksbank syndicate that primarily included primarily changes in our credit line structure, in some of our covenants, an extension of the credit facility period until June 30, 2016 and a gradual reduction of the maximum amount of loans from $63.5 million to $50 million by February 28, 2016. On March 10, 2016 we signed a furtheranother amendment to the credit facility agreement, which extended the credit facility repayment date tilluntil March 31, 2017 under the same terms of the previous amendment. On March 30, 2017 we signed an additional amendment to the credit facility agreement, which extended the credit facility repayment date until March 31, 2018. Following this last amendment, the credit facility provides for loans and an extension of credit up to an aggregate of $100.2 million. See Item 5. “OPERATING"OPERATING AND FINANCIAL REVIEW AND PROSPECTS; B. Liquidity and Capital Resources,”" for a more detailed discussion.
In December 2014, we announced a significant new restructuring of our operations to reduce our operational costs. As part of the restructuring effort, we realigned operations, reduced head count and implemented other cost reduction measures in order to lower our breakevenbreak-even point and improve profitability. The restructuring plan included consolidating or relocating certain offices and reduction of staff functions and several operations positions, as well as other measures. In connection with this restructuring announcement, we incurred restructuring charges of $6.8$5.8 million and $1.2 million in the fourth quarter of 2014 and the first quarter of 2015, respectively.
Wireless Backhaul; Short-haul, Long-haul and Small Cells Backhaul
Deployed by operators worldwide, today’stoday's wireless base stations handle many different technologies such as smart phones, tablets and PCs. Voice and data traffic generated by these high-end devices are then gathered and transmitted via the backhaul transport network to the radio frequency (RF), or wireless, network. Wireless backhaul offers network operators a cost-efficient alternative to wire-line (copper/fiber) connectivity. Support for high capacities means that all value-added services can be supported, while the high reliability of wireless systems provide for lower maintenance costs. Because they require no trenching, wireless links can also be set up much faster and at a fraction of the cost of wire-line solutions. On the operator’soperator's side, this translates into an increase in operational efficiency and faster time-to-market, as well as a shorter timetable to achieving new revenue streams.
The wireless backhaul market is divided into two main market segments. The first is a market segment in which operators invest resources and efforts to select the best wireless backhaul solution that will meet their wireless backhaul needs, in terms of the ability to improve their business operational efficiency, services reliability and their customers’ (subscribers’customers' (subscribers') quality of experience. This market segment is referred to as best-of-breed. The other market segment is characterized by operators that do not select the wireless backhaul solution, since this decision is made by a network’snetwork's solution provider retained by the operator. This network solution provider delivers an end-to-end solution and the equipment required to operate the entire network, including the wireless backhaul equipment. Operators in this segment of the market often view the wireless backhaul solution as a “commodity”,"commodity," which should deliver network connectivity, without optimization of network and other resources, and a solution which does not play a primary role within the end-to-end network rollout considerations. This segment of the market is referred to as bundled-deals.
Ceragon serves the best-of-breed segment of the market and specializes in a range of solutions, which we believe provide high value for our customers:
| · | Shorthaul solutions, which typically provide a wireless link capacity of up to 1 Gbps per link and are used to carry voice and data services over distances of between several hundred feet to 10 miles. Short-haul links are deployed in access applications (macro cells and small cells) wirelessly connecting the individual base-stations and cellular towers to the core network. Short-haul solutions are also used in a range of non-carrier “vertical”"vertical" applications such as broadcast, state and local government, public safety, education and off-shore communication for oil and gas platforms. |
| · | Long-haul solutions, which typically provide a capacity of up to 5 Gbps, are used in the “highways”"highways" of the telecommunication backbone network. These links are used to carry services at distances of 10 to 50 miles, and, using the right planning, configuration and equipment, can also bridge distances of 100 miles. Long-haul solutions are also used in a range of non-carrier "vertical" applications such as broadcast, state and local government, public safety, utilities and off-shore communication for oil and gas platforms. |
Ceragon has, on more than onceone occasion, been the first to introduce new products and features to the market, including the first solution for wireless transmission of 155 Mbps at 38 GHz, the first native IP wireless transmission offering. More recently, we introduced a variety of technological enhancements including the first hitless/errorless 8-step Adaptive Coding and Modulation (ACM) technology (2007); first native Ethernet multi-channel long-haul radio with ACM (2010); unique asymmetric transfer mode and multi-layer compression (2011); and 1024QAM Long-Haul IP radio with 9 step ACM (2012) The industry’s; the industry's first multi-coremulticore radio solution supporting 2048 QAM and 4x4 MIMO (2012) and the industry’sindustry's first and only “Advanced"Advanced Frequency Reuse” technology.Reuse" technology (2015). This technology, based on the Company’sCompany's multicore technology allows operators to flexibly deploy the wireless base stations exactly where those are needed, without being bound to wireless backhaul deployment limitations as a result of interferences from various other links, which are often deployed in a dense carrier’scarrier's network.
Industry Background
The market demand for wireless backhaul is being generated primarily by cellular operators, wireless broadband service providers, businesses and public institutions that operate private networks. This market is fueled by the continuous customer growth in developing countries, and the explosion in mobile data usage in developed countries. Traditionally based on circuit-switched solutions such as T1/E1 or SONET/SDH, the market for wireless backhaul has shifted over the past several years, mostly to more flexible higher capacity and cost efficient architectures, based on IP/Ethernet technologies. The main catalyst of the shift towards IP/Ethernet-based networks as a whole, and the wireless backhaul in particular, has been the vast adoption of 4G/LTE wireless service technology in developed markets (predominantly the United States, Canada, Europe and some parts of Asia Pacific). While the adoption of 4G/LTE has yet to occur in some emerging markets (Latin America, Africa and other countries in Asia Pacific), 3G base stations deployed over recent years in emerging markets have also been relying on IP/Ethernet-based wireless backhaul, further fueling the market adoption of IP-based backhaul.technology.
Rapid subscriber growth and the proliferation of advanced smartphones, tablets and other high data consuming devices have significantly increased the amount of traffic that must be carried over a cellular operator’soperator's backhaul infrastructure. As a result, existing transport capacity is heavily strained, creating a bottleneck that hinders service delivery and quality.
With the growth in adoption of 4G/LTE and LTE-A,LTE-Advanced/Pro, which provides even higher subscriber capacity, cellular operators are seeking strategies for new services, using new technologies which will allow further business growth, by facilitating quick and cost efficient enablement of new services for more connected subscribers (either human or machine). AmongstAmong those are next generation cellular 5G technologies and Software Defined Networks (SDN) technologies. Next generation cellular 5G services technologies, for which the standard is not anticipated to be ratified before 2017,2018 or to be deployed until at least 2020, are expected to allow the support for a 1,000 fold1,000-fold larger amount of subscribers with up to 1 Gbps service capacity for many. The need for supporting 5G service capacities will require wireless backhaul with higher capacity and scalability to support 5G services.
SDN technologies are designed to enable fast network rollout with simplified interoperability between vendors by decoupling certain functions from network devices (routers and switches) and centralizing the control functions, traditionally performed by these dedicated network devices, within an SDN network controller. This change will leave the network devices to handle the data transport alone. Together with 5G, SDN may allow fast service enablement, thus requiring a flexible and scalable network infrastructure, to allow for fast and cost effective network implementation and optimization.
The wireless backhaul domain of the network will require adaptation to these industry trends by enabling far higher capacities, with ultra-low latency for high service quality and a high degree of wireless backhaul resource optimization that will be incorporated within the wireless backhaul network infrastructure. Network optimization is expected to be achieved, in part, by the use of SDN technologies with wireless backhaul optimization applications, which shall exploit network intelligence gathered by SDN controllers within the network.
Cellular Operators
In order to address the strain on backhaulbackhaul capacity, cellular operators have a number of alternatives, including leasing existing fiber lines, laying new fiber optic networks or deploying wireless solutions. Leasing existing lines requires a significant increase in operating expenses and, in some cases, requires the wireless service provider to depend on a direct competitor. Laying new fiber-optic lines is capital-intensive and these lines cannot be rapidly deployed. The deployment of high capacity and ultra-high capacity point-to-point wireless links represents a scalable, flexible and cost-effective alternative for expanding backhaul capacity. Supporting data rates of 1 Gbps and above, over a single radio unit, wireless backhaul solutions enable cellular operators to add capacity only as required while significantly reducing upfront and ongoing backhaul costs.
Some of today’stoday's backhaul networks, primarily in emerging markets, still employ a large number of circuit switched (or TDM) solutions - whether T1/E1 or high-capacity SDH/SONET. These networks, originally designed to carry voice-only services, have a limited bandwidth capacity and offer no cost-efficient scalability model. The surge in mobile data usage, fueled by anticipation and adoption of 4G/LTE, drives operators to migrate their networks to a more flexible, feature-rich and cost optimized IP/Ethernet architecture. Additionally, the surge in data usage in densely populated areas drives operators to explore new network architectures that utilize a variety of small-cell technologies requiring the deployment of dense wireless backhaul network in various microwave and millimeter-wave spectral bands. As operators transition to 4G/LTE and LTE-Advanced,LTE-Advanced/Pro, all of which are IP-based wireless access technologies, they look for ways to benefit from IP technology in the backhaul while maintaining support for their primary legacy services.
In order to ensure the success of this backhaul network migration phase, operators require solutions that can support their legacy transport technology (TDM) while providing all the advanced IP/Ethernet capabilities and functionalities. This is because, in most cases, 4G/LTE base stations are co-located with 2G/3G base stations, and thus share the same backhaul network. Cellular operators therefore seek “hybrid”"hybrid" wireless backhaul solutions that can carry both types of traffic seamlessly over a single network, to facilitate their network migration. Our solutions, which support any network architecture and include both all-IP as well as hybrid products, offer operators a simple and quick network modernization plan.
Wireless Broadband Service Providers
For wireless broadband service providers, which offer alternate high data access, high-capacity backhaul is essential for ensuring continuous delivery of rich media service across their high-speed data networks. If the backhaul network and its components do not satisfy the service providers’providers' need for cost-effectiveness, resilience, scalability or ability to supply sufficient capacity, then the efficiency and productivity of the network may be seriously compromised. While both wireless and wire-line technologies can be used to build these backhaul systems, many wireless service providers opt for wireless point-to-point microwave solutions. This is due to a number of advantages of the technology including: rapid installation, support for high-capacity data traffic, scalability and lower cost-per-bit compared to wire-line alternatives.
Other Vertical Markets
Many large businesses and public institutions require private high bandwidth communication networks to connect multiple locations. These private networks are typically built using IP-based communications infrastructure. This market includes educational institutions, utility companies, oil and gas industry, broadcasters, state and local governments, public safety agencies and defense contractors. These customers continue to invest in their private communications networks for numerous reasons, including security concerns, the need to exercise control over network service quality and redundant network access requirements. As data traffic on these networks rises, we expect that businesses and public institutions will continue to invest in their communications infrastructure, including backhaul equipment. Like wireless service providers, customers in this market demand a highly reliable, cost-effective backhaul solution that can be easily installed and scaled to their bandwidth requirements. Approximately 20% of our business is associated with private network operators.
Wireless vs. Fiber Backhaul
Though fiber-based networks can easily support the rapid growth in bandwidth demands, they carry high initial deployment costs and take longer to deploy than wireless. Certainly, where fiber is available within several hundred feet of the operator’soperator's point of presence, with ducts already in place, and when there are no regulatory issues that prohibit the connection – fiber can become the operator’soperator's preferred route. In almost all other scenarios, high-capacity wireless backhaul using microwave and millimeter-wave technologies, is significantly more cost efficient. In fact, in most cases the return-on-investment from fiber installations can only be expected in the long term, making it hard for operators to achieve lower costs per bit and earn profits in a foreseeable future.
Wireless microwave and millimeter-wave backhaul solutions on the other hand are capable of delivering high bandwidth, carrier-grade Ethernet and TDM services. Our wireless backhaul solutions are suitable for all capacities, up to 2,5carrying multi Gbps of the operators' traffic over a single radio connection (or “link”"link") and may be scaled up to higher degree of multiple Gbps using intelligent wireless carriers bonding technologies for bonding several radio frequency carriers together.. Unlike fiber, wireless solutions can be set up quickly and are more cost efficient on a per-bit basis from the outset. In many countries, microwave backhaul links are deployed as alternative routes to fiber, ensuring on-going communication in case of fiber-cuts and network failures. Millimeter-wave backhaul links over short distances are expected to be used for this purpose as well, as millimeter-wave spectrum becomes readily available in various countries, at acceptable costs.
Licensed vs. License-exempt Wireless Backhaul
Service providers select the optimal available transmission frequency based on the rainfall intensity in the transmission area and the desired transmission range. The regulated, or licensed, bands are allocated by government licensing authorities for high-capacity wireless transmissions. The license grants the licensee the exclusive use of that spectrum for a specific use thereby eliminating any interference issues. LicensedA licensed microwave spectrum is typically the choice of leading operators around the world because it matches the bandwidth and interference protection they require. Our products operate in the 4 – 42 GHzfrom 4GHz microwave frequencyto 86GHz millimeter-wave bands, the principal licensed bands currently available for commercial use throughout the world, as well as in the 70, 80 GHz frequency bands, known as the E-band spectrum, for use in ultra-high (beyond 1 Gbps capacity) for relatively short-distance links, required for the radio access network (RAN) backhaul, as well as small cell backhaul within the radio access network.
