Leslie Phillips - Investor Relations Mike Pangia - President and Chief Executive Officer Mike Shahbazian - Chief Financial Officer.

Rich Valera - Needham & Company Aaron Yu - Singular.

Good day and welcome to the Aviat Networks Quarter Two 2015 Financial Results Conference Call. Please note today’s conference is being recorded. At this time, I would like to turn the conference over to Leslie Phillips, Investor Relations. Please go ahead, ma’am..

Thank you, Joshua. Good afternoon, and welcome to Aviat Networks fiscal second quarter 2015 results conference call. I’m joined today by Mike Pangia, President and Chief Executive Officer; and Michael Shahbazian, Chief Financial Officer. This call is being broadcast live over the internet for all interested parties.

And the webcast would be archived on the Investors Relation part of the company’s website.

During today’s call, management may make forward-looking statements regarding Aviat’s business, including statements relating 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 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 also available on the company’s website. With that, I will now turn the call over to Mike Pangia..

Thanks, Leslie, and good afternoon to everyone listening on the phone as well as on the webcast. Fiscal second quarter revenue of $92.5 million came in above the high-end of our guidance range. The top line performance was primarily driven by strength in North America.

Leveraging the actions that we have taken over the past four quarters to run the business more efficiently, our non-GAAP gross margin improved 230 basis points year-over-year and 60 basis points quarter-over-quarter to 27.2% for the fiscal second quarter. Non-GAAP operating expenses were $27.2 million, down $3.2 million year-over-year.

Our Q2 OpEx included approximately $2 million of mostly one-time financial audit expenses related to 2014 Audit. Further demonstrating the progress we’ve made in reducing expenses, non-GAAP net loss from continued operations was $2.6 million compared to $9.4 million in the year ago period.

We reported breakeven adjusted EBITDA versus a negative adjusted EBITDA of $6.8 million in the fiscal second quarter of 2014. Our second quarter performance is a clear illustration of the positive impact or efforts to streamline the business we’ve had on our financial results.

While this is a move in the right direction, we remain focused on further improving the effectiveness and efficiencies of our operations and delivering more consistent results. Cash at quarter end was $38.7 million. The ending cash balance was affected by the timing of collections which we’ll elaborate on in a few minutes.

And lastly, while our second quarter bookings improved sequentially, our book-to-bill ratio was below 1, as a few larger bookings were deferred until later this fiscal year. We expect sequential improvement in bookings for the remainder of the fiscal year.

During the remainder of my prepared remarks, I will review the results of our two largest geographic regions for the quarter and also provide a brief update on our new product rollout plans. Mike Shahbazian will then provide a more in-depth review of our fiscal second quarter financials and our guidance for the fiscal third quarter.

I’ll then provide some details on the actions we expect to implement in the second half of the fiscal year to drive additional business improvements and efficiencies. I’ll conclude my prepared remarks with our business outlook for the second half of fiscal 2015. Now, turning to a discussion of our results by geography.

Starting with Africa, revenue from Africa dropped slightly from Q1 and was down year-over-year. Based on booking activity and our current view of the transaction pipeline the recovery in Africa is still slower than we had anticipated. We remain in a solid incumbent position with our top customer MTN.

We believe the demand drivers such as a focus on network enhancement and new services for business enterprise are still there. As such we are confident that when MTN allocates more CapEx spend to microwave back-haul, Aviat will be strong in the mix.

During last quarter’s update, I mentioned our progress on contract extensions with other key customers in the region, announced in mid-December, our renewed supplier agreement with Safaricom, the leading mobile operator in Kenya serves as a great example.

As part of the multiyear contract extension to modernize and expand its microwave back-haul network, Safaricom will leverage the Eclipse Radio then transition to the CTR to optimize IP networking technology.

Our longstanding relationship with Safaricom validates our total cost of ownership proposition by which customers receive innovative products as well as top-tier service support positioning Aviat as a preferred long-term partner.

Moving to North America, in the second quarter, our North America business benefited from a strong backlog, leading to an especially strong contribution to our revenue results. In the mobile vertical, we increased our footprint for product and services with the Tier 2 U.S. mobile operator.

However, we are currently experiencing a cyclical slowdown in spending with our largest mobile customer, and this will have an impact on our second half results.

Notwithstanding, we continue to maintain a strong position with our existing North America mobile operator customer base and remain in contention for new business with mobile operators who are not current customers.

