Leslie Phillips - IR Mike Pangia - President and CEO Michael Shahbazian - CFO.

Kevin Dede - H.C. Wainwright Aaron Yu - Singular Research.

Good day, everyone and welcome to the Aviat Networks Q3 2015 Financial Results Conference. Today’s call is being recorded. At this time for opening remarks, I'd like to turn the conference over to Ms. Leslie Phillips, Investor Relations. Please go ahead, ma’am..

Thank you, Kelly. Good afternoon and welcome to Aviat Networks third 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 Relations page 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 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 includes a GAAP to non-GAAP reconciliation and other supplemental financial information, is also available on the company’s website. With that, I will turn the call over to Mike Pangia.

Mike?.

Thanks, Leslie and good afternoon to everyone listening on the phone as well as on the webcast. We've experienced good progress since our last earnings call in late January. In February, we announced key contract wins in Africa.

In March, we premiered what we believe to be the world's most powerful microwave radio for mission-critical networks and throughout the quarter, our CTR product experienced a significant ramp in bookings and shipments. And today, I'm pleased to announce that a large North America mobile operator has selected Aviat to modernize its network.

It was our technology offering combined with our strong services and network management capabilities that were instrumental in helping us secure this new customer win. I'll now provide an overview of our financial results followed by this quarter's customer and product activity.

Mike Shahbazian will give a more in-depth review of our financial results and will provide our guidance for the upcoming quarter. I'll then close the call by discussing the actions we are taking to further optimize and improve our business model.

Our fiscal third quarter financial results were largely as expected and we made progress with bookings and our expense reduction initiatives. Fiscal third quarter revenue was $74.8 million. We estimate that our revenue was reduced by approximately $1.4 million due to the strengthening of the US dollar against many of our international currencies.

Q3 bookings improved significantly on a sequential basis and we have returned to reporting a book to bill above 1. We are seeing momentum in bookings across nearly every geographic segment, largely fuelled by our CTR product line.

Non-GAAP gross margin was 23.7% and was impacted by a couple of one-time events that Mike will describe in greater detail in his comments.

Demonstrating the progress we've already made with our expense reduction actions, third quarter non-GAAP operating expenses were down approximately $7 million or 23% year-over-year and nearly $3.5 million or 12.5% sequentially to $23.8 million.

We expect to exit fiscal 2015 with a non-GAAP OpEx run rate of approximately $23 million with further improvements expected by midyear fiscal 2016. Adjusted EBITDA for the third quarter was a loss of $4.2 million versus a loss of $7.8 million in the year earlier period.

For the first nine months of fiscal 2015, adjusted EBITDA was a loss of $5.9 million versus a loss of $20.3 million for the first nine months of fiscal 2014. Our non-GAAP loss per share for the third quarter was $0.10, an improvement over the $0.16 loss per share reported in the year ago quarter.

Now, for an update on customer and productivity in our major geographic areas. Starting with North America, our mobile and non-mobile business continues on course.

On the mobile side, during the quarter, we secured a $9 million contract with a leading North America regional operator and began shipping the all-indoor IRU 600 for the carrier's western region backhaul network. The contract includes a strong services component in which we will provide turnkey integration and deployment support.

And as I mentioned earlier, we recently secured first time business with a large North America mobile operator. Our technology offering and the strong services offering were key differentiators which allowed Aviat to win this new customer.

In Q3, we experienced a steady flow of business from our non-mobile operations and we expect to see more opportunities in public safety and private low latency networks in Q4 and beyond.

That said, it's important to remember that due to the longer bookings to revenue conversion cycle and binary nature of this business, the specific timing of the revenue from our non-mobile business is difficult to predict.

Revenue for the third quarter and first nine months of fiscal 2015 illustrates the inconsistent timing and lumpiness of our non-mobile revenue.

While fiscal third quarter revenue for North America was down year-over-year and sequentially, our North America revenue for the first nine months of fiscal 2015 was up 9.3% year-over-year to $114.7 million driven by the strength in our private networks business.

Maintaining our leadership as a provider for mission-critical networks, we recently premiered the IRU 600 EHP. Two to three times more powerful than the typical radio in the market today, we believe the IRU 600 is the most powerful commercial microwave radio ever produced.