License-exempt products typically operate in the “sub-6 GHz”"sub-6 GHz" 2.4 – 5.85 GHz band or in the 24 GHz spectrum band. These systems can be deployed without any regulatory approval. Due to limited availability of spectrum, and the narrow bandwidth of frequency channels in this range, licensed-exempt systems can carry limited network capacity. Often operating in a near-line-of-sight (NLOS) mode, these systems also suffer from high signal loss which puts more limitations on their ability to provide high capacities for network traffic use. Another disadvantage is that because these frequencies are unregulated, it is impossible to ensure high, carrier-grade quality of service and high availability. There are, however, applications in which service providers, public or private, may use license-exempt spectrum products, for instance in enterprises, education, utility, financial, or public safety. Cellular operators and wireless ISPs may also use license-exempt spectrum solutions where NLOS is the only means to connect two end-points. For the license-exempt wireless networks market we offer products that are designed to operate in the “sub-6 GHz”"sub-6 GHz" frequencies.
Recently, the license exempt “Sub 6GHz”license-exempt spectrum is being considered for providing a backhaul solution for cellular small cells situated on street-level fixtures such as lamp poles in urban locations. Though prone to interference by other license-exempt spectrum users, these products may provide some solution to the requirement of wireless backhaul within such small cells network environments, where relatively lower capacity is required.
Industry Trends and Developments
| · | Software Defined Networking (SDN) is an emerging concept aimed at simplifying network operations and allowing network engineers and administrators to quickly respond to a fast-changing business environment. SDN delivers network architectures that transition networks from a world of task-specific dedicated network devices, to a world of optimization of network performance through network intelligence incorporated within network controllers performing control functions and network devices, which perform traffic (data-plane) transport. Our IP-20 platform,Platform, which we launched during 2013, is an SDN-ready solutions suite that is built around a powerful software-defined engine and may be incorporated within the SDN network architecture. Our SDN architecture is envisioned to provide a set of applications that can achieve end-to-end wireless backhaul network optimization by intelligently making use of the scarce network resources, such as spectrum and power consumption. |
| · | ·
| The emergence of small cells presents backhaul challenges that differ from those of traditional macro-cells. Small cells can be used to provide a second layer of coverage in 4G/LTE networks, resulting in higher throughput and data rates for the end-user. Although small cell deployments are still evolving and are as of yet not showing significant volumes, Ceragon already offers tailored solutions for forward looking mobile operators. Our small-cell wireless backhaul portfolio includes a variety of compact all-outdoor solutions that provide operators with optimal flexibility in meeting their unique physical, capacity, networking, and regulatory requirements. |
| · | The network sharing business model is growing in popularity among mobile network operators (MNOs) who are faced with increasing competition from over-the-top players and an ever-growing capacity crunch. Network sharing can be particularly effective in the backhaul portion of mobile networks, especially as conventional macro cells evolve into super-sized macro sites that require exponentially more bandwidth for wireless backhaul. It has become abundantly clear that in these new scenarios, a new breed of wireless backhaul solutions with a significant investment is required. Our IP-20 platformPlatform supports network sharing concepts by addressing both the ultra-high capacities required for carrying multiple operator traffic, as well as the policing for ensuring that each operator’soperator's service level agreement (SLA) is maintained. The IP-20 platform can deliver up to several Gbps of data over a single link. At the same time, by employing advanced hierarchical quality of service (H-QoS) mechanisms, the IP-20 platform ensures fairness and policy enforcement on a shared network. |
| · | While green-field deployments tend to be all IP-based, the overwhelming portion of network infrastructure investments goes into upgrading, or “"modernizing”" existing cell-sites to fit new services with a lower total cost of ownership. Modernizing is more than a simple replacement of network equipment. It helps operators build up a network with enhanced performance, capacity and service support. For example, Ceragon offers a variety of innovative mediation devices that eliminate the need to replace costly antennas that are already in deployment. In doing so, we help our customers to reduce the time and the costs associated with network upgrades. The result: a smoother upgrade cycle, short network down-time during upgrades and faster time to revenue. |
| · | A growing market for non-mobile backhaul applications which includes: Offshoreoffshore communications for the oil and gas, as well as the shipping industry, which require a unique set of solutions for use on moving rigs and vessels; Broadcastbroadcast networks that require robust, highly reliable communication for the distribution of live video content either as a cost efficient alternative to fiber, or as a backup for fiber installations.installations; and Smart Grid networks for utilities, as well as local and national governments that seek greater energy efficiency, reliability and scale. |
| · | A growing demand for high capacity, IP-based long haul solutions in emerging markets. This demand is driven by the need of operators to connect more communities to 3.5G and 4G mobile value added value services, and a lack of alternative (wire-line) backbone telecommunication infrastructure in these emerging markets. |
| · | Market consolidation in the wireless backhaul segment continues. This trend was made evident in our acquisition of Nera and DragonWave’sDragonWave's acquisition of the microwave division of Nokia Siemens Networks. |
| · | Subscriber growth continues mainly in emerging markets such as India, Africa and Latin America. |
We offer a broad product portfolio of innovative, field-proven, high capacity wireless backhaul solutions, which incorporate our unique multicore technology. Our multicore technology is a key element in our differentiation within the wireless backhaul market, serving the best-of-breed market segment. Our multicore technology is comprised of a high order of digital signal carriers imbedded in modems having multiple baseband cores, designed for microwave and millimeter-wave communications, and RF integrated circuits (RFIC), which support the entire available microwave and millimeter-wave spectrum. We integrate our multicore technology into sub systems and complete wireless backhaul solutions that deliver high value for our customers. With our approach to solutions, from system-on-a-chip design, all the way to solutions design, we enable cellular operators, other wireless service providers, public safety organizations, utility companies and private network owners to effectively obtain a range of benefits:
| · | Increase business operational efficiency by reducing network related expenses: our customers are able to obtain the required capacity with one-quarter of the spectrum needed otherwise, double network capacity without adding more equipment simply by remotely expanding wireless link capacity, significantly reduce energy related expenses by utilizing our energy efficient products, use smaller antennas thereby reducing telecommunication tower leasing costs, and improve their staff productivity with the use of a single wireless backhaul platform for their longhaul, shorthaul and small cells backhaul needs. We offer a range of solutions for quick and simple modernization of wireless networks to 4G/4G LTE, 4.5G/LTE-A technologies,LTE-Advanced/Pro, which significantly contribute to our customers’customers' ability to modernize and expand their service networks. |
Our wireless backhaul solutions are offered across the widest range of frequencies - from 4GHz microwaves to 86GHz millimeter-waves. This provides our customer more flexibility in deploying its wireless backhaul infrastructure, as it enables the customer to select the spectrum available in customer’scustomer's market, from a wider range or frequencies. Any transport network topology is supported to enable high network availability and resiliency, including ring, mesh, tree and chain topologies.
| · | Enhance customers’customers' (subscribers) quality of experience: our multicore technology allows our customers to improve subscriber (user) quality of experience generated from the voice, data and multimedia services that they provide to their customers. Our solutions enable our customers to deliver services with the flexibility to deploy wireless bases stations and other types of communication sites, exactly where needed, in order to maximize their customers’customers' quality of experience. We do so by providing a solution which can dramatically reduce the interference between wireless backhaul links, thereby allowing more flexibility for deploying wireless backhaul wherever needed. |
Our Hierarchical Quality of Service (H-QoS) technology allows our customers offer a high order of SLAs (Service Level Agreements) to their customers, which increase their customers’ satisfaction and in turn can provide an additional source of revenues.
| · | Ensure peace of mind: Ourour solutions utilize the latest in microwave and millimeter-wave technology, incorporated in-house developed System on ChipsSystem-on-Chips (baseband and RF integrated circuits), and use the latest advances in SMT (Surface-mount technologies) - based-based manufacturing – allowing our customers to benefit from the highest service availability across their Ceragon - basedCeragon-based wireless backhaul network. |
We provide our customers with future solutions already built-in to their Ceragon installed base;Ceragon-installed base. We invest a significant amount of effort in designing and providing solutions, which are not only backward compatible with our earlier product generations, but allow our customers to reuse the radio units and antennas of their Ceragon links installed based, thereby replacing only the low labor-consuming indoor (sheltered) units - thus benefiting from the latest wireless backhaul performance of our latest technology across their Ceragon installedCeragon-installed base. Moreover, our solutions support both TDM - Time Division Multiplexing (E1/T1, STM-1/OC-3) and IP/Ethernetmultiple technologies within the same wireless backhaul equipment, providing our customers with high flexibility in network transition from legacy circuit-based connectivity to 4G and other IP/Ethernet-based connectivity, at their desired pace of transition - while achieving long-term operational efficiency, high service quality and availability.
Design to Cost. We see increasing demand for smaller systems with low power consumption and a cost structure that fits today’stoday's business environment in the diverse markets, seeking wireless backhaul solutions. We believe that this complicated puzzle can only be solved through vertical integration from system to chip level. Our strategy to drive performance up while driving cost down is achieved through our investment in modem and RF (radio frequency) integrated circuit (IC) design. Our advanced chipsets, which are already in use in hundreds of thousands of units in the field, integrate all the radio functionality required for high-end microwave and millimeter-wave systems. By owning the technology and controlling the complete system design, we achieve a very high level of vertical integration. This, in turn, yields systems that have superior performance, due to our ability to closely integrate and fine-tune the performance of all the radio components. By significantly reducing the number of components in the system and simplifying its design, we have made our solutions easier to manufacture. We have introduced automated testing that allows us to speed up production while lowering the costs for electronic manufacturing services manufacturers. Thus we believe we are able to achieve one of the lowest per-system cost positions in the industry and can offer our customers further savings through compact, low power consumption designs – which is becoming a key parameter in the ability of operators to deploy their networks, while meeting operational efficiency targets.
As an example, our FibeAir IP-20C, which can quadruple the link capacity over a single frequency channel, has nearly the same footprint as our RFU-C which is a single-channel radio unit, and not a full system. This achievement could not have been possible without our full control of the entire design and production processprocess.
Strategic Partnerships. Ceragon maintains strategic partnerships with third party solution vendors and network integrators. Through these relationships Ceragon develops interoperable ecosystems, enabling operators to profitably evolve mobile networks by using complementary backhaul alternatives.
Our portfolio of products utilizes microwave and millimeter-wavesmillimeter-wave radio technologies that provide our customers with a wireless connectivity that dynamically adapts to weather conditions and optimizes range and efficiency for a given frequency channel bandwidth. Our products are typically sold as a complete system comprised of four components: an outdoor unit, an indoor unit, a compact high-performance antenna and a network management system. We offer all-packet microwave radio links, with optional migration from TDM to Ethernet. Our products include integrated networking functions for both TDM and Ethernet.
We offer our products in three configurations: All-indoor, All-outdoor and Split-mount.
| · | Split-mount solutions consist of: |
· Split-mount solutions consist of:
| Ø | Indoor units which are used to convert the transmission signals from digital to intermediate frequency signals and vice versa, process and manage information transmitted to and from the outdoor unit, aggregate multiple transmission signals and provide a physical interface to wire-line networks. |
| Ø | Outdoor units or Radio Frequency Units (RFU), which are used to control power transmission, convert intermediate frequency signals to radio frequency signals and vice versa, and provide an interface between antennas and indoor units. They are contained in compact weather-proof enclosures fastened to antennas. Indoor units are connected to outdoor units by standard coaxial cables. |
| · | All-indoor solutions refer to solutions in which the entire system (indoor unit and RFU) reside in a single rack inside a transmission equipment room. A waveguide connection transports the radio signals to the antenna mounted on a tower. All indoor equipment is typically used in long-haul applications. |
| · | All-outdoor solutions combine the functionality of both the indoor and outdoor units in a single, compact device. This weather-proof enclosure is fastened to an antenna, eliminating the need for rack space or sheltering as well as the need for air conditioning. |
| · | Pointing accuracy solutions for high vibration environments. These are advanced microwave radio systems for use on moving rigs/vessels where the antenna is stabilized in one or two axes, azimuth or azimuth/elevation. |
| · | Antennas are used to transmit and receive microwave radio signals from one side of the wireless link to the other. These devices are mounted on poles typically placed on rooftops, towers or buildings. We rely on third party vendors to supply this component. |
| · | End-to-End Network Management. Our network management system uses standard management protocol to monitor and control managed devices at both the element and network level and can be easily integrated into our customers’customers' existing network management systems. |
An antenna, an RFU and an indoor unit comprise a terminal. Two terminals are required to form a radio link, which typically extends across a distance of several miles and can extend across a distance of over 100 miles. The specific distance depends upon the customer’scustomer's requirements and chosen modulation scheme, the frequency utilized, the available line of sight, local rain patterns and antenna size. Each link can be controlled by our network management system or can be interfaced to the network management system of the service provider. The systems are available in both split-mount, including an indoor and outdoor unit, all-indoor and all-outdoor installations.
