Good day, and welcome to the Aviat Networks' Fourth Quarter and Fiscal Year 2015 Financial Results Conference Call. 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. .

Thank you, Tiffany. Good morning, and welcome to Aviat Networks' Fourth Quarter and Fiscal 2015 Results Conference Call. I'm joined today by Mike Pangia, President and Chief Executive Officer; and Ralph Marimon, Chief Financial Officer..

This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor 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 revenue, 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's 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 turn the call over to Mike Pangia.

Mike?.

Thanks, Leslie, and good morning to everyone listening on the phone as well as on the webcast. .

After the market closed yesterday, we published our fourth quarter -- our fiscal fourth quarter earnings release and filed our 10-K within the 15-day extension period provided by the SEC. The delay was primarily related to an issue with our project accrual accounting that was uncovered during the annual audit process.

While we'll provide more details about this later in the call, this accounting issue resulted in several adjustments to our fiscal fourth quarter results. Even with these adjustments, our fiscal fourth quarter results show improvement across many areas of our operations, including non-GAAP operating expenses and cash flow from operations.

Our pace of business remains strong. During the fourth quarter, we announced new CTR wins in the Middle East and Asia Pacific, and began deployments of our CTR product with a new Tier 1 mobile operator in the United States under the contract announced last week. These and other contracts drove another doubling of CTR orders quarter-over-quarter. .

In addition, in the fourth quarter, Aviat was recognized as the top microwave specialist in the recent Infonetics survey. We've taken several steps to improve efficiencies and our business operations. As a result, we see an improved path towards sustained profitability and cash generation. We expect our Q1 results to show continued progress. .

Before going any further, I'd like to introduce Ralph Marimon, Aviat's newly appointed CFO. After conducting an extensive CFO search, Ralph joined Aviat in late May, bringing over 10 years of public company CFO experience in complex industries. We feel very fortunate to have him join the management team. Welcome, Ralph. .

I'll now provide an overview of our financial results followed by the fourth quarter's customer and product activity. Ralph will give a more in-depth review of our financials and provide guidance for our fiscal first quarter of 2016. I'll then close the call by discussing some of our objectives and business drivers for the upcoming year. .

Now more about our results. Revenue for our fiscal fourth quarter was $87.8 million. With bookings during the quarter at their highest level in fiscal 2015, we achieved the book to bill above 1. Momentum in bookings is being fueled by the CTR line of products and demand for our outstanding service capabilities.

We're proud of our ability to provide a strong services component to our customers ranging from network planning to design consulting. These services support the entire end-to-end product and network life cycle. Non-GAAP gross margin came in below our expectations due to adjustments related to inventory and project accruals.

Non-GAAP operating expenses for the fourth quarter of 2015 were in line with the $23 million run rate we anticipated. .

As with past several quarters, we successfully reduced our OpEx spend significantly year-over-year. These improvements are part of an ongoing effort to simplify our operations.

We see additional opportunities to make improvements both internally and externally, such as web sales process and tools to support closer collaboration with customers and suppliers. While we might see some fluctuations, we believe this level of OpEx will be further reduced while still allowing us to invest in growth opportunities. .

Adjusted EBITDA and earnings per share for the fourth quarter both showed improvement over the prior quarter and year-over-year even with the impact of higher inventory reserves and certain adjustments. .

During the fourth quarter, we had positive cash flow from operations, which best represents the progress we are making and improving our business model. As we continue to focus on cash as a primary metric, we expect to make further improvements through fiscal 2016. .

Moving on to some of our fourth quarter highlights and customer activity. In June, research organization, Infonetics, published the results of its annual microwave strategies and vendor leadership survey based on input from mobile operators from around the world. Aviat was the top-rated microwave specialist in 2015.

Aviat ranked #1 among all microwave specialists in 7 of the 10 categories, including security where we were ranked #1 when compared to both microwave generalists and specialists. We believe this recognition reiterates the strength of our brand.

It also serves as further evidence as to how and why Aviat can compete and win against the microwave generalists. .

Also helping us win new business is our strength in support and services. You can see this reflected in nearly all of our fiscal 2015 contract wins, and we expect this important point of differentiation to set us apart moving forward.

Throughout fiscal 2015, we worked diligently to diversify our global revenue base, adding new customers in North America, Africa and Asia. We are working to bring in new business from Latin America and Europe, where we continue to see compelling opportunities. .

In the mobile operator vertical and per our announcement last week, we are currently working with a Tier 1 mobile operator in the United States on its LTE expansion. This is the first CTR deployment with a leading mobile operator in North America.