Non-mobile performed exceeding well in the fiscal second quarter, as revenue flowed from several large non-mobile projects that were booked in prior periods.

Earlier this week, we released survey results that show that IP/MPLS routing as a top networking technology choice for public safety, government, utility and other non-mobile private operators in North America.

However, the survey also shows that nearly 70% of respondents consider their lack of in-house expertise, the number one barrier to implementation. With our complete portfolio of IP/MPLS products and services, Aviat is well-positioned to continue gaining share in these non-mobile verticals.

Beyond these two regions, we’re also seeing signs of new investment to expand network capacity with key customers in Asia-Pacific. A significant increase in mobile broadband data and with the arrival of much more affordable smartphones is driving these needs. Our new product programs are progressing well.

CTR platform in particular has been pivotal securing our specialist supplier position with several of our largest customers as we go through contract renewal and extension negotiations for future phases of network expansion and modernization.

We have already deployed CTR with customers in South America, Africa and Europe and we expect to see multiple new orders for CTR from five of our top 10 customers in the second half of fiscal year ‘15. I’m now pleased to introduce and welcome Mike Shahbazian, who has served as our Interim CFO since late December of 2014.

With over 35 years of experience, highlighted by multiple successful CFO roles, Mike is a Financing Operations veteran well positioned to continue driving improvements in our financial controls and reporting processes. We’re excited to have him here. Mike will now provide a summary of our second quarter results.

Mike?.

Thank you, Mike and thanks to all of you for joining us today. If you’ve not already done so, I’d encourage you to download from the Investors Section of our website, financial press release we posted earlier today. It contains Aviat’s un-audited GAAP financial statements along with a reconciliation of non-GAAP financial measures.

My prepared remarks will be focused on the non-GAAP financial overview of our fiscal second quarter and the related business trends. I’ll then provide guidance for this fiscal third quarter.

Revenue for the second quarter came in at $92.5 million, compared to $82.4 million in the first quarter of fiscal 2015 and to $85.8 million in the second quarter of fiscal 2014. Product revenue accounted for 63% of total revenue compared to 68% in the first quarter of 2015, with services representing 37% compared to 32% in the previous quarter.

This increase in services resulted from completion of a number of large projects in North America during the second quarter. MTN was once again a 10% plus customer in the quarter. Non-GAAP gross margin for the fiscal second quarter was 27.2% of sales up from 26.6% of our fiscal first quarter.

Second quarter gross margin was positively impacted by higher volume in North America and product and services mix particularly in Europe and Asia. Our non-GAAP product gross margin was 26.9% while non-GAAP service gross margin was 27.8%. As many other U.S.

based companies have reported, we too were affected by the dramatic and sudden increase in the dollar. We recorded about $900,000 in FX losses in our current cost of sales, current quarter cost of sales resulting in 100-basis point impact on our gross margin rate.

For the fiscal second quarter our non-GAAP operating expenses totaled $27.2 million up from $25.3 million in the first quarter. This difference is primarily attributable to the expanded audit procedures relating to completion of the fiscal 2014 audit and the 10-K filing in December.

This was offset in part by slightly lower R&D spending and less than planned sales expenses, resulting from the lower order volume in the quarter. Even with the extraordinary audit fees, our second quarter spending is down substantially from $30.4 million in the year ago fiscal quarter.

Non-GAAP loss from continuing operations for the fiscal second quarter was $2.6 million or a loss of $0.04 per share compared to a non-GAAP loss from continuing operations of $9.4 million or a loss of $0.15 per share in the year ago quarter.

Fiscal second quarter adjusted EBITDA was breakeven compared to a loss of $6.8 million in the year ago quarter. The company ended the fiscal second quarter with a cash balance of $38.7 million down from $42.4 million at the close of the fiscal first quarter.

As we advised on the last earnings call, the December 26, quarter end did impact cash collections negatively and we collected substantial less than expected in the final week. We recovered more than the shortfall in the first week of this fiscal quarter. Cash used by operating activities was $4.4 million in the fiscal second quarter.

We expect to have positive cash flow during the third quarter but at this point we do not anticipate we would be cash flow positive for the full fiscal year, notwithstanding we believe we have adequate liquidity from our existing cash balance, line of credit and future cash collections. CapEx in the quarter amounted to $1.2 million.

Free cash flow which includes cash used in operating activities plus CapEx was a use of $5.6 million for the quarter. Now moving to working capital, DSOs were 80 days down from 93 days last fiscal quarter. DSO improved due to increased revenue in the quarter.