The IP-20 Platform provides a wide range of solutions for any configuration requirement and diverse networking scenarios. Composed of high-density multi-technology nodes and integrated radio units of multiple radio technologies ranging from 4GHz and up to 86GHz, it offers ultra-high capacity of multiple Gbps with flexibility in accommodating for every site providing high performance terminals for all-indoor, split-mount and all-outdoor configurations.
| Short-Haul | Long-Haul | |
Product | FibeAir IP-20G & IP-20GX | FibeAir IP-20N / IP-20A* | FibeAir IP-20C | FibeAir IP-20S | FibeAir IP-20E | FibeAir IP-20C HP | FibeAir IP-20LH | Evolution IP-20 LH | PointLink |
Description | Multi-Radio Technology Edge Node | Multi-Radio Technology Aggregation Node | Compact All-Outdoor Multi-Core Node | Compact All-Outdoor Node | Compact All-Outdoor Node for E-band (70-80GHz) | Compact, high power, multi-carrier trunk | Ultra-high power multi-carrier trunk with HP-radio ODUs | Ultra-high power multi-carrier trunk with Evolution ODUs | High capacity offshore communication |
Interfaces | 1GE, FE, and E1/T1 | 10GE, 1GE, FE, E1/T1 | 1GE | 1GE | 1GE | 10GE, 1GE, STM-1/OC-3, E1/T1 Note: support for some interfaces requires use of IP-20N/IP-20A IDU | 10GE, 1GE, FE, STM-1/OC-3, E1/T1 | 10GE, 1GE, , FE, STM-1/OC-3, E1/T1 | |
Site Configuration | Split-mount | All-outdoor | All-outdoor / Split Mount (with IP-20N or IP-20A IDU) | All-indoor / Split-mount | Split mount |
Transport Technology | Hybrid and/or all-packet | All-packet | All-packet and/or Hybrid | Hybrid and/or all-packet | |
Typical Applications | Cellular operators, Wireless service providers, Incumbent local exchange carriers, Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies) | Cellular operators, Wireless service providers, Incumbent local exchange carriers, Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies) | Cellular operators, Wireless ISPs, , , Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies)
| Cellular operators, Wireless ISPs, , Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies)
| Cellular operators, Wireless ISPs, , Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies)
| Cellular operators, Wireless ISPs, Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies) | Cellular operators, Wireless service providers, Incumbent local exchange carriers, Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies) | Cellular operators, Wireless service providers, Incumbent local exchange carriers Private Networks (Public Safety, First Responders, state/local gov. institutions and Utility Companies) | Offshore oil/gas rigs in high vibration environment |
Type of Customers | Cellular operators, Wireless ISPs, Private Network providers, Government institutions | Cellular operators, Wireless ISPs, Private Network providers, Government institutions | Cellular operators, Wireless ISPs, Private Network providers, Government institutions | Cellular operators, Wireless ISPs, Private Network providers, Government institutions | Cellular operators, Wireless ISPs, Private Network providers, Government institutions | Cellular operators, Wireless service providers, Incumbent local exchange carriers, Private Network providers | Cellular operators, Wireless service providers, Incumbent local exchange carriers, Private Network providers | Cellular operators, Wireless service providers, Incumbent local exchange carriers, Private Network providers | Oil and gas drilling companies, shipping industry |
Operating system | Unified operating system (CeraOS), uniformly supporting End-to-End networking, services and radio capabilities across the entire IP-20 platform series of products | |
* ANSI version
Our network management system (NMS) can be used to monitor network element status, provide statistical and inventory reports, download software and configuration to elements in the network, and provide end-to-end service management across the network. Our NMS solutions support all IP-20 platform products, as well as our legacy FibeAir IP-10 and Evolution products through a single user interface.
| Network Management System (NMS) |
| | |
Description | User-friendly Network Management System designed for managing large scale wireless back haul networks. Optimized for centralized operation and maintenance of a complete network with an intuitive graphical interface for managing performance, end-to-end configuration, faults and system security. |
Key Features | Managing wireless backhaul networks; Fault management; Configuration & performance management; Network awareness; Full FCAPS Support Redundancy & Backup; Pay as you Grow with Software Key Mechanism; Northbound Interfaces; Multi-platform Operating System Support |
Our IP-based network products use native IP technology. Our hybrid products use our hybrid concept which allows them to transmit both native IP and native circuit-switched TDM traffic simultaneously over a single radio link. Native IP refers to systems that are designed to transport IP-based network traffic directly rather than adapting IP-based network traffic to existing circuit-switched systems. This approach increases efficiency and decreases latency. Our products provide effectively seamless migration to gradually evolve the network from an all circuit-switched and hybrid concept to an all IP-based packet.
As telecommunication networks and services become more demanding, there is an increasing need to match the indoor units’units' advanced networking capabilities with powerful and efficient radio units. Our outdoor RFUs are designed with sturdiness, power, simplicity, and compatibility in mind. As such, they provide high-power transmission for both short and long distances and can be assembled and installed quickly and easily. The RFUs can operate with different Ceragon indoor units, according to the desired configuration, addressing any network need be it cellular, backbone, rural or private backhaul networks.
Our RFUs deliver a maximum capacity over 80 MHz channels with configurable modulation schemes from QPSK to 2048QAM. High spectral efficiency is ensured by using the same bandwidth for double the capacity, using a single channel, with vertical and horizontal polarizations. This feature is implemented with a built-in cross polarization interference canceller (XPIC) mechanism. Ceragon was also the first wireless backhaul solutions vendor to introduce a fully functioning LoS 4x4 MIMO (Multiple Inputs, Multiple Outputs) radio. Taking advantage of LoS MIMO technology, our solutions quadruple the available capacity over a single frequency channel using a single, compact FibeAir IP-20C device.
Roll Out Services. Since 2012, we are responsible for installing part of the links we ship. We offer complete solutions and services for the design and implementation of telecommunication networks, as well as the expansion or integration of existing ones. We have a global projects and services group that operates alongside our products groups. Under this group we offer our customers a comprehensive set of turn-key services including: advanced network and radio planning, site survey, solutions development, installation, maintenance, training and more. Our services include utilization of powerful project management tools in order to streamline deployments of complex wireless networks, thereby reducing time and costs associated with network set-up, and allowing faster time to revenue. Our experienced teams can deploy hundreds of “wireless"wireless backhaul links”links" every week, and our rollout project track-record includes hundreds of thousands of links already installed and in operation with a variety of tierTier 1 operators.
We are committed to providing high levels of service and implementation support to our customers. Our sales and network field engineering services personnel work closely with customers, system integrators and others to coordinate network design and ensure successful deployment of our solutions.
We support our products with documentation and training courses tailored to our customers’customers' varied needs. We have the capability to remotely monitor the in-network performance of our products and to diagnose and address problems that may arise. We help our customers to integrate our network management system into their existing internal network operations control centers.
We have sold our products through a variety of channels to over 460 service providers as well as to hundreds of private networks in more than 130 countries. Our principal customers are wireless service providers that use our products to expand backhaul network capacity, reduce backhaul costs and support the provision of advanced telecommunications services. In 2015,2016, we continued to maintain our positioningposition as the number one wireless backhaul specialist, in terms of unit shipments and global distribution of our business. While most of our sales are direct, we do reach a number of these customers through OEM or distributor relationships. We also sell systems to large enterprises and public institutions that operate their own private communications networks through system integrators, resellers and distributors. Our customer base is diverse in terms of both size and geographic location.
In 2015,2016, customers from the Europe region contributed 14%15% of total yearly revenue. Our sales in Latin America and Africa reached 24%were 27% and 10%7% of yearly revenue in 2015,2016, respectively. Our sales in Asia Pacific (excluding India), North America and India in 20152016 were 9%10%, 13%14% and 30%27%, respectively.
The following table summarizes the distribution of our revenues by region, stated as a percentage of total revenues for the years ended December 31, 2013, 2014, 2015 and 2015:2016:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2013 | | | | 2014 | | | | 2015 | | | 2014 | | | 2015 | | | 2016 | |
Region | | | | | | | | | | | | | | | | | | | | | |
North America | | | 9 | % | | | 11 | % | | | 13 | % | | | 11 | % | | | 13 | % | | | 14 | % |
Europe | | | 18 | % | | | 16 | % | | | 14 | % | | | 16 | % | | | 14 | % | | | 15 | % |
Africa | | | 20 | % | | | 15 | % | | | 10 | % | | | 15 | % | | | 10 | % | | | 7 | % |
India | | | 8 | % | | | 25 | % | | | 30 | % | | | 25 | % | | | 30 | % | | | 27 | % |
APAC (excluding India) | | | 11 | % | | | 11 | % | | | 9 | % | | | 11 | % | | | 9 | % | | | 10 | % |
Latin America | | | 34 | % | | | 22 | % | | | 24 | % | | | 22 | % | | | 24 | % | | | 27 | % |
Sales and Marketing
We sell our products through a variety of channels, including direct sales, OEMs, resellers, distributors and system integrators. Our sales and marketing staff, including supporting functions, includes approximately 523513 employees in numerousmany countries worldwide, who work together with local agents, distributors and OEMs to expand our business.
We are a supplier to four key OEMs which together accounted for approximately 7%6% of our revenues in 2015.2016. System integrators, distributors and resellers accounted for approximately 12%19% of our revenues for 2015.2016. We are focusing our efforts on direct sales, which accounted for approximately 75% of our revenues for 2015, because we believe that this is the way to provide more value to our customers.2016. We also plan to develop additional strategic relationships with equipment vendors, system integrators, distributors, resellers, networking companies and other industry suppliers with the goal of gaining greater access to our target markets.
Our marketing efforts include advertising, public relations and participation in industry trade shows and conferences.
Manufacturing and Assembly
Our manufacturing process consists of materials planning and procurement, assembly of indoor units and outdoor units, final product assurance testing, quality control and packaging and shipping. With the goal of streamlining all manufacturing and assembly processes, we have implemented an outsourced, just-in-time manufacturing strategy that relies on contract manufacturers to manufacture and assemble circuit boards and other components used in our products and to assemble and test indoor units and outdoor units for us. The use of advanced supply chain techniques has enabled us to increase our manufacturing capacity, reduce our manufacturing costs and improve our efficiency.
We outsource most of our manufacturing operations to major contract manufacturers in Israel, Malaysia, Singapore, the Philippines, Hungary and Ukraine. On March 18, 2015, we signed a contract with a certain contract manufacturer to outsource our production facility in Slovakia and the production transfer to that manufacturer in Ukraine was carried out during 2015. Most of our warehouse operations are outsourced to subcontractors in Israel, the Philippines,Netherlands, USA and Singapore. The raw materials for our products come primarily from the United States, Europe and Asia Pacific.
We comply with standards promulgated by the International Organization for Standardization and have received certification under the ISO 9001, ISO 14001, ISO 27001 and OHSAS 18001 standards. These standards define the procedures required for the manufacture of products with predictable and stable performance and quality, as well as environmental guidelines for our operations and safety assurance.
Our activities in Europe require that we comply with European Union Directives with respect to product quality assurance standards and environmental standards including the “RoHS”"RoHS" (Restrictions of Hazardous Substances) Directive.
We place considerable emphasis on research and development to improve and expand the capabilities of our existing products, to develop new products, with particular emphasis on equipment for transitioning to IP-based networks, and to lower the cost of producing both existing and future products. We intend to continue to devote a significant portion of our personnel and financial resources to research and development. As part of our product development process, we maintain close relationships with our customers to identify market needs and to define appropriate product specifications. In addition, we intend to continue to comply with industry standards and we are full members of the European Telecommunications Standards Institute in order to participate in the formulation of European standards, we are full members of the European Telecommunications Standards Institute.standards.
Our research and development activities are conducted mainly at our facilities in Tel Aviv, Israel, andbut also at our subsidiaries in Greece and Romania. As part of the restructuring activities in 2013, we closed our research and development activities in Bergen, Norway. As of December 31, 2015,2016, our research, development and engineering staff consisted of 190204 employees. Our research and development team includes highly specialized engineers and technicians with expertise in the fields of millimeter-wave design, modem and signal processing, data communications, system management and networking solutions.
Our research and development department provides us with the ability to design and develop most of the aspects of our proprietary solutions, from the chip-level, including both application specific integrated circuits, or ASICs and RFICs, to full system integration. Our research and development projects currently in process include extensions to our leading IP-based networking product lines and development of new technologies to support future product concepts. In addition, our engineers continually work to redesign our products with the goal of improving their manufacturability and testability while reducing costs.
To safeguard our proprietary technology, we rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality agreements and other contractual arrangements with our customers, third-party distributors, consultants and employees, each of which affords only limited protection. We have a policy which requires all of our employees to execute employment agreements which contain confidentiality provisions.
Our patent portfolio may not be as extensive as those of our competitors. As a result, we may have limited ability to assert any patent rights in negotiations with, or in counterclaiming against, competitors who assert intellectual property rights against us. To date, we have 1716 patents granted in the United States and other foreign jurisdictions including the EPO (European Patent Office) and 4 patent applications pending in the United States and other foreign jurisdictions including the EPO. We cannot assure you that any patents will actually be issued or that the scope of any issued patent will adequately protect our intellectual property rights.
We have registered trademarks as follows:
| · | for the standard character mark Ceragon Networks and our logo in the United States, Israel, and the European Union; |
| · | for the standard character mark Ceragon Networks in Canada; |
| · | for the standard character mark CERAGON in Russia, Morocco, Israel, Mexico, Malaysia, United States, South Africa, the Philippines, Argentina, Venezuela and Colombia and International Registration (protection granted in Australia, Iceland, Bosnia & Herzegovina, Switzerland, Croatia, Norway, Russia, South Korea, Ukraine, CTM (European Union), Turkey, Singapore, Egypt, Kenya and Macedonia); |
| · | for our design mark for FibeAir in the United States, Israel and the European Union; |
| · | for the standard character mark FibeAir in the United States; |
| · | for the standard character mark CeraView in Israel and the European Union; andUnion. |
| · | For the standard character mark Native2 in India.
|
We have pending trademark applications as follows:
| · | for the standard character mark CERAGON in Japan, Brazil, Indonesia, India, Nigeria, and International Registration (protection pending in China Egypt, Kenya and Vietnam). |
The market for wireless equipment is rapidly evolving, fragmented, highly competitive and subject to rapid technological change. We expect competition, which may differ from region to region, to persist, intensify and increase in the future - especially if rapid technological developments occur in the broadband wireless equipment industry or in other competing high-speed access technologies.