Beyond the technology and product, it was our strong services and network management capabilities that helped Aviat secure this new business. We've made great progress with this customer and have already made significant achievements against the multiyear contract. .

In addition to this contract win, we strengthened our position in Asia Pacific, announcing multiyear agreements with Globe, a Tier 1 telecom provider in the Philippines. As part of the operator's LTE expansion, Aviat will provide our CTR as well as microwave network planning and engineering. .

In Africa, mobile operators have faced macroeconomic challenges over the past few quarters, ranging from currency devaluations to political instability in some countries. We will continue to work closely with their customers in supporting their improved TCO objectives by leveraging our strong experience in the region.

The MTN group remains our largest customer in the region, and we strive to exceed their expectations on a daily basis. MTN continues to invest in network performance improvements and in the enterprise segments. We believe our products, technology and services are extremely well-suited to support these initiatives.

From a long-term perspective, we believe Africa has all of the drivers for continued growth, and it is a region we will continue to focus on. .

Moving to our public safety vertical. Our operations remain strong in the fourth quarter, and we received significant orders from a leading global systems integrator. We announced an agreement with the United Arab Emirates Security Agency to implement CTR microwave routers in a new public safety LTE network. The customer will initially deploy the CTR.

When the customer then deploys commercial LTE, Layer 3 services at the network edge will be introduced via IP/MPLS technology.

We also had some key wins in other private network verticals, securing multimillion dollar awards with one of the world's largest investor-owned energy companies, a new customer, and a leading oil and gas company in Latin America.

In Asia Pacific, we are working with a specialized carrier to support broadcasters with connectivity for mission-critical services. .

As highlighted in the Infonetics survey, Aviat ranked #1 in security across both microwave specialist and generalist. Our focus on security greatly supports our strength in public safety and other private networks as Aviat can be relied upon for providing important, differentiated functionality and support services to match. .

Moving to an update on our products. Over the past year, we executed well against our long-term road map, making further enhancements to our product portfolio with new microwave and IP routing solutions. We introduced variance of our CTR platform to specifically address lower density networks.

And in September, we introduced an all-outdoor version of the product. The CTR is a transformational microwave product line since it efficiently integrates microwave transport and IP routing in a single solution.

The software-defined functionality of the CTR platform allows us to expand this capability over time and create further revenue-generating software releases in the future. We are pleased with the pace of adoption of our CTR product, and we now have over 50 customers using the CTR to address their networking needs.

The product is well positioned with new customer opportunities and is helping Aviat expand our position with existing key customers. .

In addition to offering innovative products and as mentioned earlier, we're also focused on services that enhance our customers' total cost of ownership. During the year, we expanded the number of customer networks managed from our North America network operations center and extended our NOC operations in New Mexico.

The NOC increasingly enables us to monitor and optimize our customer networks. Our strong maintenance business represents a significant recurring revenue stream, and we continue to develop our professional services portfolio as a key to our long-term strategy and differentiation. .

Now I'll turn the call over to Ralph Marimon to discuss our financial results in more detail.

Ralph?.

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 yesterday. The release contains Aviat's audited GAAP financial statements along with a reconciliation of non-GAAP financial measures. .

Before reviewing the financial results, I'd like to address the delay we had in releasing our earnings and filing our 10-K. During the course of the year and financial close in audit, we found an issue with our accounting process primarily related to project accrual accounting, which took extra time to resolve.

As a result of this process, we made an immaterial revision to our prior year financial statements, which has been reflected in our most recent filings. This revision had no impact on our cash flows. Also during the close process, we identified material weaknesses in our financial controls, which are detailed in our 10-K filing.

Management and the board are committed to a strong internal control environment, and we expect to fully remediate these control issues in the coming fiscal year. .

My prepared remarks will be focused on the non-GAAP financial overview of our fiscal fourth 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 first quarter 2016..

Revenue for the fourth quarter came in at $87.8 million, up 17% sequentially and up 3% year-over-year. Product revenue was 63% of sales and services were 37% of sales compared to product revenue of 63% and service revenue of 37% of sales in the third quarter. .

Cash generated by operating activities was $500,000 in the fiscal fourth quarter, marking our strongest quarter of cash generation this year. As Mike mentioned, we believe this metric best represents the progress we are making to improve the business model. .

Company ended the fiscal fourth quarter with a cash balance of $34.7 million compared to $35 million at the close of the fiscal third quarter. Gross margin for the fiscal fourth quarter was 21.4% of sales.

Gross margin was below our expectations primarily due to higher-than-forecasted expenses related to inventory and projects, which we do not expect to recur. Without these higher charges, gross margin would have been approximately 25%. .