DPOs was 62 days compared to 71 days and turns increased to 6.1 from 4.5 largely due to reduced inventory and higher cost of sales associated with the increased revenue in the quarter. Regarding remediation efforts, we’ve already made progress addressing the weaknesses identified in the recent 10-K filing.

As we complete our remediation programs over the next several months, we believe we can simplify and streamline our reporting processes and more effectively utilize our new ERP system. I’d now like to turn your attention to guidance for the fiscal third quarter of 2015. We expect revenue for our third quarter to be between $75 million to $80 million.

As Mike discussed in his opening remarks, the recovery in Africa is still slower than expected and the low-end of our range represents more of the status quo with some modest improvements reflected towards the higher end of the range.

Given the ongoing demand drivers, we are confident that MTN will ultimately need to increase their strength for back-haul and our top line should improve accordingly. This improvement maybe realized as early as our fourth fiscal quarter.

In the third quarter we also expect to see a reduction in our North American revenue as some of our larger non-mobile projects were completed in the second quarter, earlier than we had anticipated as reflected in our high North American revenue of $44 million.

Finally, we have reduced our expectation for several markets which have been impacted by declining currency and other economic challenges. So, in conclusion, we see the third quarter as a weaker quarter as compared to the second quarter but we expect improving demand as we move to fourth quarter and beyond.

Margins were stronger in our fiscal second quarter, given the lower revenue, volume, mix and foreign exchange adjustments, we expect gross margins in our third quarter to be lower. We do expect an improvement in the fourth quarter as volumes improve and new products continue to ramp.

We expect non-GAAP operating expenses in the range of $25.5 million to $26.5 million primarily based on the reduction of audit fees. I would now like to turn the call over to Mike, for some additional remarks before we turn the call over to the operator for questions..

Thanks, Mike. To close our prepared remarks, our strong fiscal second quarter results demonstrate our ability to leverage both the mobile and non-mobile businesses and the impact of our past restructuring efforts.

However, as illustrated by our Q3 outlook, there are several factors which are negatively impacting our business, some temporary which has made it difficult for us to be consistent in our financial performance. To this end, we are evaluating structural changes to improve the overall business while continuing to consider strategic alternatives.

I want to reiterate that management is fully committed to running Aviat as a profitable cash generating business on a more consistent basis. We are focused and aligning our product roadmap and investments with key accounts in the geographic regions where we see the highest potential for profitable growth.

We have a tremendous base of customers and vertical markets to build from. This is also a critical step in simplifying our business. In the near term, these actions could have an impact on our top-line. However, we are confident that our profitability will improve.

The board is fully aligned and in agreement with our plans to tackle operational expenses improve profitability and generate cash on a more consistent basis. We expect to provide more clarity around these plans in the near future. Our ongoing efforts along with our innovative product roadmap and great customer base, make us optimistic for the future.

I’d now like to turn the call over to the operator to begin the question-and-answer period.

Operator?.

Thank you, sir. [Operator Instructions]. We’ll take our first question from Rich Valera with Needham & Company..

Thank you. I just want to get a sense of your visibility beyond the current quarter on the top line. It sounds like you’re expecting some bookings improvement particularly I guess in Africa towards the latter part of the quarter. And I think you said you expect the top line to improve maybe as early as the fourth quarter.

Any more color you can give on a rebound in the top line to something meaningfully higher than what you’re guiding to in the current quarter and just visibility in general?.

Yes, so, as our bookings have been lower than we expected, obviously our visibility has been impacted in the near term. So, as I said earlier, we do expect to continue, we expect to continue to see sequential improvements in our bookings which will help us with our visibility going into the fourth.

And it’s not just our expectations around Africa, what we do see some improvements and recovery go into the fourth. But we also see that in some of our other markets as I referred earlier, we have had some deferrals on decisions, on some booking activity.

And we do expect some of that also to be in place with bookings improvement as early as the third quarter which will help us in the fourth as well..

Okay. And then with respect to the cash usage, I guess the first half of the fiscal year, your views looks like comfortably over $10 million I think, I confuse something close to $13 million of cash. Understanding the target of being cash positive for the year, this is a stretch.

I mean, how can we think about cash in the second half of the year or going forward, yes, I just want to get your sense of putting the first half behind us, how do we look at cash, cash usage going forward?.

This is Mike. I can certainly give you my response on that. Certainly we did utilize some cash during the first half of the year. As we look forward, as I mentioned we had a very strong collection period early in the quarter. And we expect that to continue, we’re expecting fairly high collections this quarter.