We compete with a number of wireless equipment providers worldwide that vary in size and in the types of products and solutions they offer. Our primary competitors include large wireless equipment manufacturers (“generalists”)referred to as generalists, such as Fujitsu Limited, Huawei Technologies Co., Ltd., L.M. Ericsson Telephone Company, NEC Corporation, Nokia and ZTE Corporation. In addition to these primary competitors, a number of other smaller wireless backhaul equipment suppliers, including Aviat Networks, DragonWave Inc., and SIAE Microelectronica S.p.A offer or develop products that compete with our products.
We also expect consolidation to continue as the wireless equipment market continues to be highly competitive and, as a result, faces strong price pressures. We expect to continue to be a leader in the best-of-breed segment of the wireless backhaul market in terms of market share, technology and innovation, providing significant value to our customers.
We expect that continued market pressures will drive further consolidation within equipment manufacturers competing with us and which focus solely on the best-of-breed segment of the wireless backhaul market. Examples of such previous consolidations are our acquisition of Nera in 2011, of Nera, the acquisition by Dragonwave of the wireless division of Nokia (formerly NSN), and the merger of the wireless divisions of Harris and Stratex Networks.
We expect further consolidations will take place within the “generalists”;generalists; the most recent is the merger between Nokia and Alcatel-Lucent, while Nokia itself is the result of a previous joint venture between Nokia and Siemens, and Alcatel-Lucent is the result of a previous merger between Alcatel and Lucent.
Further market consolidations among industry “generalists”generalists may drive some operators, which seek best-of-breed solutions, to seek “bundled”"bundled" network solutions from these "generalists",generalists, which today, in part, resell our products. This trend may put an additional strain on our competitiveness.
We believe we compete favorably on the basis of:
| · | our focus on the mobile market and active involvement in shaping next generation standards and technologies, which deliver best customer value; |
| · | Ourour ability to expand to other vertical markets such as oil and gas and public safety, by drawing upon the capabilities of our technologies and solutions; |
| · | product performance, reliability and functionality, which assist our customers to achieve the highest value; |
| · | range and maturity of product portfolio, including the ability to provide solutions in every widely available microwave and millimeter-wave licensed and license-exempt frequency, as well as our ability to provide both circuit switch and IP solutions and therefore to facilitate a migration path for circuit-switched to IP-based networks; |
| · | focus on high-capacity, point-to-point microwave technology, which allows us to quickly adapt to our customers’customers' evolving needs; |
| · | range of rollout services offering for faster deployment of an entire network and reduced total cost of ownership; and |
| · | support and technical service, experience and commitment to high quality customer serviceservice. |
Our products also indirectly compete with other high-speed communications solutions, including fiber optic lines and other wireless technologies.
The Industrial Research and Development Administration, formerlyIsrael Innovation Authority (formerly – the Israeli Office of Chief ScientistScientist).
The Government of Israel encourages research and development projects in Israel through the Industrial Research and Development Administration,Israel Innovation Authority, formerly and more commonly known as the OCS,Israeli Office of Chief Scientist (the "OCS"), pursuant to and subject to the provisions of the R&D Law. We received grants from the OCS for several projects, and may receive additional grants in the future.
Under the R&D Law, we applied for and were granted R&D grants. Asterms of the certain grants, a recipient of such grants we werecompany may be required to pay the OCS royalties ranging between 3% to 5% of the revenues derivinggenerated from sales ofits products or services incorporating know how developed withinwith funds received from the OCS, until 100% of the dollar value of the grant is repaid (plus LIBOR(along with interest).
In December 2006, we entered into an agreement with the OCS to conclude our R&D grants sponsored by the OCS, and by 2008 completed paying all debts remaining therefrom. In each of 2013 and 2014 we received approval for a new R&D grant from the Government of Israel through the OCS in amounts of approximately $0.7 million and $0.9 million respectively, which were already received (the "Generic Plan"). The Generic Plan requires us to comply with the requirements of the R&D Law in the same manner applicable to previous grants, provided, however, that the obligation to pay royalties on sales of products based on technology or know how developed with the Generic Plan does not apply to us, but may apply, under certain conditions, to a recipient of the technology or know how developed with the Generic Plan, to the extent such is sold and/or transferred. Final approval of the 2015 grant under the Generic Plan is still pending.
The R&D Law generally requires that a product developed under a grant program be manufactured in Israel.Israel, in accordance with such manufacturing volume as was detailed in the original grant application. However, upon the approval of the OCS, some of the manufacturing volume may be performed outside of Israel. Such approval may only be granted under various conditions, such as theand entails repayment of increased royalties in an amount equal to up to 300% of the total grant amount, plus applicable interest, or increase of 1% in the royalty rate, depending on the extent of the manufacturing that is to be conducted outside of Israel.Israel, and an increase of 1% in the royalty rate.
The R&D Law also provides that know-how (and its derivatives) developed with funds received from the OCS and any right derived therefrom may not be transferred to third parties, unless such transfer was approved in accordance with the R&D Law. The research committee operating under the OCS may approve the transfer of know howknow-how between Israeli entities, provided that the transferee undertakes all the obligations in connection with the R&D grant as prescribed under the R&D Law. In certain cases, such research committee may also approve a transfer of know howknow-how outside of Israel, in both cases subject to the receipt of certain payments, calculated according to a formula set forth in the R&D Law, in amounts of up to six (6) times the total amount of the OCS grants, plus applicable interest (in case of transfer outside of Israel), and three (3) times of such total amount (in case thesufficient R&D activity related to the know how remains in Israel). Such approvals are not required for the sale or export of any products resulting from such R&D activity.
Further, the R&D Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient; it law requires therecipient. The grant recipient, and its controlling shareholders, and foreign interested parties tomust notify the OCS of any change in control of the grant recipient or a change in the holdings of the means"means of controlcontrol" of the recipient that resultsresult in a non-Israeli becoming an interested party directly in the recipient andrecipient. The R&D Law also requires the new interested party to undertake to the OCS to comply with the R&D Law. For this purpose, “control”"control" means the ability to direct the activities of a company (other than any ability arising solely from serving as an officer or director of the company), including the holding of 25% or more of the Means"means of Control,control", if no other shareholder holds 50% or more of such Means"means of Control. “Meanscontrol." "Means of control”control" refer to voting rights or the right to appoint directors or the chief executive officer. An “interested party”"interested party" of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares will be required to notify the OCS that it has become an interested party and to sign an undertaking to comply with the R&D Law. In addition, the rules of the OCS may require additional information or representations with respect to such events.
The R&D Law has been amended effective as of January 1, 2016. Under the amendment, athe new Industrial Research and Development AdministrationIsrael Innovation Authority has been established and is in charge of implementing the governmental policy regarding the R&D Law (and has been given discretion in the implementation of the R&D Law for such purpose). However, and until prescribed otherwise, the existing provisions relating to the transfer of knowhow and manufacturing outside of Israel, as detailed above, shall remain in full force and effect with respect to benefits and funding approved or received prior to such date.
In December 2006, we entered into an agreement with the OCS to conclude our R&D grants sponsored by the OCS, and by 2008 completed paying all debts remaining therefrom. In 2013 and 2014 we received approval for new R&D grants from the Government of Israel through the OCS in amounts of approximately $0.7 million and $0.9 million respectively. In 2015 and 2016 we received approval for additional R&D grants in a total amount for the two years, of approximately $1.2 million, part of which have already been received (together the "Generic Plan"). The Generic Plan requires us to comply with the requirements of the R&D Law in the same manner applicable to previous grants, provided, however, that the obligation to pay royalties on sales of products based on technology or know how developed with the Generic Plan does not apply to us, but may apply, under certain conditions, to a recipient of the technology or knowhow developed with the Generic Plan, to the extent such is sold and/or transferred. In addition, we may manufacture part of the products developed under the program outside of Israel, up to the percentages declared in our applications for such grants.
In addition to the grants described above, in March 2014, we agreed to participate in two “Magnet”"Magnet" Consortium Programs (the “Programs”"Magnet Programs") sponsored by the OCS, which grants do not bear any royalty obligations. In the framework of the Magnet Programs, intended to support innovative generic industry-oriented technologies, we are to cooperate with additional companies and research institutes. With respect to each of the years 20142015 and 20152016 we received an approval from the OCS for a sum of $1.4$2.5 million in the aggregate under the Magnet Programs, most of which was already received. In 20162017 we expect to receive additional sum of approximately $1$0.8 million, subject to our compliance with the terms of the Magnet Programs. The R&D Law applies to the Magnet Programs, including the restrictions on transfer of know how or manufacturing outside of Israel, as described above.
C. OrganizationalOrganizational Structure
We are an Israeli company that commenced operations in 1996. The following is a list of our significant subsidiaries:
| | | | | |
| | | | | |
Ceragon Networks, Inc. | | New Jersey | | | 100 | % |
Ceragon Networks AS | | Norway | | | 100 | % |
Ceragon Networks (India) Private Limited | | India | | | 100 | % |
Ceragon Networks S.A. de CV | | Mexico | | | 100 | % |
D. Property, Plants and Equipment
Our corporate headquarters and principal administrative, finance and operations departments are located at a leased facility of approximately 65,000 square feet of office space and 5,750approximately 7500 square feet of warehouse space, in Tel Aviv, Israel. The leases for the majority of this space will expire December 31, 2017.
We also lease the following space at the following properties:
| · | in the United States, we lease approximately 5,350 square feet of new premises in Overlook at Great Notch, New Jersey, expiring September, 2021 and approximately 12,461 square feet of office space in Richardson, Texas expiring May 2018. The lease of our old premises in Paramus New Jersey expired in April 2015. |
| · | in Norway we lease approximately 12,000 square feet of office space in Bergen, expiring in May 2019; |
| · | in India, we lease approximately 11,737 square feet of office space in New Delhi expiring in October 2019. |
| · | In Mexico we lease approximately 4,306 square feet of office space in Mexico City, Mexico, expiring in March 2019. |
We also lease space for other local subsidiaries to conduct pre-sales and marketing activities in their respective regions.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in conjunction with our consolidated financial statements, the notes to those financial statements, and other financial data that appear elsewhere in this annual report. In addition to historical information, the following discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth in “Risk Factors”"Risk Factors" and elsewhere in this annual report. Our consolidated financial statements are prepared in conformity with U.S. GAAP.
Overview
We are the number one wireless backhaul specialist in terms of unit shipments and global distribution of our business. We provide wireless backhaul solutions that enable cellular operators and other wireless service providers to deliver voice and data services, enabling smart-phone applications such as Internet browsing, social networking applications, image sharing, music and video applications. Our wireless backhaul solutions use microwave and millimeter wave technology to transfer large amounts of telecommunication traffic between base stations and small-cells and the core of the service provider’sprovider's network.
We also provide our solutions to other non-carrier vertical markets such as oil and gas companies, public safety network operators, businesses and public institutions, broadcasters, energy utilities and others that operate their own private communications networks. Our solutions are deployed by more than 460 service providers of all sizes, as well as in hundreds of private networks, in nearly 130 countries.
In March 2013, we received $113.7 million of credit facilities which replaced all of the Company’sCompany's previous credit facilities. In October 2013 and again in April 2014, we obtained the bank syndicate's consent for temporary less restrictive financial covenants. On March 31, 2015 we reached an agreement with the bank syndicate under which our existing credit facility agreement was amended to reflect a reduction in our credit facility and to include, among other changes, certain relief under our covenants as well as an extension of the agreement until June 30, 2016. On March 10, 2016 we signed a furtheran additional amendment to the credit facility agreement, which extended the credit facility repayment date tilluntil March 31, 2017 under the same terms of the previous amendment. On March 30, 2017 we signed another amendment to the credit facility agreement, which extended the credit facility repayment date until March 31, 2018. Following this last amendment, the credit facility stands at a total sum of $100.2 million. For a more detailed discussion see below under B. Liquidity and Capital Resources.
In December 2014, we announced a significant new restructuring of our operations to reduce our operational costs. The restructuring plan is intended to realign operations, reduce head count and undertake other cost reduction measures in order to lower our breakeven point and improve profitability. Once the restructuring and other cost reduction measures are completed, they were expected to result in annual savings of approximately $18 to $22 million. The restructuring plan includes relocating certain offices and reducing staff functions and some operations positions, as well as other measures. In 2014 and the first quarter of 2015, we incurred restructuring charges of $6.8 million and $1.2 million, respectively, both related primarily to the 2014 restructuring plan. In addition, in the fourth quarter of 2014 we incurred a $4.4 million write-off of discontinued product inventory related to the restructuring plan.
In August 2014, the Company completed a public offering of its shares on Nasdaq. Total net proceeds from the issuance amounted to approximately $45.1 million, net of issuance expenses in the amount of $400 thousand.
In April 2014, we signed an agreement with Eltek ASA to settle all claims, counter claims, legal proceedings, and any other contingent or potential claims regarding alleged breaches of representations and warranties contained in the purchase agreement governing the Nera Acquisition in January 2011. Pursuant to the settlement agreement, we received $17 million in cash.
