Peter Salkowski - Investor Relations Mike Pangia - President and Chief Executive Officer Ned Hayes - Senior Vice President and Chief Financial Officer.

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

Good day and welcome to the Aviat Networks Preliminary Q1 2015 Financial Results Conference Call. Please note today's conference is being recorded. At this time, I would like to turn the call over to Mr. Peter Salkowski. Please go ahead, sir..

Thank you, Joshua. Good afternoon, everybody, and welcome to Aviat Networks preliminary first quarter of fiscal 2015 earnings call. I'm joined today by 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 projections of earnings and revenues, business drivers, the timing and capabilities of new products, network expansions 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 website of Aviat Networks at www.aviatnetworks.com. In addition, during today's call, we 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. I'll now turn the call over to Mike Pangia.

Mike?.

Thanks, Peter. So to kick off today's call, I'll provide a summary of our preliminary financial results for the fiscal first quarter. Overall, we reported improving operating results revenue of $82.4 million. While we're not where we want to be yet, there are some positive trends in the business now.

Non-GAAP gross margin was 26.6%, a solid sequential improvement from the previous fiscal quarter. Non-GAAP operating expenses were $25.3 million, which despite higher than expected audit costs were well below our guidance of $26 million to $27 million. Non-GAAP net loss was $3.9 million, resulting in a non-GAAP EPS loss of $0.06.

Our topline results continued to be affected by the reduced spending of customers in Africa, and revenue for the first fiscal quarter was down 34% year-over-year for this region. However, based on the recent review of our largest customer's requirements for the next several quarters, we are starting to see some light at the end of this long tunnel.

Our strong incumbent position with this large customer remains intact and we're heavily engaged with them in leveraging our solutions to increase the return on capital. Elsewhere in the region, we're making good progress on contract extensions with other key customers.

Our overall efforts are starting to show results as we're experiencing improved bookings activity in the fiscal second quarter from Africa as compared to the first fiscal quarter and anticipate a more steady forward business in calendar year 2015.

We continue to work diligently on optimizing gross margins and operating expenses with a strong focus on cash generation in fiscal 2015. Beginning earlier in calendar 2014, we took several direct actions to improve our business, addressing product cost, supply chain overhead cost and overall operational expenses.

The examples include consolidation of our contract manufacturing suppliers and locations and a significant improvement in our R&D cost structure. And an increased focus on our service capabilities in our public safety and public utility business verticals in North America has resulted in a more favorable gross margin contribution.

In addition, we have finished a complete refresh of our product portfolio with some new products already approaching volume ramp, while others should follow by the end of the fiscal year. Our refreshed products have led to new customer wins in all segments.

Lastly, we continue to remain focused on driving higher volumes of business with our marquee base at existing customers. We take great pride from delivering our customers the lowest total cost of ownership.

Regarding the timing of the filing of our fiscal 2014 10-K and the 10-Q for the fiscal first quarter of 2015, we are close to completing these filings and are pleased that the process is not expected to result in any prior-period restatements.

We have also identified areas within our business processes where we'll need to make investments to assure the timely filing of our future financial statements. Ned will elaborate on our first quarter financials in a few minutes. Having already discussed Africa, I'll now provide an update on North America and our product portfolio.

In North America, our first quarter revenue reflects the strong and steady business in both the mobile and non-mobile verticals. Following the large public safety award announced in our first fiscal quarter, we won several small public safety network contracts including a turnkey IP/MPLS network with a state police agency in the Northeast.

These projects typically roll out over several successive quarters. We received an order from a tier-1 mobile operator to build, operate and maintain links to enterprise customers in areas not served by their fiber network. We will look to add more opportunities of this kind to leverage our network operation center and service delivery capabilities.

We continue to see solid growth in our NOC managed services business in North America with strong renewal rates from our existing customers. We also continue to see steady business for our unique low latency solutions from which we levered solid margin contribution and recurring future revenue streams.

Now turning to an update on our products and solutions. During our fiscal first quarter, we announced the results of a Heavy Reading survey of mobile network operators, which covered 43 mobile operators from all parts of the world.

The survey shows that mobile network operators consider fixed enterprise services including IP/MPLS and Layer 3 services a top priority, along the same lines as adding subscribers. We're already seeing this trend with our customer base.

For example, in Africa, several customers have created new business units to serve the enterprise segment to add incremental revenue streams, while leveraging their network infrastructure investments.

With our CTR offering combined with our strong services and enterprise capabilities, our goal is to be a strategic partner in these business applications within our installed base and with new customers. We continue to roll out our new products and now expect to see volume ramp in the second half of the fiscal year on several fronts.