For use with the 6 gigahertz and 11 gigahertz bands, the product is designed to support mission-critical applications of all types. Moving to an update on our operations in Africa, across the continent, major players are making investments in enhancing their networks and offering services for businesses and enterprises.

Our CTR product with its dual microwave networking and routing capabilities is designed specifically to capitalize on this trend. We are increasingly confident in our position as an important supplier in the region and in Q3, we secured multiple new contracts in Africa.

Recently, we began to deliver equipment and perform services under a new three-year turnkey agreement with MTN South Africa. We’ll be working with this tier 1 mobile operator to modernize its mobile backhaul network and expand its network services.

As another example, this quarter we announced several deals with another major African mobile operator, in which Aviat is supplying the CTR, Eclipse and STR microwave radios to complete the operator’s transition to full IP. As part of these projects, our work will extend through Gabon, Nigeria and Tanzania.

We are encouraged by our progress in diversifying our business in Africa and believe that our specialized services capabilities will continue to differentiate us from our competition.

In summary, our progress in the quarter is a great illustration of the success we’ve had of reducing our cost structure and realigning our product and services offerings to meet the needs of existing and new customers. We signed new contracts and added new customers.

The CTR platform is clearly helping us win new business and retain our position with key customers and we expect this trend to continue. Q3 orders for CTR doubled from the prior quarter and through the first five weeks of this quarter, we have already matched the orders total from Q3.

Over the next several quarters, we remain focused on expanding share with our key customers, attracting targeted new customers, leveraging our new product ramp, improving operational efficiencies and generating cash. We are seeing improvement in our operations and we are pleased overall with the progress we’ve made this quarter.

Now, I’ll turn the call over to Mike Shahbazian to discuss our financial results in more detail.

Mike?.

Thank you, Mike and thanks to all of you for joining us. If you've not already done so, I’d encourage you to download the financial press release from the investors section of our website that we posted earlier today. The release contains Aviat's unaudited 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 third quarter and the related business trends. Unless otherwise stated and other than revenue, all dollar figures I provide will be on a non-GAAP basis. I’ll then provide guidance for the fiscal fourth quarter.

Revenue for the third quarter came in at $74.8 million compared to $92.5 million in the second quarter of fiscal 2015 and to $81.4 million in the third quarter of fiscal 2014. Product revenue was 63% of sales and services were 37% of sales, the same ratios as in the second quarter.

Gross margin for the third quarter was 23.7% of sales, down from 27.2% of sales of our fiscal second quarter. The third quarter gross margin was impacted by less favourable absorption of fixed costs due to lower volumes and changes in currency that occurred in the quarter.

As many other U.S.-based companies have reported, we’re affected by the continuing strengthening of the dollar. Margin was reduced by currency impact and additional realized foreign currencies losses, which added $1 million to our cost of sales, resulting in 130 basis point drop in our gross margin.

For the fiscal third quarter, our operating expenses totaled $23.8 million, down from $27.2 million in the fiscal second quarter. This sequential decline was driven by a benefit from the change in currency rates and implementation of our expense reduction measures.

Third quarter operating expenses were down approximately $7 million or 23% year-over-year. Our loss from continuing operations for the fiscal third quarter was $6.5 million or a loss of $0.10 per share compared to a loss from continuing operations of $10.2 million or a loss of $0.16 per share in the year ago quarter.

Fiscal third quarter adjusted EBITDA was a loss of $4.2 million compared to a loss of $7.8 million in the year ago quarter. The company ended the fiscal third quarter with a cash balance of $35 million, down from $38.7 million at the close of the fiscal second quarter.

Our cash balance was affected by movement in exchange rates relative to the dollar in the quarter, particularly in countries where we are unable to hedge our balance sheet, reducing our US dollar reported cash by $2.7 million. In addition as a result of repatriating cash in the quarter, we incurred expenses of approximately $1 million.

Cash used by operating activities was $400,000 in the fiscal third quarter. CapEx in the quarter amounted to $600,000. Free cash flow, which includes the cash used in operating activities plus CapEx, was a use of $1 million for the quarter. Now moving to working capital, DSOs were 84 days, up from 80 days last fiscal quarter.

