Peter Salkowski - IR Chuck Kissner - Executive Chairman Mike Pangia - President & CEO Ned Hayes - SVP & CFO.

Rich Valera - Needham & Company Aaron Yu - Singular Research.

Good day, and welcome to the Aviat Networks Fourth Quarter and Fiscal 2014 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Peter Salkowski. Please go ahead, sir..

Thank you, Elizabeth. Good afternoon, everyone, and welcome to Aviat Networks preliminary fiscal fourth quarter 2014 results conference call. I’m joined today by Chuck Kissner, Executive Chairman of the Board; Mike Pangia, President and Chief Executive Officer; and Ned Hayes, Senior Vice President and Chief Financial Officer.

During today’s call, management may make forward-looking statements regarding Aviat’s business, including statements related to the projections of earnings and revenues, business drivers, the timing and capabilities of new products, network expansion by mobile and private network operators and variations of economic recovery in different regions.

These and other forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements.

Please note that these forward-looking statements reflect the company’s opinions only as of the date of this call and the company undertakes no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events.

For more information, please see the press release and filings made by the company with the SEC. These can be found on the Investor Relations section of Aviat Networks website at www.aviatnetworks.com. In addition, during today’s call, management will be referencing both GAAP and non-GAAP financial measures.

A copy of the press release and financial tables, which include a GAAP to non-GAAP reconciliation and other supplemental financial information, is available on the Investor Relations section of the company’s website. In late July of this year, Chuck Kissner transitioned into the Executive Chairman role for Aviat Networks.

In this new role, Chuck will kick off today’s call with some opening remarks.

Chuck?.

Thanks, Peter. It’s only been a few weeks since I was appointed as Executive Chairman. I wanted to take this opportunity to emphasize that my expanded role is to support Mike and the entire management team at Aviat.

What you’ll hear today is that in the midst of an improving but challenging market, they’ve made progress in the fourth quarter in stabilizing revenue, growing bookings, reducing OpEx, and rebuilding the cash balance.

I’m sure most of you listening to this call are probably aware the Board and Mike asked me to spend more time in the company to help management fine-tune the company’s near-term business improvement tactics, its longer-term product and services planning and to work closely with them on the company’s strategic direction.

Before providing comments later regarding the future direction of the company, Mike will share highlights from the recently completed fiscal fourth quarter and the fiscal year, highlight the performance of our two largest geographic markets and provide an update on our product initiatives.

Ned will then review the preliminary fiscal fourth quarter and full-year financial results as well as to provide guidance for the fiscal first quarter of 2015 with some visibility into the year.

Mike?.

Thanks, Chuck. I’ll start my prepared remarks by stating how delighted I am to have Chuck working closely with the executive team. Now is an optimal time for Chuck to take on this new role, enabling him to have a more direct impact, and for him to build on our recent progress.

I believe Aviat and its shareholders are going to benefit from his extensive knowledge of the wireless transmission industry. With that I’d now like to turn your attention to our preliminary fiscal 2014 fourth quarter and full-year results. Total revenue for the fourth quarter was $85.9 million, resulting in a non-GAAP loss of $0.13 per share.

Sequentially, revenue was up $4.5 million while non-GAAP operating expenses declined by approximately $2 million. As a result of these improvements, our cash balance increased by $2.4 million in the quarter and we ended the year with cash and equivalents of nearly $49 million.

While encouraged by the sequential revenue and cash improvements we made in the fourth quarter, I’m even more encouraged by the signs of an improving pace of business that we experienced from a bookings perspective.

Our fourth quarter book-to-bill ratio was substantially above 1, and as a result of two consecutive quarters of higher bookings, our backlog has increased considerably, leading to an enhanced line of sight for fiscal 2015. Ned will discuss our fourth quarter financials in more detail in a few minutes. Turning briefly to our full-year results.

Fiscal 2014 revenue was $346.5 million, resulting in a non-GAAP loss per share of $0.57. Fiscal 2014 revenue was impacted by reduced spending by two of our largest existing customers.