And we do expect to run slightly positive for the quarter. As we look out over the fourth quarter, we would expect to see continuing positive trends but it’s not clear that we’re going to be positive cash flow for the full year given the results we experienced during the first quarter..

Do you think it would be positive in the fourth quarter itself though?.

Might be a little bit early to say but certainly we’re hoping that we’re going to have continuing momentum as we go into the fourth quarter..

Right. I mean, I would think that positive for the whole year would be a very distinct goal at this point given the first half.

I mean, is that something that’s even in the picture?.

I believe we don’t expect to be in a cash generation positive for the fiscal year..

Fair enough. Did you wanted to address the gross margin a bit, nice gross margin for the quarter but it sounds like you had a lot of things go your way between the revenue upside and the favorable North American mix.

So, I’m trying to get a sense one of - what kind of sequential decline you’re looking for in the gross margin in the current quarter? And how we should think about gross margin as we look beyond the current quarter, it wasn’t that long ago we were talking about 30% as a kind of medium term target.

And frankly that’s looking like a pretty challenging target given what I expect will be probably a meaningful drop in the current quarter. So, color around gross margin dynamics would be appreciated? Thanks..

So, in terms of the positive direction on our gross margins in the past quarter, obviously the higher business in North America which is our most profitable sector does have a positive impact. But we did also mention Rich that we also had something going against us which was the FX impact.

So our gross margins actually could have been even 100 basis points better in the last quarter. We’re not, as far as the third quarter, we do expect to see a reduction. Again, you can take a look at the volume impact as a primary driver for that relative to the fixed cost we have.

As we go out to the balance of the year, as we’re looking at focusing our attention on those markets where we see the highest potential for profitability. Well, we have an opportunity to leverage our roadmap as new volume and new products, as higher volume and new products come into play, we expect to see ourselves improving.

And then, as we continue to focus on the structural changes as well as aligning our costs, we’ll continue to be moving towards the upper 20s and into that 30% margin range. That’s where our focus and attention is..

Great. And how do you think about the FX headwind, I appreciate you had about 100-bps headwind in the just reported quarter.

How are you thinking about that as an impact in the current quarter?.

Yes. So, I think the current quarter obviously is a - will be, we expect to have the similar impact because when we talked about our reduction, we’re talking about it from the reported gross margin in the quarter.

I think the, as big an impact is in several markets where we do have prices and local currencies, that’s where we will have to try to renegotiate or not continue with some of those opportunities depending on the timing and how long that impact exists.

So I do think that it is going to be more of a top line impact and we’ve already seen that in the guidance and the bookings that we’ve had to date..

Fair enough. Just one more on OpEx. It sounds like you had about $2 million of - you suggested largely non-recurring audit expenses. And sequentially OpEx go down by I guess about half that.

Why is that, why wouldn’t they go down more if those - order expenses not completely go away or is it some other stuff that sort of increase that quarter-over-quarter?.

Right, no that’s a good point. We do expect the expenses associated with audit fees to go down sequentially. However, we do expect to incur higher sales expense primarily associated with sales incentive programs because we do expect higher bookings during the third quarter.

And so, certainly that would flow through there, with that, some other events, trade shows and things like that. So, we will have, a little bit higher spend in marketing as well. And we’ve got some additional engineering costs we’re going to incur during the third quarter.

So, these will offset some of the benefits we’re going to get from lower spend in the G&A regarding the audit fees..

Got it, okay. That’s it from me. Thank you very much..

Thanks Rich..

Thank you. [Operator Instructions]. And we’ll take our next question from Aaron Yu with Singular..

Hi, good afternoon guys..

Hi Aaron..

Hi, I wanted to I guess just ask, if you guys have been in conversation with the new directors from Steel Partners and Lone Star, and kind of get a sense of what nature those conversations have been? And they’ve sort of maybe outlined any strategic plans that they sort of have in store for Aviat over the next several months or a year?.

So, we have, we’ve reached a settlement agreement with those parties which we announced I believe a few weeks back. And we now have a new board in place. And we’re working, we’re 100% aligned and working with the new board towards our goals..

Got it. Great. Thanks guys..

Thank you..

And there are no further questions at this time..

So, I want to thank everyone for your participation today. And thank you for your interest in Aviat Networks. This concludes Aviat Networks’ fiscal second quarter 2015 earnings call. Goodbye and have a great rest of your day..