We're encouraged by the activities with our key customer and developing countries reward enterprise business applications, which will leverage networking capabilities of the CTR.

With respect to our outlook, we're seeing sequential improvement in the fiscal second quarter, as we benefit from a strong backlog in North America and as mentioned earlier from a bookings perspective, the early signs of the recovery in Africa, which is part of the fuel that will be contributing to our topline moving forward.

We are confident regarding our position as a strategic partner to MTN and remain optimistic that the recovery with them will come, although the specific timing, the magnitude are so difficult to predict at this time. Beyond recovery in Africa, we see additional growth opportunities.

We have several international customers that are now aggressively moving to LTE and Aviat is well positioned to support them through this transition. We expect bookings to improve and continue improving for the remainder of the fiscal year, driven by strength in the Americas, Asia-Pacific and Africa.

In addition, we're focused on leveraging our services capabilities to grow existing accounts and win new business. These include deployment and maintenance capabilities, which we believe are becoming increasingly relevant as complexities increase for network operators.

It's a differentiator that enables Aviat to increase value and stand out in the selection process, leading to deeper relationships with our customers and giving Aviat a chance to generate additional recurring revenue. We see our enterprise offering as innovative and relevant for customers in developing countries.

Lastly, we see exciting opportunities in the non-mobile segment ranging from public safety in North America to low latency applications throughout the world. An objective for fiscal 2015 continues to be generating cash, and we remain focused on doing so for the fourth fiscal year. Ned will now provide a summary of our first quarter results.

Ned?.

fiscal first quarter book-to-bill ratio was below 1. We continue to see bookings deferrals from our largest customer in Africa, bookings appear down in North America in large part because we recorded a very large order of about $19 million in the fourth quarter fiscal 2014 in that region.

Revenue for FQ1 came in at $82.4 million, down sequentially from $85.4 million in FQ4. Product revenue accounted for 68% of total sales with services revenue representing the remaining 32% of total sales. Africa and the Middle East region was flattish sequentially at $24.6 million in FQ1 as compared to $24.2 million in FQ4.

MTN was once again a 10%-plus customer in the quarter. North America revenue was also flattish sequentially, with FQ1 revenues of $38.6 million compared to $37.2 million in the fiscal fourth quarter and up year-over-year compared to $33.7 million in the year-ago quarter.

Non-GAAP gross margin for the fiscal first quarter was 26.6% of sales, up from 25.0% in our fiscal fourth quarter of 2014. This quarter's non-GAAP gross margin was positively impacted by product and services mix, particularly in North America. Our non-GAAP product gross margin was approximately 26%, while non-GAAP services gross margin was 27.5%.

For the fiscal first quarter, non-GAAP operating expenses totaled $25.3 million, down from $28.8 million spent on non-GAAP OpEx in the previous sequential quarter and $30.5 million in the year-ago quarter.

This quarter's non-GAAP operating expenses benefited somewhat by having lower than expected variable selling costs, which included lower sales incentive compensation on lower bookings levels and lower agent commissions.

Having said that, the $25.3 million of OpEx did include costs in the quarter associated with our protracted financial audit of fiscal year 2014's results. These incremental audit costs continued into the current fiscal second quarter.

Non-GAAP loss from continuing operations for the fiscal first quarter was $3.9 million or a loss of $0.06 per share compared to a non-GAAP loss from continuing operations of $7.8 million or a loss of $0.13 per share in the year-ago quarter.

Fiscal first quarter adjusted EBITDA was a loss of $1.7 million compared to a loss of $5.7 million in the year-ago quarter.

The company ended fiscal first quarter with a cash and equivalents balance of $42.4 million, down from $48.8 million at the close of the fiscal fourth quarter due primarily to the timing of accounts receivables payments that wound up being pushed into very early this current fiscal quarter.

In fact, the company collected more than $5 million from three large customers in the first business day of the second fiscal quarter. Cash used by operating activities was $4.7 million in the fiscal first quarter.

CapEx in the quarter amounted to $1.2 million, very close to our quarterly CapEx target of $1 million per quarter in this fiscal year resulting from the completion of our new ERP system implementation and the completion of our product portfolio refresh. Free cash flow in the quarter came in at a negative $5.9 million.

Now looking at working capital metrics, DSOs were 94 days, up from 82 days last fiscal quarter. DPOs improved to 71 days from 65 days. Inventory turns declined to 4.5 turnings from 5.2 largely due to some inventory purchases associated with transitioning our contract manufacturers in the quarter.