Earlier this year, we took actions to improve our cost structure and focused on generating cash and operating leverage under a wider scenario or wider range of scenarios.

Our sequentially improving numbers are a result of these efforts and we are dedicated to making additional improvements that generate significantly better results in fiscal year 2015. Accordingly, we expect the company to be cash breakeven for the first half of fiscal 2015 and to generate cash for the full fiscal year.

Now, I'd like to provide some color on our two largest geographic regions, North America and Africa. I'll then share some product highlights before handing the call over to Ned.

Starting with North America, orders in North America increased 40% sequentially and 50% year-over-year in the fourth quarter fueled by a previously announced $19 million project in the public safety segment on top of continued steady demand from the mobile segment and additional new business in low-latency applications.

For the fiscal year, North America orders were up approximately 9% on a year-over-year basis.

Regarding our North America mobile operator business, while we saw an anticipated reduction in demand from our largest North American customer in fiscal year 2014, we still grew our geographic footprint in the account, and qualified new solutions with them for small cell backhaul and disaster recovery applications.

In addition, demand from our regional U.S. mobile operator customers increased over the year and we remain in consideration for upcoming requirements with two other national U.S. carriers.

As for our North America public safety business, we continue to position ourselves as the leading independent provider for mission-critical networks in North America. Recently, we received FIT certification for our strong security solution.

This certification covers network management security, payload encryption, as well as physical security, all considered increasingly important in the future state, local government, and other public safety networks.

We see North America as a solid and promising market for Aviat and I'm especially pleased with the year-over-year growth in our North American maintenance and network operations services, which not only provides multiple years of recurring revenue, but strengthens the relationship with our customers and improves our ability to satisfy their current and future needs.

Moving now to Africa. By far, the biggest impact to our fiscal 2014 results was the reduction in spending by MTN, our largest customer. MTN reported their 2014 interim results in early August, which showed that their first-half 2014 CapEx spending was down approximately 28% when compared to the same period in 2013.

In Nigeria, MTN's largest operating company and Aviat's largest customer within the MTN Group, CapEx spending declined by over 50% in the first half of the calendar year versus the same period in the prior year. For the first half of calendar 2014, MTN's CapEx spending totaled only 35% of the allocated full year amount.

We attribute MTN’s slowdown in spending to a refocusing of network expansion priorities and tighter processes around inventory consumption. We believe MTN is committed to continued expansion and improvement of its networks and we anticipate some recovery in CapEx spending in the coming quarters.

Despite the decline in overall demand from MTN, we have successfully expanded our geographic footprint within the group and continue to build on our partnership with them. Elsewhere in Africa, we made excellent progress towards developing new customer relationships and expanding our footprint with other network operator customers.

Over the last few weeks, the company has concluded contract negotiations in Kenya, Sierra Leone, South Sudan and Tanzania with orders expected to begin in fiscal 2015.

Our African customers, as the owners of the most modern communications infrastructure in the respective countries, are just starting to leverage their position towards providing fixed services to enterprise customers leading to new opportunities for us to pursue.

Along with being recognized as the Microwave Backhaul Vendor of the Year at the Ghana Telecom Awards, I'm very pleased with our progress and momentum in Africa. We expect continued improvement over the next couple of quarters driven by our customer diversification efforts and higher CapEx spending by our largest customer.

And now turning to an update on Aviat's products and solutions. Our number one focus is on rolling out our CTR microwave router platform. It is clear that this product's potential has significantly enhanced our position with respect to technical evaluations in the vendor selection processes.

This is not only key to breaking into new accounts, but is also critical in securing long-term contract extensions in a competitive multi-vendor environment. For example, in Europe, we recently secured a three-year extension to our current contract with a tier 1 mobile operator.

In Russia, we signed one completely new mobile operator customer and regained our position with another, all based on the CTR and its road map of capabilities. Over the next few quarters, CTR will be phasing in through existing customer networks in the Philippines, South Africa, Kenya, and the Ivory Coast.