Industry Trends
Market trends have placed, and will continue to place, pressure on the selling prices for our products. Our objective is to continue to meet the demand for our solutions while at the same time increasing our profitability. We seek to achieve this objective by constantly reviewing and improving our execution in, among others, development, manufacturing and sales and marketing. Set forth below is a more detailed discussion of the trends affecting our business:
| · | Growing Number of Global Wireless Subscribers. Growth in the number of global wireless subscribers is being driven by the availability of inexpensive cellular phones and more affordable wireless service, particularly in developing countries and emerging markets, and is being addressed by expanding wireless networks and by building new networks. |
| · | Increasing Demand for Mobile Data Services. Cellular operators and other wireless service providers are facing increasing demand from subscribers to deliver voice and data services, including Internet browsing, music and video applications. |
| · | The emergence of small cells in particular markets (North America, Asia Pacific) present wireless backhaul challenges that differ from those of traditional macro-cells. Small cells architectures can be used to provide a second layer of coverage in 4G networks, resulting in higher throughput and data rates for the end-user. While adoption by some service providers in North America and Asia Pacific, other service providers around the globe and which have previously considered the deployment of 4G small cells have come to the conclusion that the benefit of additional coverage and capacity versus the required investment, does not provide significant value and hence have deferred the consideration of small cells radio access network to a time in which 5G radio access networks shall be considered. |
| · | Transition to IP-based Networks. Cellular operators and other wireless service providers are deploying all-IP networks and upgrading their infrastructure to interface with an IP-based core network in order to increase network efficiency, lower operating costs and more effectively deliver high-bandwidth data services. |
| · | Software Defined Networking (SDN) deliver network architectures that transition networks from a world of task-specific dedicated equipment elements, to a world of optimization of network performance through network intelligence. |
| · | Network sharing business models are being adopted by mobile network operators (MNOs) who are faced with increasing competition from over-the-top players and an ever-growing capacity crunch. Network sharing can be particularly effective in the backhaul portion of mobile networks, especially as conventional macro cells evolve into super-sized macro sites that require exponentially more bandwidth for backhaul. |
We are also experiencing pressure on our sale prices as a result of several factors:
| · | Increased Competition:Competition. Our target market is characterized by vigorous, worldwide competition for market share and rapid technological development. These factors have resulted in aggressive pricing practices and downward pricing pressures, and growing competition from both start-up companies and well-capitalized telecommunication systems providers. |
| · | Regional Pricing Pressures:Pressures. A significant portion of our sales derives from India, in response to the rapid build-out of cellular networks in this country. For the years ended December 31, 2013, 2014, 2015 and 2015, 8.0%2016, 24.8%, 24.8%30.3% and 30.3%27.3%, respectively, of our revenues were earned in India. Sales of our products in these markets are generally at lower gross margins in comparison to other regions. Recently, network operators have started to share parts of their network infrastructure through cooperation agreements, which may adversely affect demand for network equipmentequipment. |
| · | Transaction Size:Size. Competition for larger equipment orders is increasingly intenseintensifying due to the fact that the number of large equipment orders in any year is limited. Consequently, we generally experience greater pricing pressure when we compete for larger orders as a result of this increased competition and demand from purchasers for greater volume discounts. As an increasing portion of our revenues is derived from large orders, we believe that our business will be more susceptible to these pressures. |
As we continue to focus on operational improvements, these price pressures may have a negative impact on our gross margins.
As we continue to adjust our geographic footprint, we are increasingly engaged in supplying installation and other services for our customers, often in emerging markets. In this context, we may act as the prime contractor and equipment supplier for network build-out projects, providing installation, supervision and commissioning services required for these projects, or we may provide such services and equipment for projects handled by system integrators. In such cases, we typically bear the risks of loss and damage to our products until the customer has issued an acceptance certificate upon successful completion of acceptance tests. If our products are damaged or stolen, or if the network we install does not pass the acceptance tests, the end user or the system integrator, as the case may be, could delay payment to us and we would incur substantial costs, including fees owed to our installation subcontractors, increased insurance premiums, transportation costs and expenses related to repairing or manufacturing the products. Moreover, in such a case, we may not be able to repossess the equipment, thus suffering additional losses. Also these projects are rollout projects, which involve fixed-price contracts. We assume greater financial risks on fixed-price projects, which routinely involve the provision of installation and other services, versus short-term projects, which do not similarly require us to provide services or require customer acceptance certificates in order for us to recognize revenue.
After a significant decrease in our revenues in 2013 and a slight increasecompared to 2012, there were no material differences in 2014 and 2015, however, in 2015,2016, our revenues decreased compared to 2014 and 2013. However, thisexperienced an additional decrease. This decrease is mainly attributed to the strategy we implemented in order to accelerate our return to profitability, which included managing the revenue mix more carefully, and seeking revised pricing, payment and other terms in certain new orders.orders and our business focus on service providers that seek to resolve their wireless backhaul challenges through solutions, which create higher business value and are willing to pay a premium in order to create this value.
Results of Operations
Revenues. We generate revenues primarily from the sale of our products, and, to a lesser extent, services. The final price to the customer may largely vary based on various factors, including but not limited to the size of a given transaction, the geographic location of the customer, the specific application for which products are sold, the channel through which products are sold, the competitive environment and the results of negotiation.
Cost of Revenues. Our cost of revenues consists primarily of the prices we pay contract manufacturers for the products they manufacture for us, the costs of off the shelf parts, accessories and antennas, the costs of our manufacturing facility, estimated warranty costs, costs related to management of our manufacturing facility, supply chain and shipping, as well as inventory write-off costs and amortization of intangible assets. In addition, we pay salaries and related costs to our employees and fees to subcontractors relating to installation services with respect to our products.
Significant Expenses
Research and Development Expenses. Our research and development expenses consist primarily of salaries and related costs for research and development personnel, subcontractors’subcontractors' costs, costs of materials and depreciation of equipment. All of our research and development costs are expensed as incurred. We believe that continued investment in research and development is essential to attaining our strategic objectives.
Selling and Marketing Expenses. Our selling and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, amortization of intangible assets, trade show and exhibit expenses, travel expenses, commissions and promotional materials.
General and Administrative Expenses. Our general and administrative expenses consist primarily of compensation and related costs for executive, finance, information system and human resources personnel, professional fees (including legal and accounting fees), insurance, provisions for doubtful accounts and other general corporate expenses.
Restructuring costs. Our restructuring expenses consisted primarily of severance and related benefit charges, and to a lesser extent, facilities costs related to obligations under non-cancelable leases for facilities that we ceased to use and other associated costs.
Financial Income (expenses), net. Our financial income (expenses), net, consists primarily of interest paid on bank debts, gains and losses arising from the re-measurement of transactions and balances denominated in non-dollar currencies into dollars, gains and losses from our currency hedging activity, amortization of marketable securities premium, net, and other fees and commissions paid to banks, offset by interest earned on bank deposits and marketable securities.
Taxes. Our tax expenses consist of current corporate tax expenses in various locations and changes in tax deferred assets and liabilities.liabilities, as well as reserves for uncertain tax positions.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require management to make certain estimates, judgments and assumptions based upon information available at the time they are made, historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented.
Our management believes the accounting policies that affect its more significant judgments and estimates used in the preparation of its consolidated financial statements and which are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
| · | Inventory valuation; and |
| · | Provision for doubtful accounts; |
| · | Stock-based compensation expense; and |
| · | Impairment of goodwill and long-lived assets.accounts. |
Revenue recognition. We generate revenues from selling products to end users, distributors, system integrators and original equipment manufacturers (“OEM”("OEM").
Revenues from product sales are recognized in accordance with ASC topic 605-10, “Revenue recognition”"Revenue Recognition" and with ASC 605-25 “Multiple-Element Arrangements” (“"Multiple-Element Arrangements" ("ASC 605”605"), when delivery has occurred, persuasive evidence of an arrangement exists, the vendor's fee is fixed or determinable, no future obligation exists and collectability is probable.
In case the sale is subject to a right of return, we record a provision for estimated sale returns and stock rotation granted to customers on products in the same period the related revenues are recorded in accordance with ASC 605. These estimates are based on historical sale returns, stock rotations and other known factors.
Pursuant to the guidance of ASU 605-25, “Multiple"Multiple Deliverable Revenue Arrangements”,Arrangements," when a sales arrangement contains multiple elements, such as equipment and services, we allocate revenues to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (‘‘VSOE’’(''VSOE'') if available, third party evidence (‘‘TPE’’(''TPE'') if VSOE is not available, or estimated selling price (‘‘ESP’’(''ESP'') if neither VSOE nor TPE is available. In multiple element arrangements, revenues are allocated to each separate unit of accounting for each of the deliverables using the relative estimated selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy.
In certain arrangements, we consider the sale of equipment and its installation to be two separate units of accounting in the arrangement in which the installation is not essential to the functionality of the equipment, the equipment has value to the customer on a standalone basis and whenever the arrangement does not include a general right of return relative to the delivered item or delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. In such an arrangement, revenues from the sale of equipment are recognized upon delivery if all other revenue recognition criteria are met, and the installation revenues are deferred to the period in which such installation occurs (but not less than the amount contingent upon completion of installation, if any) using relative selling prices of each of the deliverables based on the aforementioned selling price hierarchy.
We determine the selling price in our multiple-element arrangements by reviewing historical transactions, and considering internal factors including, but not limited to, pricing practices including discounting,(including discounting), margin objectives and competition. The determination of ESP is made through consultation with management, taking into consideration the pricing model and strategy.
When sale arrangements include a customer acceptance provision, revenue is recognized when we demonstrate that the criteria specified in the acceptance provision has been satisfied or as the acceptance provision has lapsed and deemed to be attained.
To assess the probability of collection for revenue recognition purposes, we analyze historical collection experience, current economic trends and the financial position of our customers. On the basis of these criteria, we conclude whether revenue recognition should be deferred and recognized on a cash basis.
Deferred revenue includes unearned amounts received in our arrangements, and amounts received from customers but not recognized as revenues due to the fact that these transactions did not meet the revenue recognition criteria.
Inventory valuation. Our inventories are stated at the lower of cost or market value. Cost is determined by using the moving average cost method. At each balance sheet date, we evaluate our inventory balance for excess quantities and obsolescence. This evaluation includes an analysis of slow-moving items and sales levels by product and projections of future demand. If needed, we write off inventories that are considered obsolete or excessive. If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of revenues in the period the revision is made. As of December 31, 2015 our inventory write-off provision was $5.0 million.
Provision for doubtful accounts. We perform ongoing credit evaluations of our trade receivables and maintain an allowance for doubtful accounts, based upon our judgment as to our ability to collect outstanding receivables. Allowance for doubtful accounts is made based upon a specific review of all the overdue outstanding invoices. In determining the provisions, we analyze our historical collection experience, current economic trends, the financial position of our customers and the payment guarantees (such as letters of credit) that we receive from our customers. We also insure certain trade receivables under credit insurance policies. If the financial condition of our customers deteriorates, resulting in their inability to make payments, additional allowances might be required. As of December 31, 2015, our allowance for doubtful accounts was $12.2 million and our trade receivables were $116.6 million. Total expenses for doubtful debt during 2015 amounted to $4.5million. Historically, our provision for doubtful accounts has been sufficient to account for our bad debts.
Taxes on income. We utilize the liability method of accounting for income taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in the past. As a result of our cumulative losses and the utilization of our loss carry forward opportunities, we have recorded valuation allowances to reduce our net deferred tax assets to the amount we believe is more likely than not to be realized. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for any valuation allowance, in the event we were to determine that it is more likely than not that we will be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would increase income in the period such a determination is made. Likewise, should we determine that it is more likely than not that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would be charged to expenses in the period such a determination is made. As a result, in the years ended December 31, 2013, 2014 and 2015 we recorded a tax expense from the adjustment of the deferred tax assets in the amount of approximately $4.0 million, $9.9 million and $2.2 million, respectively.
We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are in accordance with applicable tax laws. As part of the determination of our tax liability, management exercises considerable judgment in evaluating tax positions taken by us in determining the income tax provision and establishes reserves for tax contingencies in accordance with ASC 740 “Income Taxes” guidelines. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation or the change of an estimate based on new information. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate, as well as the related interest and penalties.
Management’s judgment is required in determining our provision for income taxes in each of the jurisdictions in which we operate. The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws. Although we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome, there is no assurance that the final tax outcomes will not be different than those which are reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision, net income and cash balances in the period in which such determination is made.
Stock-based compensation expense. ASC 718, “Compensation- Stock Compensation,” requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated income statement.
We selected the binomial option pricing model as the most appropriate fair value method for our share-option awards based on the market value of the underlying shares at the date of grant. We recognize compensation expenses for the value of our awards, which have graded vesting, based on the accelerated attribution method over the requisite service period, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures and on management’s estimates. If actual forfeitures differ from our estimates, stock-based compensation expense and our results of operations would be impacted.
Stock-based compensation expense recognized under ASC 718 was $3.8 million, $3.3 million and $1.6 million for the years ended December 31, 2013, 2014 and 2015, respectively.
Impairment of Long-Lived Assets.
Our long-lived assets include property and equipment, goodwill and identifiable other intangible assets that are subject to amortization. In assessing the recoverability of our goodwill, property and equipment and other identifiable intangible assets that are held and used, we make judgments regarding whether impairment indicators exist based on our legal factors, market conditions and operating performances. Future events could cause us to conclude that impairment indicators exist and that the carrying values of the goodwill, property and equipment and other intangible assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations.
ASC 350 “Intangible"Intangible – Goodwill and Other,”" requires that goodwill be tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of the company. We have concluded that we have one reporting unit. The goodwill impairment test is a two-step test. Under the first step, the fair value of the company is compared with its carrying value (including goodwill). If the fair value of the company is less than its carrying value, an indication of goodwill impairment exists and we must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the company’scompany's goodwill over the implied fair value of that goodwill. If the fair value of the company exceeds its carrying value, step two does not need to be performed. The fair value of the Company is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of our long-term rate of growth, the period over which cash flows will occur and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value or goodwill impairment for the Company. During 2014, we recognized impairment of goodwill in the amount of $14.8 million primarily from Nera Acquisition.
We are required to assess the impairment of long-lived assets, tangible and intangible, other than goodwill, under ASC 360 “Property,"Property, Plant, and Equipment,”" when events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment indicators include any significant changes in the manner of our use of the assets or the strategy of our overall business, significant negative industry or economic trends and significant decline in our share price for a sustained period. Our 2014 restructuring plan has created the need for such an impairment in 2014. In 2015 no impairment was required.