DSOs declined due to decreased revenue in the quarter. Our actual receivables and payables balances declined substantially, reflecting the volume of business in the quarter. Days payables outstanding were 60 days compared to 62 last quarter and terms decreased to 5 from 6.1.

Inventories increased due to start-up activities related to the network build out in South Africa. I’d now like to turn your attention to guidance for the fiscal fourth quarter of 2015. We expect revenue for our fourth quarter in the range of $80 million to $85 million. We estimate that our adjusted EBITDA will be approximately breakeven.

We consider adjusted EBITDA to be a good proxy for company cash flows over a normalized period. We expect breakeven to a slight use of cash for the quarter. Regarding liquidity, we believe our existing cash balance, line of credit and expected future cash collections will provide us with adequate liquidity.

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. We see momentum from our bookings this quarter, carrying over to higher revenue performance in Q4 and we will make further strides with our business model in other areas.

The introduction of our new products, particularly the CTR platform, is proving to be instrumental, requiring new customers as well as increasing our footprint with existing customers. Our focus on simplifying the business has resulted in a significant reduction in our expenses, which puts us on a clear path to cash generation.

As I look forward to fiscal year 2016, I'm increasingly confident that the actions we have taken are starting to pay off. I would like to thank all of Aviat’s employees for their hard work and efforts. Now, back to the operator for questions..

Thank you. [Operator Instructions] We will go first to Evan Dede with H.C. Wainwright..

Good afternoon, gentlemen. It’s Kevin Dede. A bunch of things for you, Mike and no offence, Mr.

Shahbazian, but I guess I was kind of wondering how you felt about life at Aviat and what your plans were?.

My plans, well, I've been a CFO, this is my ninth company and I started doing interim roles after about 40 years. So I enjoy doing this, but I immensely enjoyed my time period with Aviat. It's a very interesting organization with a very interesting executive and management team and I would say that it's an experience I’ll treasure going forward.

So all of these have been experiences and this one is very unique along those lines..

So how would you say the search for a permanent CFO is going?.

Is that question to Mr. Shahbazian or....

It should be to Mike Pangia..

Yeah. That’s sort of an open one..

Yeah. It's going very, very well and we are getting very close. So notwithstanding that, again, I appreciate Mike being on board..

Great. Okay. So Mr.

Pangia, how would you characterize the integration of CTR and MTN and how are the network engineers there thinking about the evolution of their network going forward? And do you see it sort of I guess, their engineers are leveraging your platform to incorporate small-cell if necessary in densely populated areas, just give me some sort of 20,000 foot perspective on how you’re viewing the integration process?.

Well, first off, we feel very good about our position with MTN. We continue to be very focused on delivering value to them. As expressed in the recent press release, I think winning new business with them is an indication that we are continuing to deliver value.

CTR is instrumental in that value proposition, both in terms of its capabilities from a layer 2 perspective as well as its networking capabilities. And we actually appreciate the business with MTN and we strive to exceed their expectations on a daily basis and we will continue focusing on delivering them value.

Notwithstanding that, we also feel very good about the progress we've made with other customers in Africa, which also see value in what we’re providing, not only with respect to CTR but also our strong services and support capabilities in the region also are critical to delivering TCO or at least the best TCO relative to other providers and we will continue to strive for that..

Okay.

I guess sort of as a recall to layer 2, could you sort of take it up into another level of detail, what are they experiencing that you might be able to put the decision as a selling point for other operators?.

Yes. So we have a number of elements in the value proposition.

In terms of the products capabilities from a layer 2 transmission perspective, its ability to do routing and other layer 3 capabilities which also helps as we look at the enterprise space and then on top of that, we have a very strong service capability and support capability, which in the broader scheme of things isn’t just about the pulling equipment and supporting it, but it’s also regarding the logistical elements of working in a region like Africa..

So I guess Mike, what I was hoping you might be able to help me clarify is just through the evolution of mobile networks in general, I guess I'm kind of wondering I mean there has been, obviously there is a lot of talk about software defined network and it just seems to me that the CTR fits into that type of evolutionary thinking? I'm just kind of wondering how the engineers at MTN view that and how they see the CTR as an integral product in that evolutionary group?.