One new tier 1 account has been secured in Africa, which specifically requires the integration of the microwave transport and IP routing functions in the same device. Several other customers are now expressing their interest in this approach.

We continue our progress on designing cost improvements into several products as well as fine tuning some aspects of our portfolio towards selected market verticals such as low-latency applications and those requiring encryption and security.

With respect to our 2015 outlook, we consider the quarter just completed a good starting point for the further improvements we will make across all areas of the business. While we are encouraged by the signs of recovery we see in the market and the impact of the restructuring actions we've accomplished, there is more work to be done.

With that, I would like to turn the call over to Ned for a review of our preliminary fiscal fourth quarter results. Ned..

Thanks, Mike. Aviat's preliminary GAAP financial statements, along with a reconciliation of non-GAAP financial measures, are included in the company's press release issued today, following the markets close. I'd like to take a few minutes to summarize our preliminary non-GAAP financial performance at a high level.

The key figures were; for the second quarter in a row, our fourth quarter book-to-bill ratio was substantially above 1. In fact, fourth quarter bookings were the highest they've been since the December 2013 quarter, and in North America, the bookings were the highest since the June 2008 quarter.

What contributed to the bookings strength in North America was the $19 million purchase order Mike mentioned earlier that we received from a large U.S. County. We also saw improved bookings out of Africa. Excluding the North America purchase order, the fourth quarter book-to-bill ratio would still have been above 1.

I want to remind everyone that it can take three to four quarters for public safety bookings to be recognized as revenue on our income statement. Given the strong bookings performance in the last two fiscal quarters, the company's total backlog has increased considerably year over fiscal year.

This was driven primarily from the North America sector, as previously mentioned. The company ended the fourth fiscal quarter with the cash and equivalents balance of $48.8 million, up from $46.4 million in the third fiscal quarter, thanks to very strong cash collections and tight working capital management.

The cash and cash equivalents balance of the quarter excludes $1.1 million worth of restricted cash related to our self-insured disability plan. We ended the quarter with net cash, which is cash less debt, of approximately $43 million, or approximately $0.70 per share. This compares to net cash of $40.4 million at the end of the fiscal third quarter.

We were able to improve our cash position despite the quarter's operating losses and payments on restructuring liabilities of $3.7 million in the quarter. Now turning to the income statement. Revenue for FQ4 came in at $85.9 million, up sequentially from $81.4 million in the fiscal third quarter of the fiscal year.

The products services revenue split for the quarter was $57.1 million in product revenue, or 66% of quarterly revenue, and $28.8 million in services revenue, or 34% of the quarter’s revenue. Africa and the Middle East region revenue improved sequentially from $21.7 million in FQ3 to $24.2 million in fiscal fourth quarter.

MTN, our key account in Africa, was once again a 10%-plus customer in the quarter. North America revenue was flat quarter over sequential quarter with FQ4 revenues of $37.7 million versus $37.4 million in the previous sequential quarter.

Non-GAAP gross margin for the fiscal fourth quarter was 25% of sales, down from 25.8% for our fiscal third quarter of 2014.

The fourth quarter non-GAAP gross margin was impacted by cost overruns on certain projects amounting to a little over $0.5 million and costs associated with managing inventories and consolidating our two major CMs into one during the quarter, amounted to a little over $300,000.

Our non-GAAP product gross margin was approximately 24% of sales while non-GAAP services gross margin was approximately 27% of sales in the quarter.

We expect efforts made in the fourth quarter will have a positive impact on fiscal first quarter margins in the new fiscal year, and we expect those margins to improve 50 to 100 basis points sequentially in the first quarter of fiscal 2015.

For the fiscal fourth quarter, non-GAAP operating expenses totaled $28.8 million, down from $30.9 million spent on OpEx in the previous sequential fiscal quarter. Now on last quarter's call, we guided to an OpEx number close to $27 million for the fourth fiscal quarter.