For the fiscal fourth quarter, our operating expenses totaled $23.2 million, down from $23.8 million in the fiscal third quarter. This sequential decline was driven by implementation of our expense-reduction measures. Fourth quarter operating expenses were down $5.6 million or 19% year-over-year. .

Our loss from continuing operations for the fiscal fourth quarter was $5 million or $0.08 per share compared to a loss from continuing operations of $8.7 million or $0.14 per share in the year ago quarter. Fiscal fourth quarter adjusted EBITDA was a loss of $2.5 million compared to a loss of $6.3 million in the year ago quarter.

CapEx in the quarter amounted to $700,000. Free cash flow, which includes cash used in operating activities plus CapEx, was a use of $200,000 for the quarter. .

Before moving to working capital -- sorry, now moving to working capital. Inventory turns improved to 7.1 from 5.0. DSOs were 91 days compared to 84 days last fiscal quarter and DPO were 61 days compared to 60 last quarter.

Strong inventory management improved the cash conversion cycle in the quarter, and AR collections and payments continue to pay similar to the past several quarters. .

For the fiscal 2015 results, please reference the press release published yesterday. I'd now like to turn your attention to guidance for the fiscal first quarter of 2016. We expect revenue in the range of $78 million to $83 million. We expect breakeven to positive adjusted EBITDA and breakeven to cash generation in the quarter. .

Regarding liquidity, we believe our existing cash balance, line of credit and expected future cash collections will provide us with adequate liquidity. .

Now I would like to turn the call over to Mike for some additional remarks before we turn the call over to the operator for questions. .

Thanks, Ralph. So in fiscal 2015, demand for innovative products, including the CTR and strong service portfolio, help stabilize the top line. In 2016 fiscal year, we will use these key differentiators to preserve our market share and expand our addressable market. .

In fiscal 2015, we also made great progress at optimizing our business model and sizing the company to generate positive cash flow. Overall, we are entering fiscal year 2016 with a significantly better financial and operational position than when we started the last fiscal year.

While we are encouraged by this progress, we see additional opportunities to build off this momentum, increase our cash flows and create value for our customers and shareholders. I'd like to thank all of Aviat's employees for their hard work and efforts. .

Now back to the operator for questions. .

[Operator Instructions] And we'll go to Kevin Dede with Rodman. .

I've got a couple of questions for you. Book to bill seems strong, 50 customers on the CTR.

I was wondering if you could give us a little more insight on how that customer base breaks down between carrier and private network or government?.

Yes, that -- it's primarily a carrier, mobile operators. .

Can you -- could you just sort of review how you think they're looking at the TCO argument that you bring them? And what sort of network reengineering you think is implied in pushing that routing capability to the edge?.

Well, I mean, let me just to maybe simplify the answer. It's really driven off of the product as a layer to traditional transmission product. It has a lot more capability than the product that's replacing in terms of its evolution.

As we discussed before, the ability to integrate routing functionality is a significant OpEx savings from a hardware perspective as well as from an OpEx perspective. Obviously, if you're only dealing with 1 product, you've got 1 service, you've got less power consumption. And all of those factors lead to the opportunities that we have in front of us.

The one thing I will say though about the product and its innovative capabilities, it does take a longer sales cycle because you are integrating both networking as well as the transmission area. In some cases with customers, those organizations are still independent.

And there's quite a bit of interoperability requirements as well because of the innovative capability of the product. We're very encouraged by working with several customers and demonstrating the product and working through the long sales cycle, and more opportunities are opening up for us around the world.

And again, this is primarily focused in on the mobile operator area here, internationally, despite the success in North America. And obviously, we're also leading to some business wins in the public safety area as well as we announced our win in the Middle East. .

Okay.

So when you reference interoperability, you're really referring to that platform's capability to support other vendor-specific microwave links?.

It's got to connect to other vendor products, given where it's positioned in the network. And we're moving along very nicely in that area in terms of the some of that testing that we're doing with existing customers. .

Okay. So just another line of questioning. I know that you've been forced to resize the company and that includes IT support, and it probably includes other machinations in product manufacturing and customer support.

I was wondering if you wouldn't mind giving us a synopsis of where your infrastructure stands at this point, where you're manufacturing, where your distribution focuses and whether or not you think you're in a position now to support your growth going forward. .

Yes, so the actions that we've taken on our cost structure have been in many different areas, primarily focusing on operating much more efficiently, simplifying some processes. Also, as we've discussed in the past, really taking a hard look at our markets to determine which ones we think represents the best opportunities for us moving forward.

I feel very, very comfortable that the actions that we've taken have positioned us to be a much stronger company in many ways and how we operate.