We remained focused on working capital management and we expect to make incremental progress going forward. At the end of our fiscal first quarter, our book value was approximately $1.55 per share. Now I'd like to turn our attention to guidance for the fiscal second quarter of 2015.

We expect revenue for our second quarter of fiscal year '15 to be in the range of $85 million to $90 million. Non-GAAP gross margins should continue to improve, principally due to favorable customer mix, new products ramping and lower manufacturing support costs.

We expect the efforts made in the fiscal first quarter along with earlier efforts to contribute to a sequential increase in fiscal second quarter non-GAAP gross margins.

Non-GAAP operating expenses for the fiscal second quarter will increase to a range of $26 million to $27 million due to a more normalized variable selling expenses and some continued incremental spending for the protracted financial audit of fiscal year '14.

The good news is that these incremental audit expenses are not run rate figures and should be eliminated by the end of our fiscal third quarter. Cost and expense control will continue to be a primary focus for the company with every intention of generating positive EBITDA, EPS and cash on a quarterly basis.

On the sales and marketing front, we will continue to evaluate entry and exit opportunities in all of our addressable markets. R&D spend continues to pace, but upcoming completion of releases may afford an opportunity to reduce or redeploy these expenditures.

G&A should stabilize and over time there should be opportunities to improve our overall spending in this area as well. Fiscal second quarter cash and equivalents should be equal to or slightly higher than $42 million.

And as Mike noted earlier, we remained focused on generating cash in fiscal 2015, supported by improvements in our business model and continued focus on working capital initiatives. All of our efforts are directed to this end and will remain there.

I'll now turn the call back over to Mike for his closing remarks before we turn the call over to the operator for questions.

Mike?.

Thanks, Ned. Based on our results and illustrated by the guidance Ned provided, we are dedicated to improving our operational efficiencies with the near-term goal of reaching breakeven on a non-GAAP basis in the second half of this fiscal year. However, just reaching breakeven is not the ultimate goal.

We recognize that in order to generate a sustainable positive return on investment in addition to gross margin improvement, we need to further improve our ratio of OpEx to revenue based on a conservative view of the topline.

To drive this action within the fiscal year, as we're now nearly halfway through it, we are now reevaluating our go-to-market strategy with an enhanced focus on customers, which product and services requirements play to our strengths.

This may also involve redirecting our investments from territories with current economic challenges and have little chance of recovery. Beyond this, we will continue to implement R&D efficiencies and make improvements to our internal processes and procedures to enable lower G&A expenses, while improving our financial reporting capabilities.

These changes should generate consistent returns on the company's investments and new products and its services business. In addition to internal efforts to improve the business, we will continue to evaluate all strategic opportunities that we believe have potential to increase the value of the business and return for our shareholders.

I'll now turn the call over to the operator to begin the question-and-answer period.

Operator?.

[Operator Instructions] And we'll take our first question from Rich Valera with Needham & Company..

First question, just wanted to see if you could give any more color on potential timing of your filings, your 10-K and Q. Can you give any sense of whether we're talking potentially days or weeks or beyond that in terms of the timing? It sounds like you're reasonably optimistic..

I think the range that you characterized, days to weeks, is probably the right characterization of what we're looking at here. And we are reasonably optimistic..

And what remains to be done? I mean what could be the stumbling blocks at this point?.

At this particular point in time, it really is just documentation, having our external auditors go through their internal review process both local and national.

We feel that we've provided the lion's share of documentation and support and remediation programs for any internal control deficiencies that might have been identified through the course of the audit. The forensic accounting project is done and through the course of this protracted analysis, we do not foresee any restatements of prior periods..

And as far your communication with the NASD on your plan of compliance, presumably they've received that, and when would you expected to hear from them on whether they accepted that plan or not?.

We have given them a timeframe by which we will be in compliance. The company's plan right now is to simultaneously file the K and the Q to come back into compliance, and they have accepted that plan..

Moving on to the business, so your revenue came in a bit light this quarter versus your guidance.

Could you give any color on where the weakness was relative to where you were thinking going into the quarter?.

I think it wasn't one particular area. I think there were a lot of small things that added up. To give you an example, we did complete our manufacturing consolidation in North America in the first quarter. That did lead to some back-ended or non-linearity with respect to shipments.

And teher were a few cases or examples where delivery to trigger revenue wasn't achieved within the end of the quarter. And also our quarter ended, I believe, September 26, so we had some of that. Some book and ship related to Africa also fell out. So there were a number of small things that added up, Rich..