First off, I'm looking at the product’s capabilities and the other attributes that we provide beyond just MTN. So.

No, I understand.

But I mean just wanted to see if the standout is sort of the leading customer on the curve of adoption?.

No, we've had must multiple customers adopting the product now. As I referred to earlier, we’ve seen a doubling of orders from the second quarter and the third and through the first five week, it’s already equalled the whole last quarter. This is much more than just MTN.

So as we talk about the broad range of customers are looking at this product and as it relates to your comments earlier about SDN or software defined networks, this is a step in that direction from the standpoint that it does take products that are multiple products and it integrates that functionality into a product.

It does provide more software in terms of the value and also another important element as we’re moving it into the software defined networking world is service capabilities have to be strong, because the OpEx part of the equation is also becoming even more critical to a customer and we are also addressing that with our service capabilities, network management tools and support..

Okay.

Your new North American customer, the one that you announced here this evening, is it fair to say that that customer is a tier 1?.

It's a large North American mobile operator..

Okay.

The expense run rate you characterized and it’s at the $23 million range for the next quarter, but in your restructuring release, what was it, maybe a month or two ago, you commented that you hope to extract another $10 million to $12 million out of operating expenses and this evening, you seem to reiterate that and seeing expenses reduce further for the first half of the next fiscal year, I'm just wondering how you might rather characterize that expense reduction and how we might see it in the P&L?.

Okay. So first off, when I talked about a $23 million exit rate, to some extent, you can't look an individual quarter, especially our fourth quarter in anticipation of strong bookings, which we expect to continue.

There is a variable element on our sales expense that usually increases in the fourth quarter related to, it’s one of the stronger quarters we normally have with respect to our bookings.

And then notwithstanding that, we expect to see further improvements in that OpEx moving into fiscal year 2016 and that's when you will see further improvements, all other things being equal..

Okay.

But at this point you are not comfortable sort of giving us a ballpark on where you expect to see that?.

We expect it to be improved, it will be improved versus the $23 million.

Again all things being equal, there is obviously variable expenses associated with our business as well and to the extent that our business is better than what one would expect from a run rate perspective, that number could be higher, but we’re very focused actually on reducing the fixed cost element of that even further than where we are at right now..

Right.

So on that fixed cost discussion, is there any of that that you think relates to cost of goods?.

Well, our reductions, I've only referred to the element associated with the OpEx side.

But not referencing, first of all, I’m not referencing cost of goods here, I’m referencing the spending associated with delivering and supporting products and above and beyond the OpEx reductions, we’re also having reductions in terms of the overhead part of our business with respect to our supply chain, further signifying that, that benefit which show up as an improvement in our margins..

Right. Okay.

Can you shed any light on where you might expect gross margin to fall out in the June quarter?.

All I can say is that we’re very focused on improvements across the whole P&L. Our focus is on generating positive EBITDA and gross margins is one lever as part of that value proposition.

So I would see -- I am expecting an improvement in gross margin in the fourth quarter, but I'm also expecting improvements in other areas and our focus going forward is [ph] on generating positive EBITDA on a consistent quarterly basis..

Okay.

Could you talk to sort of the overall pricing environment in North America, Africa and then I suppose, I guess, Asia and Europe as much as you can see?.

It's always difficult to provide pricing elements without -- again without reconciling it to total cost of ownership, because there is elements when we talk, when we think about pricing, we’re usually thinking just about the CapEx part of the equation. And that's different than providing value.

So what I’m seeing in the industry is that there is obviously continued compression from a hardware perspective, it's more intensive in the international arena than it is in North America, but the perspective there is that’s continuing to be pressured and again that's why software defined network is an important element, but the other values we’re providing in terms of software capability, ability to improve the support, the service side, those are all attributes that lead to improving value to the customer, which ends up generating a benefit on our end in terms of margin and other elements..

Can you talk a little bit about that pricing equation vis-a-vis CTR and the competitive offering that you see from Independence?.

So, the other element of pricing is there are certain markets where there is a focus primarily on just the CapEx side of the equation that are extremely price sensitive. And it's very difficult to drive value in those markets that are only looking at one element of the equation.