And we still have a number of opportunities in the areas of simplification and improvement from a spending perspective that are actually -- there's a lot of areas that are actually not headcount related, and these are areas that include things like the impact of not having forecasting that's perfect given the environment we're in.

And we're working on those types of initiatives that will make us even stronger from a supply chain perspective in other areas. As far as how we operate and our focus going forward, we are very much intending to have a focus in noncash generation as our #1 proxy, not necessarily the top line, but because of what we're going to focus.

And we're looking for quality business rather than simply just chasing the top line in the near term. We believe that we have all the right investments and in fact, we will invest more in the areas that we believe there's increasing opportunities for profitable growth. .

Okay. So it's comforting to hear, Mike, that your priorities haven't changed. I was just wondering if you might be able to peel the onion back another layer and give us some insight on where your distribution centers are.

I mean, I remember it wasn't too long ago, well maybe, it depends on how you measure time, where you decided that it was important to open a DC in Western Europe.

And I'm just kind of -- and I know you've had to consolidate manufacturing, I'm just kind of wondering where your assets reside at this point and whether or not those fiscal assets are sufficient. .

And so I think you're talking about our -- so from an operational perspective in terms of our manufacturing supply chain, I think we're offering that as efficiently as we can and we're leveraging the best infrastructure to do that.

I don't think that, that necessarily has any direct correlation to where we'll be focusing our attention from a market perspective. From a market perspective, we have a global base of customers, and I think we'll continue to leverage that global base.

Where we see opportunities, we just continue to see opportunities in our strongest markets in both Africa and North America, and we'll continue to focus on those.

So I'm not -- maybe I haven't answered your question perfectly, but we feel very good about the infrastructure we have in the new locations we have it to support our opportunities for growth. .

Okay.

You alluded to opportunities in Latin and South America, and I guess I'm curious to know that your infrastructure as is will support opportunities as they emerge there?.

Yes, so I think relative to -- I think Latin America is a good example of when I talked about Latin America, we're not going after business in all of Latin America. We know we're -- we have a couple of areas of strength there, and we're focusing our attention on the opportunities in those areas of strength.

I don't think it's appropriate for me to spell out what those are specifically at this point in time. And as we have business opportunities that are significant that we will make public, then we'll do that at the appropriate time. I think when it comes to Europe -- also Europe, we all know Europe is a large area.

We do have some strong basis within Europe. I think we've discussed before Eastern Europe as an example where we have a strong base, and we see a number of opportunities with customers there. Again, I think in the European side, what I would say is that there's obviously some challenges there from a macro perspective as well.

I think the currency, devaluation of the euro versus U.S. dollar has had some effect. But again, we feel very good and again fueled by CTR about our opportunities there in Europe as well in the areas that we're focused on within that large part of the world. .

Okay, last question for me. I'm wondering if you wouldn't mind sort of giving us the top down view of the competitive environment and how sort of flattish telecom CapEx spending has shaken things out a little bit in light of the Alcatel and Nokia combination. .

Yes. So I think it's -- I think there's been a lot of reports that have come out related to the microwave area, and I think they all reflect somewhat of a flat market.

We talked before regarding -- it's hard to look at the market from an overall perspective without peeling the onion back and looking at where there's growth versus where there's perhaps a contraction.

I think if you take a look in the last several quarters and again based on the competitive landscape, I think India has been an area of significant area growth in this space. We obviously don't operate in India, so that's an area where it has had a lot of attention. I think Europe has been a market, which has had challenges that I've discussed.

I think Africa has had some challenges, as I also mentioned earlier, regarding currency valuations, fluctuations. North America continues to be I think a very strong market. We believe, again, because of our position is both in mobile operator as well as public safety private networks, there's continues to be opportunities.

The challenge in North America is always timing because a lot of the opportunities outside of mobile are large and binary. And when they're one, it has a huge impact in the bookings side and it takes a few quarters for that to convert to revenue. We feel very good about that as well.

Our competitive landscape primarily is -- when we compete primarily against the large generalist, and our focus and our attention is to specialize provider in this area, is what sets us apart.

Our service capabilities, our ability to design networks to deliver our products on time within a very, very strong lead times and all of our post-sales support activities are the things that set us apart from the generalists. So we feel very good about our competitive position around the world, both against generalists and specialists. .

There are no other questions in the queue at this time. I would like to turn the call back to Leslie Phillips. .

Thank you. I want to thank everyone for your participation today, and thank you for your interest in Aviat Networks. This concludes Aviat Networks' Fourth Quarter and Fiscal Year 2015 Earnings Call. Goodbye, and have a great rest of your day. .

And that concludes today's conference call. Thank you for your participation..