You mentioned, I think, sort of some bookings momentum in Q2. And prior to this quarter, I think you'd had four quarters of positive book-to-bills. So just trying to get a sense of how you're thinking about the trajectory of the business.

Clearly you're thinking about it up for the second quarter, and it sounds like maybe you'd have a decent book-to-bill in the second quarter as well. I know you don't want to give any guidance beyond one quarter.

But should we think of this quarter as somewhat of a blip in the string of what I thought were pretty solid bookings quarters leading up to this and perhaps a better bookings quarter coming? Just want to know how you're thinking about sort of the revenue trend in 2Q and beyond really..

That's a great question from the perspective of the tracking that we've had. We had created a very strong backlog. So a lot of the bookings that we had achieved actually give us quite a bit of run rate with respect to revenue as a result of the type of bookings that we had in North America.

I think we talked about that earlier primarily in the non-mobile segment. And in North America, we referred to some significant orders that we received in the fourth quarter. And as we know, our public safety business has large binary deals. We do have a line of sight to those as well this fiscal year.

There're probably more into the second half of the fiscal year, those large binary deals than the first half. So we expect that to obviously have an impact on improving our bookings. But beyond that, we definitely see an improving profile related to Africa and it's beyond MTN, other customers that we brought on board.

Also we expect to see pickups in the second half and as we move forward quarter-to-quarter..

So just to follow-up on MTN, I get the sense that they ordered at one point probably more product than they really needed, and this, I think, goes back quite a few quarters and presumably have been deploying that in the interim.

Do you have any sense of where they are now? Are they sort of normalized in terms of the level of product they have? And are we presumably going to get back to some kind of more normalized demand run rates soon because of that? Or any other color you could give on MTN would be helpful..

Absolutely. There is a large telecom show in Africa called Africom that happens November of every year. So we just recently had it and we had a deep-dive review with them.

And we feel very comfortable about the trends that we're seeing and the opportunities that we already have in front of us with respect to their rollout plans and in particular in their two largest areas.

So starting off first with growth in terms of deployments in South Africa and we would expect that to follow in Nigeria and the rest of the territories as well. So definitely seeing opportunities moving forward. And I'm talking on the mobile side.

In addition to that, there's also a lot of enterprise opportunities emerging not just with MTN, but other operators in Africa as well. And we're seeing a combination of those things leading to more of a normal of improving bookings profile going forward..

Ned, can you say how much audit expense is in the 2Q OpEx number that you gave?.

I think as we've discussed before, I think it was probably several hundred thousand dollars in FQ1 and probably a similar amount in FQ2..

And we'll take our next question from Aaron Yu with Singular Research..

I wanted to just confirm that your thinking on the cash balance is still intact. I know you guys previously said you expect about flat through the first half with build sequentially in the second half of the year..

Yes. So our specific guidance for the quarter is equal to or slightly higher than $42 million with certainly the internal goal to get us as close as we possibly can back to where we saw ourselves at the end of the previous fiscal year..

And if we really adjust the $42 million for the AR that was collected on the first day of the year, it probably looks more like sort of $47 million number..

Yeah, unfortunately we're ending our quarter on the 26th, and these large public safety customers are ending theirs on the calendar quarter-end. So a little bit of a slip there in terms of the snapshot date..

And I just wanted to get some color on the North American business. The big mobile operators, one of them, really talked about how strong 4G adoption has been in the last couple of quarters for them.

Are you guys seeing that flow through? Is that impacting sort of the small cell market at all?.

As far as the dynamics in North America as it relates to rollout of LTE, our largest mobile operator and customer in North America had a massive rollout of LTE that actually concluded before this fiscal year. We started to see reductions related to their spend on transmission and microwave as a result of completing that.

Still good ongoing business, but the rate of their expenditures from a back-haul perspective have reduced from where they initially had rolled out LTE. Beyond that, yeah, there is definitely opportunities as we look forward in the small cell segment. Still early stages.

And beyond that, we also see opportunities to address enterprise applications with mobile operators in North America as well. That's on the mobile operator side. On the public safety front, we do see a trend towards the LTE there of networks modernizing and that will continue for some time to come..

And it looks like there are no further questions at this time. I would like to turn the conference back over to Mr. Peter Salkowski..

Thank you very much. I want to thank everyone for your participation today and thank you for your interest in Aviat Networks. This concludes Aviat Networks preliminary fiscal first quarter 2015 earnings call. Bye for now and have a great rest of your day. Thank you..

And this will conclude today's conference. We thank you for your participation..