Upon determination that the carrying value of a long-lived asset may not be recoverable based upon a comparison of aggregate undiscounted projected future cash flows to the carrying amount of the asset, an impairment charge is recorded for the excess of fair value over the carrying amount. We measure fair value using discounted projected future cash flows. During 2014, we recognized impairment of fixed assets in the amount of $2.4 million related to specific assets that will not be used as a result of our restructuring plan. In 2015 and 2016 no impairment was recognized.
Impact of recently issued Accounting Standards:
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016 and interim periods therein and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. The Company has adopted early this standard in the fourth quarter of 2016 on a retrospective basis. Prior periods have been retrospectively adjusted. As a result of the adoption of ASU 2015-17, the Company made the following adjustments to the December 31, 2015 balance sheet: a $1.6 million decrease to current deferred tax assets and a corresponding increase to noncurrent deferred tax asset.
In February 2016, FASB issued ASU 2016-02-Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of their classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. This ASU supersedes the previous leases standard, FASB Accounting Standards Codification Topic 840. The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05,"Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships ("ASU 2016-05"), which clarifies that a change in the counter party to a derivative instrument designated as a hedging instrument does not require de-designation of that hedging relationship, provided that all other hedge accounting criteria are met. The new guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within this fiscal year. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.
In March 2016, FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which affects all entities that issue share-based payment awards to their employees. The amendments in this ASU cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016. This guidance can be applied either prospectively, retrospectively or using a modified retrospective transition method. Early adoption is permitted. The Company does not expect that this new guidance will have a material impact on the Company's consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU2016-13"). ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 also applies to employee benefit plan accounting, with an effective date of the first quarter of fiscal 2022. The amendments in this update are effective for fiscal years beginning after December 31, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements, footnote disclosures and employee benefit plans' accounting.
In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The standard is effective on January 1, 2019. The Company is currently assessing the impact of the adoption of this standard on its consolidated financial statements and footnote disclosures.
In October 2016, FASB issued ASU 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory ("ASU-2016-16"), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year. The new standard should be adopted on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently in the process of evaluating the impact of this new pronouncement on its consolidated financial statements and related disclosures.
In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU-2016-18"). This standard requires the presentation of the statement of cash flows to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. The standard is effective for fiscal years and the interim periods within those fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the timing of adoption and the effects of the adoption of this ASU on the consolidated financial statements.
In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on identifying performance obligations.
The guidance permits two methods of modification: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company currently anticipates adopting the standard using the modified retrospective method rather than full retrospective method. However, the Company is continuing to evaluate the impact of the standard, and the adoption method is subject to change.
The new standard will be effective for the Company beginning January 1, 2018, and adoption as of the original effective date of January 1, 2017 is permitted. The Company will adopt the new standard as of January 1, 2018.
The Company has made progress toward completing its evaluation of the potential changes from adopting this new standard on its financial reporting and disclosures. The Company has evaluated the impact of the standard on majority of its revenue streams and associated contracts. The Company formed an implementation work group and expects to complete the evaluation of the impact of the accounting and disclosure changes on its business processes, controls and systems throughout 2017, design any changes to such business processes, controls and systems, and implement the changes before the end of 2017.
Currently, the Company is analyzing the impact that the adoption of the standard will have on specific performance obligations and variable consideration transactions. In addition incremental costs that are related to sales from contracts signed during the period would require capitalization. The company also will consider if there is a significant financing component if the time between payment and delivery is more than one year.
The Company continues to assess all potential impacts under the new revenue standard.
Comparison of Period to Period Results of Operations
The following table presents consolidated statement of operations data for the periods indicated as a percentage of total revenues.
| | Year Ended December 31 | |
| | 2014 | | | 2015 | | | 2016 | |
Revenues | | | 100 | % | | | 100 | % | | | 100 | % |
Cost of revenues | | | 77.2 | | | | 70.5 | | | | 66.2 | |
Gross profit | | | 22.8 | | | | 29.5 | | | | 33.8 | |
Operating expenses: | | | | | | | | | | | | |
Research and development, net | | | 9.4 | | | | 6.6 | | | | 7.4 | |
Selling and marketing | | | 15.1 | | | | 11.7 | | | | 13.5 | |
General and administrative | | | 6.4 | | | | 6.1 | | | | 6.9 | |
Restructuring costs | | | 1.8 | | | | 0.4 | | | | - | |
Goodwill impairment | | | 4.0 | | | | - | | | | - | |
Other income | | | (5.3 | ) | | | (1.5 | ) | | | (0.7 | ) |
Total operating expenses | | | 31.4 | | | | 23.3 | | | | 27.1 | |
Operating income (loss) | | | (8.6 | ) | | | 6.2 | | | | 6.7 | |
Financial expenses, net | | | 10.2 | | | | 4.2 | | | | 2.1 | |
Taxes on income | | | 1.8 | | | | 1.7 | | | | 0.6 | |
Net income (loss) | | | (20.6 | ) | | | 0.3 | | | | 4.0 | |
| | Year Ended December 31 | |
| | 2013 | | | 2014 | | | 2015 | |
Revenues | | | 100 | % | | | 100 | % | | | 100 | % |
Cost of revenues | | | 69.0 | | | | 77.2 | | | | 70.5 | |
Gross profit | | | 31.0 | | | | 22.8 | | | | 29.5 | |
Operating expenses: | | | | | | | | | | | | |
Research and development, net | | | 11.9 | | | | 9.4 | | | | 6.6 | |
Selling and marketing | | | 18.7 | | | | 15.1 | | | | 11.7 | |
General and administrative | | | 7.4 | | | | 6.4 | | | | 6.1 | |
Restructuring costs | | | 2.6 | | | | 1.8 | | | | 0.4 | |
Goodwill impairment | | | -- | | | | 4.0 | | | | | |
Other income | | | (2.1 | ) | | | (5.3 | ) | | | (1.4 | ) |
Total operating expenses | | | 38.5 | | | | 31.4 | | | | 23.3 | |
Operating income (loss) | | | (7.4 | ) | | | (8.6 | ) | | | 6.2 | |
Financial expenses, net | | | 3.9 | | | | 10.2 | | | | 4.2 | |
Taxes on income | | | 1.8 | | | | 1.8 | | | | 1.7 | |
Net income (loss) | | | (13.1 | ) | | | (20.6 | ) | | | 0.3 | |
Year ended December 31, 2015 compared to year ended December 31, 2016
Revenues. Revenues totaled $293.6 million in 2016 as compared with $349.4 million in 2015, a decrease of $55.8 million, or 16.0%. Revenues in India decreased to $80.2 million in 2016 from $106.0 million in 2015 mainly due to a completion of a significant rollout phase in the network of one of our customers. Revenues in the Africa region decreased to $19.9 million in 2016, from $35.0 million in 2015 primarily due to a slowdown in microwave solutions procurement of a customer group in this region. The global decline in commodity and oil prices have led to a decline in economic growth in the African continent, reducing demand for telecommunications infrastructure. Revenues in the APAC region decreased to $29.7 million in 2016 from $31.9 million in 2015. Revenues in Europe decreased to $43.5 million in 2016 from $48.6 million in 2015. Revenues in North America decreased to $40.2 million in 2016 from $45.9 million in 2015. Revenues in Latin America decreased to $80.1 million in 2016 from $82.3 million in 2015.
Cost of Revenues. Cost of revenues totaled $194.5 million in 2016 as compared with $246.5 million in 2015, a decrease of $52.0 million, or 21%, attributed mainly to:
| · | lower direct material and services costs primarily resulting from lower volume of revenues; |
| · | lower other direct and supply chain costs primarily resulting from lower volume of revenues; and |
| · | the Company's continued product-cost improvement. |
Gross Profit. Gross profit as a percentage of revenues increased to 33.8% in 2016 from 29.5% in 2015. This increase is mainly attributed to product cost improvement as well as pursuing a more selective deal approach.
Research and Development Expenses, Net. Our net research and development expenses totaled $21.7 million in 2016 as compared with $22.9 million in 2015, a decrease of $1.2 million, or 5.4% primarily as a result of decrease of $0.8 million in depreciation expenses, an increase of $0.8 million in OCS (Office of the Chief Scientist) grants, a decrease of $0.6 million in stock based compensation expenses, partially offset by an increase of $1.0 million in salary and salary related expenses.
Our research and development efforts are a key element of our strategy and are essential to our success. We intend to maintain or slightly increase our commitment to research and development, and an increase or a decrease in our total revenue would not necessarily result in a proportional increase or decrease in the levels of our research and development expenditures. As a percentage of revenues, research and development expenses increased to 7.4% in 2016 compared to 6.6% in 2015.
Selling and Marketing Expenses. Selling and marketing expenses totaled $39.5 million in 2016 as compared with $40.8 million 2015, a decrease of $1.3 million, or 3.2%, resulting mainly from a decrease of $0.9 million in office expenses, a decrease of $0.6 million in depreciation expenses, a decrease of $0.3 million in travel expenses, partially offset by an increase of $0.5 million in salary and salary related expenses. As a percentage of revenues, selling and marketing expenses were increased to 13.5% in 2016 from 11.7% in 2015.
General and Administrative Expenses. General and administrative expenses totaled $20.4 million in 2016 as compared with $21.2 million in 2015, a decrease of $0.8 million, or 4.0%. This decrease is attributable primarily to a decrease of $1.5 million in doubtful debt expenses, a decrease of $0.4 million in IT expenses and a decrease of $0.4 million in depreciation expenses, partially offset by an increase in of $1.3 million in salary and salary related expenses and an increase of $0.2 million in stock based compensation expenses. As a percentage of revenues, general and administrative expenses increased to 6.9% in 2016 from 6.1% in 2015.
Restructuring costs. There were no restructuring costs in 2016 as compared with $1.2 million in 2015. Restructuring costs in 2015 were related to completion of the 2014 restructuring plan.
Other income. Other income for 2015 and 2016 included $4.8 million and $1.9 million, respectively, related to the expiration of certain pre-acquisition indirect tax exposures in connection with the Nera Acquisition.
Financial expenses, Net. Financial expenses, net totaled $6.3 million in 2016 as compared with $14.7 million in 2015, a decrease of $8.4 million. This decrease is primarily attributable to a decrease in financial expenses incurred from the re-measurement of assets denominated in or linked to the U.S. dollar in the amount of $6.3 million, mainly related to the change of $3.9 million in the devaluation of assets and liabilities in local currency in Venezuela from $3.0 million in 2015, to appreciation of $0.9 million in 2016, related to currency fluctuations in Venezuela and Venezuelan government limitations on payments for imported goods on foreign currency, in addition to a $1.9 million decrease in bank charges and interest on loans, mainly related to the significant repayment of loans during the year. As a percentage of revenues, financial expenses, net decreased to 2.1% in 2016 compared to 4.2% in 2015.
Taxes on income. Taxes on income, totaled $1.8 million in 2016 as compared with $5.8 million in 2015, a decrease of $4.0 million, mainly attributed to the decrease in our deferred tax expenses of $1.6 million, due to a significant deferred tax assets utilization in 2015, and decrease in FIN 48 reserves of $2.8 million, related to a relative change in our tax exposures, partially offset by an increase of $0.3 million in our current taxes on income, primarily due to our sales and distribution subsidiaries, where the local activities were more profitable.
Net profit. In 2016 the company had $11.4 million in net profit as compared with net profit of $1.0 million in 2015. As a percentage of revenues, net profit increased to 4% in 2016 from a loss of 0.3% in 2015. The increase in net profit was mainly attributable to the decrease in our operating expenses and to the decrease in our financial and tax expenses.
Year ended December 31, 2014 compared to year ended December 31, 2015
Revenues. Revenues totaled $349.4 million in 2015 as compared with $371.1 million in 2014, a decrease of $21.7 million, or 5.8%. Revenues in India increased to $106.0 million in 2015 from $92.1 million in 2014 primarily due to an increase in microwave solutions investment by a couple ofseveral customers, the majority driven by a single customer, offset by a decrease in revenue from our 2014 primary customer due to completion of a major deployment cycle. Revenues in the Africa region decreased to $34.6 million in 2015, from $56.0 million in 2014 primarily due to a slowdown in microwave solutions procurement of a customer group in this region. Revenues in the APAC region decreased to $32.0 million in 2015 from $42.1 million in 2014 primarily due to a completion of deployment cycles in a couple ofseveral customers. Revenues in Europe decreased to $48.6 million in 2015 from $58.5 million in 2014 partially due to the erosion of the Euro against the U.S. Dollar. Revenues in North America increased to $45.9 million in 2015 from $40.4 million in 2014. Revenues in Latin America increased slightly to $82.3 million in 2015 from $82.1 million in 2014.
Cost of Revenues. Cost of revenues totaled $246.5 million in 2015 as compared with $286.7 million in 2014, a decrease of $40.2 million, or 14%, mainly attributed mainly to:
| · | Lower direct material costs primarily resulting from lower volume of revenuesrevenues; |
| · | The Company’sCompany's continued product-cost improvementimprovement; and |
| · | Lower employeesemployee costs primarily as a result of the 2014 restructuring planplan. |
Gross Profit. Gross profit as a percentage of revenues increased to 29.5% in 2015 from 22.8% in 2014. This increase is mainly attributed to the product cost improvement as well as pursuing a more selective deal approach.