But the strong bookings performance drove accelerators in sales incentive compensation and other variable selling expenses by $1.3 million over our previous expectations.

Our headcount-related expenses were down dramatically quarter over sequential quarter as targeted under the restructuring plan we announced seven months ago, and we believe our quarterly run rate, adjusted for variable selling and other expenses, has reached approximately $27 million as we exited the fiscal year.

Non-GAAP loss from continuing operations for the fiscal fourth quarter was $7.8 million or a loss of $0.13 per share. Fourth quarter adjusted EBITDA was a loss of $5.4 million. Now turning to the cash flow statement. Cash generated by operating activities was a positive $3.9 million in the fiscal fourth quarter. CapEx was approximately $1.6 million.

Going forward, we expect to reduce CapEx closer to $1 million per quarter, now that we've completed our ERP implementation and much of the capital activity around new product development. Free cash flow for the quarter came in at a positive $2.3 million. Now with working capital, the quarter’s story is pretty strong across all fronts.

DSOs improved to 82 days from 90 days last fiscal quarter, DPOs improved to 65 days from 60 days, and turns improved slightly to 5.2 turns from 5.0. At the end of our fiscal fourth quarter, our book value was approximately $1.67 per share. On our last earnings call, I spoke about our need to address our liquidity position.

Our focus, especially on working capital management, delivered the quarter's results on cash generation. I'd now like to turn our attention to guidance for the fiscal first quarter of fiscal year 2015. Our visibility has improved, given the strength we've seen recently in our bookings performance and resulting backlog.

We expect revenue for our first fiscal quarter of fiscal year '15 to be in the range of $84 million to $89 million, a flat to slight increase at the midpoint. We believe our first quarter's non-GAAP operating expenses will be in the range of $26 million to $27 million.

We believe we can maintain a cash and equivalents balance of approximately $49 million at the end of the first half of fiscal year 2015, although our cash balance may drop a couple of million dollars in the fiscal first quarter due to the timing of a significant binary customer payment due at the end of the quarter.

And as Mike noted earlier, we expect to generate cash in fiscal year 2015. This is due to the financial benefits of our restructuring plan that is having on our future results, along with other cost and expense reduction and working capital initiatives currently underway.

As we stated in today's earnings release, we currently do not expect to file our 10-K by the filing deadline. As we previously disclosed, we've experienced delays in finalizing our financial statements as fiscal 2014 is the first fiscal year Aviat is relying on its new installed ERP system for financial reporting purposes.

We do plan to be in a position to file our Annual Report within 15 calendar days following the prescribed due date. I would like to turn the call back over to Chuck for some additional remarks, before we turn the call over to the operator for questions.

Chuck?.

Thanks, Ned. So as you just heard from Mike and Ned, things are improving, not only in the microwave market but also in Aviat's operations. I expect we're going to do reasonably well during this business cycle. We do have the best balance sheet metrics among the independents.

We’ve got great customer loyalty and continuing profitability improvement plans and a good pipeline of new products coming out. But we want to do more. We need to do it faster. So for example, like others in our business, Aviat's gross margins don't currently support how we operate. They create growth without equivalent profitability.

One thing that impacts gross margins is commoditization. Given that, we have been and continue to be open to consolidation for the right opportunity. In fact, we've done three major consolidations during my tenure. However, even the right opportunity has risks and may not result in the desired outcome.

Aviat will continue, as we have this year, to seek the opportunities and increase the most value for the company and its shareholders. So, what else are we going to do? First as Mike and Ned have said, we've been structuring the business to continue to generate cash and be profitable under a conservative set of assumptions.

As evidenced by the results today, we've made some progress here. Although we've made progress, we believe there are additional opportunities to improve our structure and processes by further reducing complexities in the business and subsequently lowering facilities, systems and product costs.

It's even clear to me now that we have assets, technologies and competencies that have the potential to create a significant longer-term opportunity. A number of months ago, Mike asked for my support regarding our future products.