Part of our restructuring efforts have been to focus our activities and where we see the opportunity for that value creation to be there, and that's where CTR fits in as well as all the other elements I discussed earlier with regards to our service and support capabilities. And that’s where our focus is in those markets with those customers.

And it's not just about the mobile operator side as well. We have a significant amount of business in the public safety, private networks domain, in some cases, the sensitivity on price is not as high, it's about delivering value, the mission-critical capabilities of the product are important.

So that's what I mean, the pricing equation is difficult to answer without getting reference to markets and verticals and where we are focused and where we are not focused..

Okay. Fair enough.

Could you give us the breakdown between product and service revenues for March versus December?.

Sure, Mike..

March versus December..

The last I guess Q2.

Sequentially, yeah..

Okay. I'm sorry, so you wanted the.

Yeah, Mike.

I was just looking for product and service reps, percent [ph] of sales for December and March?.

Yeah. So as a breakout between services and product revenues for the quarter as a percentage of revenues, right.

Is that what you’re looking for?.

Yeah. Right. It doesn't have to be percent, I mean if you have the real dollars, whatever you want to offer..

Right. Kevin, I think that was covered in the script and it was 63% for services revenue -- product revenue and 37% for services revenue..

We said it was pretty much even..

Pretty much even with the same numbers we had for the second quarter..

Okay, fair enough. Thank you. One last question for me Mike. There is a lot of chatter about Nokia and Alcatel and I guess there are people on both sides of it, right, whether or not the French government will go for it.

I'm wondering what sort of disruption you think it may be causing now and how it might change the competitive landscape for you particularly going forward..

Yes. So our focuses are on things that we can control and clearly any time there is something like that that takes place, it could provide an opportunity, based on the fact that there will be integration and there is probably lots of unknown factors.

So we’ll look at that as an opportunity at least in the near term and we’ll continue to focus in on building our business moving forward..

The win with the new North American carrier, who do you think you displaced there and why?.

I'm not going to answer that question. No comments on that question..

Okay. Alright. Well, I’ll turn it over. Thank you for working with me, Mike. I appreciate it..

[indiscernible] So I can't comment on who was displaced, but again I will reinforce that our winning there was a combination of our strong product offering and our service capabilities, including elements like network management. Those were the differentiators..

Network management, okay. But not from say you're not, just helping them manage their own..

Network management platform in combination with the products..

Right, okay. Thank you..

You’re welcome..

We’ll move next to Aaron Yu with Singular Research. .

Hey, good afternoon, guys..

Good afternoon..

So it sounds like the momentum acceleration in the bookings was pretty broad-based across a lot of geographies, wanted to see if you guys can give a little bit more color to whether there is some pent-up demand that's coming back in the market or was it more a function of adoption of CTR and product specific initiatives?.

Yeah. So I'm very pleased with the actions that we've taken with respect to what we are focusing, the ramp of our new products, continue to leverage our service capabilities, and a combination of all those actions is starting to bear fruit, with respect to new customer wins, which is showing up in terms of improvement in bookings.

And I'm feeling increasingly more confident that we continue to see some great momentum, again largely fuelled by CTR which I did indicate already this quarter in the first five weeks in terms of the ramp there. So we’re feeling very good about the actions we've taken and the direction we are heading..

And the repatriation of cash, was that just increase for your exposure to FX in any geographies for you guys and hedge or are there sort of other drivers in rationale behind that?.

Right, so we had built up -- this is Mike, we had built up some excess cash in a couple of our international units where it is very difficult to do currency transactions, so we made a decision to accelerate payments and enter in to a couple of swap transactions that allowed us to bring cash back to the US, that certainly helped us from a liquidity standpoint in the US, so that was essential for doing that but because the markets aren’t particularly well-developed, there is just no active foreign exchange market, you we have to do a swap with using bankers and intermediary and there was a cost of doing that and that was the impact that we had to deal with.

At the same time, it did allow us to repatriate a significant amount of cash that we can use in the US..

So that cost was that the million dollars you mentioned?.

That was a million dollars between foreign exchange and also withholding costs, so the foreign exchange was swap cost and we had some withholding taxes because of the country’s tax regulations..

Okay, Thank you guys..

Thank you..

And with that, there are no further questions in today's conference. We do thank you all for your participation today. Again, that does conclude today's conference..