Research and Development Expenses, Net. Our net research and development expenses totaled $22.9 million in 2015 as compared with $35.0 million in 2014, a decrease of $12.1 million, or 34.5%, which is primarily attributed to a decrease of approximately $7.8 million in salary and salary related expenses, primarily as a result of the 2014 restructuring plan, a decrease of $0.9 million in subcontractors expenses, a decrease of $0.9 million in stock based compensation expenses, a decrease of $0.6 million in depreciation and an increase of $0.7 million in grants. Our research and development efforts are a key element of our strategy and are essential to our success. We intend to maintain our commitment to research and development and an increase or a decrease in our total revenue would not necessarily result in a proportional increase or decrease in the levels of our research and development expenditures. As a percentage of revenues, research and development expenses decreased to 6.6% in 2015 compared to 9.4% in 2014.
Selling and Marketing Expenses. Selling and marketing expenses totaled $40.8 million in 2015 as compared with $56.1 million 2014, a decrease of $15.3 million, or 27.2%, resulting mainly from a decrease of approximately $10.5 million in salary and related expenses, primarily due to the 2014 restructuring plan, a decrease of $3.0 million in sales and agent commission expenses primarily attributed to a decrease in revenue and a decrease of $1.2 million in travel expenses. As a percentage of revenues, selling and marketing expenses were decreased to 11.7% in 2015 from 15.1% in 2014.
General and Administrative Expenses. General and administrative expenses totaled $21.2 million in 2015 as compared with $23.7 million in 2014; a decrease of $2.5 million, or 10.2%. This decrease is primarily attributable primarily to a decrease of $1.9 million in salary, and salary related expenses, primarily due to the 2014 restructuring plan, a decrease of $0.7 million in IT subcontractors,subcontractor expenses, $0.6 million decrease in legal and consulting expenses, $0.4 million related to liquidation of one of the Company’sCompany's subsidiaries in 2014 and a decrease of $0.5 million in stock based compensation expenses, partially offset by an increase in doubtful debt expenses of $2.2 million. As a percentage of revenues, general and administrative expenses decreased to 6.0% in 2015 from 6.1% in 2014.
Restructuring costs. Restructuring costs totaled $1.2 million in 2015 as compared with $6.8 million in 2014, a decrease of $5.6 million, or 82%. These costs are related to completion of the 2013 and 2014 restructuring plan.
Other income. Other income for 2015 included $4.8 million related to the expiration of certain pre-acquisition indirect tax exposures in connection with the Nera Acquisition. Other income for 2014 included $16.8 million related to thea settlement agreement with Eltek ASA related to the Nera Acquisition and $3.0 million related to the expiration of certain pre-acquisition indirect tax exposures in connection with the Nera Acquisition.
Financial expenses, Net. Financial expenses, net totaled $14.7 million in 2015 as compared with $37.9 million in 2014, a decrease of $23.2 million. This decrease is primarily attributable to a decrease in financial expenses incurred from the re-measurement of assets denominated in or linked to the U.S. dollar and devaluation of assets and liabilities in local currency in Venezuela from $26.6 million in 2014, to $3 million in 2015, due to currency devaluation in Venezuela and Venezuelan government limitations on payments for imported goods in foreign currency. As a percentage of revenues, financial expenses, net decreased to 4.2% in 2015 compared to 10.2% in 2014.
Taxes on income. Taxes on income, totaled $5.8 million in 2015 as compared with $6.5 million in 2014, a decrease of $0.7 million, mainly attributed to the decrease in deferred tax expenses of $7.7 million. This amount was offset by an increase in tax expenses, net related to direct tax exposures of approximately $5.9 million, primarily due to a tax income of $4.8 million, related to expiration of pre-acquisition tax provisions, which was recorded in 2014, and an increase of $1.0 million in our current taxes on income, primarily due to sales and distribution subsidiaries, where the local activities are profitable.
Net profit (loss). In 2015 the companyCompany had a $1.0 million of net profit as compared with a net loss of $76.5 million in 2014. As a percentage of revenues, net profit increased to 0.3% in 2015 from loss of 20.6 % in 2014. The increase in net profit was mainly attributable mainly to the improvement in our gross profit and the decrease in our operating expenses, which were mainly attributable to the 2014 restructuring plan and to the decrease in our financial expenses, mainly due to the reduction of the re-measurement and devaluation effect in Venezuela.
Year ended December 31, 2013 compared to year ended December 31, 2014
Revenues. Revenues totaled $371.1 million in 2014, as compared with $361.8 million in 2013; an increase of $9.3 million, or 2.6%. Revenues in India increased to $92.1 million in 2014 from $26.6 million in 2013, primarily due to a new deployment cycle in a major customer. Revenues in Africa region decreased to $56.0 million in 2014 from $73.7 million in 2013, primarily due to a completion of a major deployment cycle in a major customer. Revenues in the Latin America region decreased to $82.1 million in 2014 from $122.2 million in 2013 due to a completion of a major deployment cycle in a single group customer in this region.
Cost of Revenues. Cost of revenues totaled $286.7 million in 2014, as compared with $249.5 million in 2013 an increase of $37.2 million, or 14.9%. This increase was attributable mainly to:
| · | Higher material costs primarily resulting from change in our revenue mix to one with lower prices of $38.8 million and inventory write-off of discontinued product inventory , in the amount of $4.4 million; partially offset by |
| · | Lower subcontractors’ expenses in the amount of $12.2 million resulting from change in our revenues mix. |
Gross Profit. Gross profit as a percentage of revenues decreased to 22.8% in 2014 from 31.0% in 2013. This decrease was attributable mainly to change in our revenue mix to regions with lower prices.
Research and Development Expenses, Net. Our net research and development expenses totaled $35.0 million in 2014 as compared with $43.0 million in 2013, a decrease of $8.0 million, or 18.5%. The net decrease in our research and development expenses was attributable primarily to a reduction of approximately $6.5 million in salary and related expenses as a result of the 2013 restructuring plan, a decrease of approximately $0.8 million in office related expenses, mainly as a result of the decrease in research and development activities in Norway partially offset by an increase of $0.4 million in grant from the Israeli Office of the Chief Scientist. Our research and development efforts are a key element of our strategy and are essential to our success. We intend to maintain our commitment to research and development and an increase or a decrease in our total revenue would not necessarily result in a proportional increase or decrease in the levels of our research and development expenditures. As a percentage of revenues, research and development expenses decreased to 9.4% in 2014 compared to 11.9% in 2013.
Selling and Marketing Expenses. Selling and marketing expenses totaled $56.1 million in 2014, as compared with $67.7 million in 2013, a decrease of $11.6 million, or 17.2%. This decrease was primarily attributable to a decrease of approximately $4.9 million in salary and related expenses, mainly as a result of the 2013 restructuring plan, a decrease of $1.0 million in commissions as a result of a change in revenue mix, a decrease of $2.1 million in office expenses, mainly related to the closure of offices, a decrease of $1.8 million in travel expenses, and a decrease in stock based compensation expenses of $0.7 million. As a percentage of revenues, selling and marketing expenses were 15.1% in 2014 and 18.7% in 2013.
General and Administrative Expenses. General and administrative expenses totaled $23.7 million in 2014, as compared with $26.8 million in 2013, a decrease of $3.1 million, or 11.6%. This decrease was attributable primarily to a decrease of approximately $1.7 million in salary and related expenses, mainly as a result of the 2013 restructuring plan and, a decrease of $1.3 million in IT subcontractors related to our ERP implementation, partially offset by an increase in doubtful debt expenses of $1.5 million. As a percentage of revenues, general and administrative expenses were 6.4% and 7.4% in 2014 and 2013, respectively.
Restructuring costs. Restructuring costs totaled $6.8 million in 2014 as compared with $9.3 million in 2013, a decrease of $2.5 million, or 27.1%, due to the completion of the 2013 restructuring and a smaller restructuring in 2014.
Goodwill impairment. Goodwill impairment in 2014 included $14.8 million primarily from the Nera Acquisition.
Other income. Other income in 2014 included $16.8 million related to the settlement agreement with Eltek ASA and $3.0 million related to the expiration of certain pre-acquisition indirect tax exposures in connection with the Nera Acquisition. Other income in 2013 included $7.7 million related to the expiration of certain pre-acquisition indirect tax exposures in connection with the Nera Acquisition.
Financial expenses, Net. Financial expenses, net totaled $37.9 million in 2014 as compared with $14.0 million in 2013, an increase of $23.9 million. The increase in the financial expenses is mainly related to a $26.6 million non-recurring finance expense that consisted of $6.1 million of local currency devaluation and $20.5 million of re-measurement of certain assets denominated or linked to the U.S. dollar in Venezuela due to the Venezuelan government limitations on payments for imported goods in foreign currency. As a percentage of revenues, financial expenses, net increased to 10.2% in 2014 as compared to 3.9% in 2013.
Taxes on income. Taxes on income remained flat in 2014. Our current taxes on taxable income in our sales, distribution and manufacturing subsidiaries, where the local activities are profitable, have decreased by $2.2 million. The reduction in tax provisions related to expiration of certain pre-acquisition direct tax exposures in connection with Nera Acquisition has increased by $4.2 million. These changes were offset by an increase in deferred tax expenses of $6.4 million, primarily due to devaluation of tax assets.
Net loss. Net loss totaled $76.5 million in 2014, compared with a net loss of $47.5 million in 2013. As a percentage of revenues, net loss increased to 20.6% in 2014 from 13.1 % in 2013. The increase in net loss was attributable primarily to the increase in financial expenses, and a small decrease in revenue as well as the decrease in gross profit, offset partially by a decrease in operating expenses.
Impact of Currency Fluctuations
We typically derive theThe majority of our revenues in U.S. dollars. Although the majority of our revenues wereare denominated in U.S. dollars, and to a significant portionlesser extent, in Euro, INR (Indian Rupee) and other currencies. Our cost of revenues are primarily denominated in U.S. dollars as well, while a major part of our operating expenses were denominatedare in NIS,New Israeli Shekel (NIS), and to a lesser extent, in Indian INR (Indian Rupee), Euro, NOK (Norwegian Kroner), INR (Indian Rupee), BRL (Brazilian Real) and Euros. Our NIS- denominated expenses consist principally of salaries and related personnel expenses.other currencies. We anticipate that a material portion of our operating expenses will continue to be denominated in NIS.
In addition, becauseFluctuation in the exchange rates between the dollarany of these currencies (other than U.S. dollars) and the NIS,U.S. dollar could significantly impact our results of operations as well as the NOK,comparability of these results in different periods. Even in cases where our revenues or our expenses in a certain currency are relatively modest, high volatility of the INR and the Euro fluctuate continuously, and because exchange rates betweenwith the U.S. dollar and the ARS (Argentine Peso), the VEB (Venezuelan bolivar) and the BRL (Brazilian Real) fluctuated significantly in recent years and continue to fluctuate, exchange rate fluctuations wouldcan still have ana significant impact on our results of operations. For example, in recent years we have suffered a significant adverse impact on our financial results due to fluctuation in the exchange rates of the U.S. dollar compared to the NGN (Nigerian Naira), the ARS (Argentine Peso) and period-to-period comparisons of our results.the VEB (Venezuelan bolivar. We partially reduce this currency exposure by entering into hedging transactions. The effects of foreign currency re-measurements are reported in our consolidated statements of operations. For a discussion of our hedging transactions, please see Item 11.”"QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.”"
Transactions and balances in currencies other than U.S. dollars are re-measured into U.S. dollars according to the principles in ASC topic 830, “Foreign"Foreign Currency Matters”.Matters." Gains and losses arising from re-measurement are recorded as financial income or expense, as applicable.
The following table presents information about the change in exchange rate of several major currencies against the dollar:
| | Change in the U.S. dollar against local currencies | |
| | | | | | | | | | | | | | | | | | |
2011 | | | 7.7 | | | | 3.0 | | | | 3.3 | | | | 7.9 | | | | 0.0 | | | | 8.2 | |
2012 | | | (2.3 | ) | | | (7.5 | ) | | | (2.1 | ) | | | 13.6 | | | | 0.0 | | | | 13.5 | |
2013 | | | (7.0 | ) | | | 9.0 | | | | (4.2 | ) | | | 29.7 | | | | 46.6 | | | | 12.5 | |
2014 | | | 12.1 | | | | 22.3 | | | | 13.5 | | | | 34.2 | | | | 694.6 | | | | 13.3 | |
2015 | | | 0.2 | | | | 15.6 | | | | 10.2 | | | | 34.6 | | | | 74.8 | | | | 32.9 | |
Effects of Government Regulations and Location on the Company’sCompany's Business
For a discussion of the effects of Israeli governmental regulation and our location in Israel on our business, see “Information"Information on the Company – Business Overview – Conditions in Israel”Israel" in Item 4 and the “Risks"Risks Relating to Israel”Israel" as well as the Risk Factor “"Our international operations expose us to the risk of fluctuation in currency exchange rates and restrictions related to cash repatriation”" in Item 3, above.
B. Liquidity and Capital Resources
Since our initial public offering in August 2000, we have financed our operations primarily through the proceeds of that initial public offering, and follow-on offeringofferings and through royalty-bearing grants from the OCS. In the initial public offering, we raised $97.8 million; and through December 31, 2006, we received a total of $18.5 million from the OCS.million. In follow-on public offerings completed in December 2007, November 2013 and August 2014, we raised net amounts of $88.3 million $35.0 million and $45.1 million, respectively. Through December 31, 2006, we received a total of $21.0 million in grants from the OCS.
In January 2011, weMarch 2013, the Company entered into a loan agreement with Bank Hapoalim B.M. in the principal amount of $35 million (the Bank Hapoalim Agreement). The Bank Hapoalim Agreement provided that the principal amount of $35 million bore interest at a rate of Libor + 3.15%, which Libor was updated every three months. The principal amount was to be repaid in 17 quarterly installments from February 19, 2012, through February 19, 2016 and the interest was to be paid in quarterly payments starting as of February 19, 2011. As of December 31, 2015, the loan balance is in the amount of $2.1 million is included in current liabilities section on our balance sheet.