We formed a small team to look at the evolving network requirements of our customers with a focus on providing our clients more valuable solutions. The progress here is encouraging.

I really think this has the possibility to be another innovation that can lift the company in the future like some of the others of the past with a stronger business model. We're going to continue to work this, and we’ll update investors as things progress. Meanwhile the team is clearly focused on results.

The management team and the Board are active and aligned around these priorities no matter what it takes. I'm encouraged by the near-term results and look forward to working with Mike and his team to leverage the company's recent progress. I'd like now to turn the call over to the operator to begin the Q&A session. Operator, the call is now yours..

Thank you. (Operator Instructions) We’ll take our first question from Rich Valera with Needham & Company. Please go ahead, sir..

Thank you. Congratulations, Chuck, on stepping into an operating role again. Best of luck..

Just to be clear, I’m not running the company, I'm helping. Thank you..

Re-engaging more, if I rephrase. So, impressive strides, it sounds like you're making on the revenue outlook and 1Q should have a very nice OpEx level relative to your prior guidance. I just wanted to get your sense on gross margin.

I was under the impression that with your OpEx reductions to the $27 million or below per quarter, that you might have a breakeven level around $90 million. But to have that, you'd need to have a gross margin pretty darn close to 30%, which is a long way from where you were this quarter or it sounds like you'll be next quarter.

So, can you talk about how you view gross margin, and should we still think about this as a 30% gross margin company? And if so, when could you get there?.

So I’ll just start it out. Ned, if you’ve got something to add. First off, we do expect to see our margins improve, and when we talk about cash breakeven, Rich, we have several elements of our P&L that are non-cash oriented. So, our cash breakeven level is different or better than what we’d normally see on the P&L.

Notwithstanding that, we're also striving to be profitable on the P&L as well as we move through the year.

Ned, did you want to add on the gross margin getting to the 30%?.

Ned Hayes:.

The non-cash elements, as we do these product transitions, we do have P&L costs. Those are non-cash in terms of P&L, but they certainly do impact the GAAP and non-GAAP earnings. We'll continue to try and manage those as best we possibly can.

But I think quarter-after-quarter, seeing modest improvement in topline is going to allow us to see modest improvement in gross margins, especially as we see traction with the new platforms coming to market..

I appreciate that.

Is there any color you're willing to give on and when you might hit that non-GAAP breakeven as opposed to cash breakeven? Is that something we would expect perhaps in the second half of the fiscal ’15 year or you're not willing to get that specific at this point?.

I don't think we're willing to get that specific at this point but I do believe that we do have a line of sight to being profitable on the P&L statement and we'll continue to work to strive to that, and we would expect to be there this fiscal year..

And then with respect to the CTR, it sounds like you're making some nice progress there, engaging both existing and new customers.

Anything you're willing to say in terms of what percent of your total bookings or revenue might come from the CTR, perhaps within this fiscal year or exiting this fiscal year, just to give us a sense of how significant an impact we might expect that to have this year, and presumably having a positive impact on the gross margin line as well..

Yeah, absolutely.

So we would expect CTR to begin to start ramping up in the next couple of quarters in terms of volume and by the end of this fiscal year, we’re probably going to be in the range of approximately 30% of our indoor units that we ship out internationally, roughly in that range, we would expect to be CTR, and that will continue to ramp sequentially as we move into the next fiscal year..

So, say by 4Q ‘15, you would say maybe 30%.

Is that fair?.

I'm talking about shipments as a percentage of our indoor units, Rich. So I wouldn’t be including, for example, our IRU 600 in North America nor would I be including our all outdoor IP products, and that's shipments. So bookings could end up being at a higher level than that, but I can't give you color on that at this point in time..

And then you made reference to the pick-up in African business, or you had a little bit this quarter and it sounds like you're expecting more. The CapEx, half-over-half CapEx projections for MTN are actually quite dramatic, not sort of gradual, but kind of plus 50% or better in the second half versus first half.

Do you see perhaps upside to your relatively modest expectations of steady sequential improvement from Africa or do things just not necessarily trickle down that quickly to you, even if they do spend their full year CapEx budget?.

So, on the positive side, the slow recovery in MTN has actually really put us in a position of being very motivated to drive other business and we've been successful in other accounts there, and our improvement in our bookings in Africa has pretty much come off of the other accounts, even with MTN still being slow.

Absolutely, if MTN were to get anywhere near the levels that they’ve allocated, we would see some upside. So we're planning our views, as Chuck said earlier, under more conservative assumptions moving forward..

And then, is there anything you can say, in North America, there was one large bid in particular on the cellular side that's been discussed quite a bit, and I think you made reference to it in your prepared remarks, saying you thought you were still in the running for a couple of large bids in North America.

Is there anything else you can say on that front, potential new business in North America on the cellular side?.

Just like I said, we're still in the mix on a couple -- two large opportunities with national carriers in the U.S..

(Operator Instructions) We’ll take our question from Aaron Yu with Singular Research. Please go ahead..

Hey, guys, sounds like some good progress was made in the quarter, so it's certainly encouraging. Question on the North American business, it looks like you guys are getting some good traction, both in the public sector and elsewhere, and just wanted to kind of dig into that.

Is that sort of a function of the macro spending picking up, or is it more sort of a result of sort of the CTR and other product lines that you guys are going to market with getting new accounts and traction in that aspect?.

So specifically referencing our North American business, CTR doesn't really have a big play there in the near term. That will come eventually, but our IRU600 product is our flagship product in North America, which is one of the top products in North America with respect to what it provides to public safety as a vertical as well as others.

Usually in the public safety domain, these deals can take any anywhere three years plus in terms of the sales cycle. So, you do see things early and so it's really more of a function as we said earlier. Last few quarters there was a slowdown in terms of the decision making cycle in some of these bids.

Ultimately, we've seen them close and we've got a line of sight to further opportunities moving forward. So it’s just a matter of timing on these large deals..

But again, Aaron, I do want to reiterate what I did say in our prepared comments. These are relatively long implementation execution cycles. It generally does take three to four quarters to fully roll these out.

So it's not as if we're going to see quick realization here in one or two quarters especially along the lines of a $19 million purchase order we talked about..

I just wanted to confirm that all of the restructuring has taken place, and there's none left for ‘15?.

There is still work to be done. That work will be accomplished under the existing and already approved 2014, 2015 restructuring plan.

In our K, you will note that we have actually taken an additional step in impairing some additional space in the Santa Clara headquarters building, but again that's more of a facilities based charge as opposed to the headcount charge, but the additional headcount actions that we have contemplated will be covered under the existing restructuring plan..

And with no questions remaining, I'd like to turn the call back over to Mike Pangia for any additional or closing comments..

Thank you, operator. So even with its challenges, the backhaul space remains attractive. To maximize our opportunities, we will continue to diligently focus on profitable growth and to work closely with Chuck and our Board of Directors to tactically and strategically steer the company.

We are encouraged by an improving visibility provided by our strong bookings and improving backlog, sequential revenue growth, positive cash generation, and the traction our new products are receiving.

As we strive for profitable growth, we are increasingly optimistic that we'll be able to generate cash in fiscal 2015, thereby further improving our liquidity position and strong balance sheet. Generating cash is a major focus for us in fiscal 2015. Now I'd like to turn the call over to Peter for a final wrap-up.

Peter?.

Thanks, Mike. Before closing the call, I’d like to remind everyone that Mike and Ned will present tomorrow at the Drexel Hamilton Technology, Media and Telecommunications Conference being held in New York and will be presenting at the Singular Research Conference in Los Angeles later in September.

I want to thank everyone for your participation today and thank you for your interest in Aviat Networks. This concludes our fiscal fourth quarter 2014 earnings call, bye-bye for now and have a great rest of your day. Thank you..

One again, that does conclude today's call and we thank you for your participation..