In March 2013, we entered into arevolving credit facility with four banks: Bank Hapoalim B.M. (also the lead - arranger and securities trustee)financial institutions (the "Lenders"), HSBC Bank Plc, Bank Leumi Le’Israel Ltd., and First International Bank Israel Ltd., pursuant tounder which we received $113.7 million of committed credit facilities consistinga sum of up to $ 40.2 million was available in the form of bank guarantees and $73.5 million in credit loans as well as up to $40.2 million for bank guarantees.the form of loans. The credit facilityagreement replaced all of the Company’s existingCompany's previous credit facilities, includingfacilities. Each Lender operated its own portion of the Bank Hapoalim Agreement, and other short term credit facilities with other banks. Borrowings will bear floating interest at a base rate plus an applicable spread of up to 3% per annum. facility.
The credit facilities arefacility is secured by (1) a floating charge over all ourCompany assets as well as several customary fixed charges on specific assets, and (2) floating and fixed charges over our bank accountswas subject to certain financial covenants.
The Lenders are able to accelerate repayments in certain events of default including insolvency, failure to comply with financial covenants or a change of control (as defined under the banks. In the frameworkIsrael Securities Law) of the Company.
During 2014 and 2015 the Company amended its credit facility we undertook certainarrangements. The loan facility was reduced gradually to $50 million and adjustments were made to several financial covenants, interest rates and other standard covenants, including not to distribute dividends (unless certain terms are met) without the banks’ prior written consent pursuant to the agreement. In October 2013 and againfees in April 2014, we obtained the bank syndicate's consent for temporary less restrictive financial covenants. Mostlight of the less restrictive financial covenants shall be in effect until October 1, 2014, except for one less restrictive financial covenant which remained in effect until March 31, 2015. After each date, the respective original covenants again apply. According to the April 2014 amendment, the available credit line has been reduced by $5 million on January 1, 2015 and additional $5 million on April 1, 2015.Company's performance during that period of time. In addition the termsCompany was allowed to discount a letter of the credit facility agreement determined that if the Company does not meet the revised EBITDA covenantfrom one of its customers up to $54 million which was in the third quarter of 2014, the available credit line will be reduced further byaddition to an additional $5 million.existing $20 million receivables factoring limit.
OnIn March 31, 20152016 the agreement with the Lenders was extended until March 2017 and in December 2016 the Company signed ananother amendment to its agreement with the four banksLenders to better align itsincrease the allowed discounting activities of letter of credit facility termsto $94 million.
In March 2017 the Company signed an additional amendment to its current needs. The main changes consist of:
| a. | An increase in the allowed accounts receivable discounting activities of one of the Company’s main customers by $34 million to an amount of up to $54 million; |
| b. | A gradual reduction of the maximum amount of credit facility for loans from $63.5 million (starting April 1, 2015) to $50 million by February 28, 2016; |
| c. | A gradual reduction in minimum cash covenant from $20 million to $15 million by October 1, 2015; |
| d. | An extension of the credit facility repayment date to June 30, 2016 (from March 14, 2016); |
| e. | Changes in the equity related covenants definition to exclude goodwill and Intangible Assets from the calculation, as well as reduction of the minimum total shareholders’ equity value to $85 million and reduction of the minimum ratio of total shareholders’ equity to total assets ratio to 0.27; and |
| f. | Other changes primarily increase in the maximum spread of interest chargeable to 3.5% and other bank fees |
On December 31, 2014, based onagreement with the previous covenants, the Company was in breach of ratio of total shareholders’ equityLenders to total assets. As part of the amendment to the credit facility, the banks agreed to apply the new covenant new term retroactively. Therefore, subject to this amendment, on December 31, 2014 the Company met all the covenants and expects to continue meeting these covenants.
On March 10, 2016 we signed a further amendment to the credit facility agreement, which extendedextend the credit facility repayment date tillto March 31, 2017 under2018. Under this amendment, one of the four banks had to terminate its participation in the agreement because of regulatory constraints and its share in the credit facility was re-distributed by the other three on a pro-rata basis. In addition, the credit facility for bank guarantees was increased to $50.2 million. Other change adjusted the fees and interest spread to the same termslevels of the amendmentoriginal agreement from March 31, 2015. As of December 31, 2015, we sold trade receivables by factoring2013, reflecting the Company's return to several financial institutions in the total amount of $14.4 million. In accordance with our agreement with the bank syndicate we may sell trade receivables up to an amount of $20 million.profitability.
In the past few years we have initiated a fewseveral restructuring plans;plans - during the fourth quarter of 2012 we initiated a restructuring plan to improve our operating efficiency and during the fourth quarter of 2013 we initiated a restructuring plan to reduce operational costs. The restructuring costs in 2013 amounted to $9.3 million. In December 2014, we announced a significant new restructuring of our operations to reduce our operational costs. The restructuring costs in 2014 amounted to $6.8 million. In the first quarter of 2015 we incurred additional restructuring costs in a sum of $1.2 million, related to the 2014 restructuring plan. All three restructuring plans referred to above contributed significantly contributed to the reduction in our operating expenses for the years ended 2013, 2014, 2015 and 2015, respectively.2016. In the year ended December 31, 20152016 our capital expenditures were $5.3$8.2 million, primarily for the development of our new IP-20 product family and its production lines.
As of December 31, 2015,2016, our debt from financial institutions amounted to $32.8 million excluding current maturities of long-term loan in the amount of $2.1$17.0 million.
As of December 31, 2015,2016, we had approximately $36.3 million in cash and cash equivalents, out of which $1.0$0.4 million is located in Venezuela. This country is regulated forIt may be difficult to transfer foreign currency exchange, which impairs the availability of that cash outside of the country.Venezuela due to foreign currency restrictions.
As of December 31, 2015,2016, our cash investments were comprised from 100%entirely of short-term, highly liquid investments with original maturities of up to three months. Most of these investments are in U.S. dollars.
Net cash provided by operating activities was $16.1 million for the year ended December 31, 2015.
Net cash used in operating activities was $32.3 and $29.5 million for the year ended December 31, 2014 and 2013, respectively.
In 2015,2016, our $16.1$25.8 million in cash provided by operating activities was affected by the following principal factors:
| · | our net income of $11.4 million; |
| · | a $15.7 million decrease in trade and other receivables, net; |
| · | $10.0 million of depreciation and amortization expenses; and |
| · | a $4.7 million decrease in inventories. |
These factors were offset by:
| · | a $11.4 million decrease in trade payables and accrued expenses, net; and |
| · | a $6.2 million decrease in deferred revenues paid in advance. |
In 2015, our $16.1 million in cash provided by operating activities was affected by the following principal factors:
| · | our net income of 1.0 million; and |
| · | a $40.2 million decrease in trade and other receivables, net; and |
| · | a $12.2$12.2 million of depreciation and amortization expenses; and |
| · | a $10.2 million decrease in inventories;inventories. |
These factors were offset by:
| · | a $41.5 million decrease in trade payables and accrued expenses, net; and |
| · | a $8.8 million decrease in deferred revenues paid in advance;advance. |
In 2014, our $32.3 million in cash used in operating activities was affected by the following principal factors:
| · | our net loss of 76.5$76.5 million; and |
| · | a $22.6 million increase in trade and other receivables, net;net. |
These factors were offset by:
| · | a $14.8 million impairment of goodwill; |
| · | a $13.5$13.5 million of depreciation and amortization expenses; |
| · | a $9.7 million increase in deferred revenues paid in advance; |
| · | a $8.9 million increase in trade payables and accrued expenses, net; and |
| · | a $9.8 million decrease in deferred tax asset; |
In 2013, our $29.5 million cash used in operating activities was affected by the following principal factors:
| · | our net loss of $47.5 million;asset. |
| · | a $21.0 million decrease in trade payables, net of accrued expenses; and |
| · | a $8.8 million decrease in deferred revenues paid in advance; |
These factors were offset by:
| · | a $15.6 million of depreciation and amortization expenses; |
| · | a $15.5 million decrease in trade receivables, net; and |
| · | a $3.6 million decrease in deferred tax asset; |
Net cash used in investing activities was approximately $8.2 million for the year ended December 31, 2016, as compared to net cash used in investing activities of approximately $4.7 million for the year ended December 31, 2015, as compared toand net cash used in investing activities of approximately $7.5 million for the year ended December 31, 2014, and net cash used in investing activities of approximately $23.8 million for2014. In the year ended December 31, 2013.2016, our purchase of property and equipment of $8.2 million and our investment in marketable securities of $0.2 million, were partially offset by proceeds from maturities of short-term bank deposits of $0.2 million. In the year ended December 31, 2015, our purchase of property and equipment of $5.3 million, were partially offset by proceeds from maturities of short-term bank deposits of $0.4 million. In the year ended December 31, 2014 our purchase of property and equipment of $12.7 million were partially offset by proceeds from sales of marketable securities of $5.2 million. In the year ended December 31, 2013 our investment in marketable securities of $7.9 million and purchase of property and equipment of $16.4 million, were offset partially by proceeds from sales of marketable securities of $0.5 million.
Net cash used in financing activities was approximately $15.8$17.8 million for the year ended December 31, 20152016 as, compared to approximately $15.8 million net cash used in financing activities for the year ended December 31, 2015 and net cash provided by financing activities which was approximatelyof $38.8 million for the year ended December 31, 2014 and net cash provided by financing activities of $49.6 million for2014. In the year ended December 31, 2013.2016, our net cash used in financing activities was primarily due to our repayment of a bank loan of $17.9 million. In the year ended December 31, 2015, our net cash used in financing activities was primarily due to our net repayment of a bank loan of $16.0 million. In the year ended December 31, 2014, our proceeds from issuance of shares, net of $45.1 million and proceeds from financial institutions of $22.7 million were partially offset by repayment of a bank loan of $29.0 million. In the year ended December 31, 2013, our proceeds from exercises of share options of $1.1 million, proceeds from issuance of shares, net of $35.0 million and proceeds from financial institutions, net of $23.7 million, were offset partially by repayment of a bank loan of $10.2 million.
For more details concerning the Company's commitments, please see below ITEM 5. "OPERATING AND FINANCIAL REVIEW AND PROSPECTS As- F. Tabular Disclosure of December 31, 2015, our principal commitments consisted of $9.4 million for obligations outstanding under non-cancelable operating leases.Contractual Obligations."
Our capital requirements are dependent on many factors, including working capital requirements to finance the business activity of the Company, and the allocation of resources to our research and development, efforts, as well as our marketing and sales activities. We anticipateplan on continuing to engage in raising fundsraise capital as we may be requiredrequire, subject to changes in our business activities.
In March 2016 the Company signed a further amendment to its agreement with the four financial institutions to extend the credit facility repayment date to March 31, 2017. We believe that current cash and cash equivalent balances together with the credit facility available based on the agreement with the financial institutionLenders will be sufficient for our requirements through at least the next 12 months.
C. | Research and Development |
We place considerable emphasis on research and development to improve and expand the capabilities of our existing products, to develop new products with(with particular emphasis on equipment for emerging IP-based networks,networks) and to lower the cost of producing both existing and future products. We intend to continue to devote a significant portion of our personnel and financial resources to research and development. As part of our product development process, we maintain close relationships with our customers to identify market needs and to define appropriate product specifications. In addition, we intend to continue to comply with industry standards and, in order to participate in the formulation of European standards, we are full members of the European Telecommunications Standards Institute.
Our research and development activities are conducted mainly at our facilities in Tel Aviv, Israel, and also at our subsidiaries in Greece and Romania. As of December 31, 2015,2016, our research, development and engineering staff consisted of 190204 employees. Our research and development team includes highly specialized engineers and technicians with expertise in the fields of millimeter-wave design, modem and signal processing, data communications, system management and networking solutions.
Our research and development department provides us with the ability to design and develop most of the aspects of our proprietary solutions, from the chip-level, including both ASICs and RFICs, to full system integration. Our research and development projects currently in process include extensions to our leading IP-based networking product lines and development of new technologies to support future product concepts. In addition, our engineers continually work to redesign our products with the goal of improving their manufacturability and testability while reducing costs.
Our research and development expenses were approximately $21.7 million or 7.4% of revenues in 2016, $22.9 million or 6.6% of revenues in 2015, and $35.0 million or 9.4% of revenues in 2014, $43.0 million or 11.9% of revenues in 2013.2014.
Intellectual Property
For a description of our intellectual property see Item 4. “INFORMATION"INFORMATION ON THE COMPANY – B. Business Overview - Intellectual Property.”
D. Trend Information
For a description of the trend information relevant to us see discussions in Parts A and B of Item 5.”"OPERATING AND FINANCIAL REVIEW AND PROSPECTS.”"
We are not party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent liabilities.
The following table lists the name, age and position of each of our current directors and executive officers:
Set forth below is a biographical summary of each of the above-named directors and executive officers.
There are no arrangements or understandings of which we are aware relating to the election of our directors or the appointment of executive officers in our Company. In addition, there are no family relationships among any of the individuals listed in this sectionSection A (Directors and Senior Management).
We have a performance-based bonus plan, which includes our executive officers. The plan is based on our overall performance, the particular unit performance, and individual performance. A non-material portion of the performance objectives of our executive officers are qualitative. The measureablemeasurable performance objectives can change year over year, and are a combination of financial parameters, such as revenues, booking, gross profit, regional operating profit, operating income, net income and collection. The plan of our executive officers is reviewed and approved by our compensation committeeCompensation Committee and boardBoard of directorsDirectors annually (and with respect to our CEO, also by our shareholders), as isare any bonus payment ofpayments to our executive officers made under such plan.