Leslie Phillips - IR Mike Pangia - President and CEO Ralph Marimon - CFO.

Good day, everyone and welcome to the Aviat Networks’ First Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session.

[Operator Instructions] Please note this call is being recorded It's now my pleasure to turn the conference over to Leslie Phillips Investor Relations. Please go ahead..

Thank you, operator. Good afternoon and welcome to Aviat Networks first quarter of 2016 results conference call. I’m joined today by Mike Pangia, President and Chief Executive Officer; and Ralph Marimon, the Chief Financial Officer.

This call is being broadcast live over the Internet for all interested parties and the webcast will 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 revenue, business drivers, the timing and capabilities of new products, network expansion by mobile and private network operators and economic activity 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 revision of these forward-looking statements in light of new information or future events.

For more information, please see the press release and filing 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 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. I am pleased with our fiscal first quarter results, which show continued improvement with our business model. In the quarter we made steady progress working with newly acquired customers and our existing customer base.

At the same time, we improved gross margins, lowered OpEx and reported positive EBITDA. Perhaps the most important metric is that we increased our net cash balance and for the second consecutive quarter, generated positive operating cash flow.

The steps we’ve taken to improve our business model position us much better for the current market with significant operating leverage to support profitable growth. We are currently investing in key internal processes to continue improvements to our structure.

We have a tremendous base of customers in both the mobile and private network verticals whose needs are a strong fit for our product and services offerings. We continue to see compelling new opportunities to work with them. I will now provide an overview of our financial results followed by fiscal Q1 customer and product activity.

Ralph will give a more in-depth review of our financials and provide guidance for our fiscal second quarter. I will then close the call by discussing our business drivers and market outlook for the upcoming quarters. Revenue for the fiscal first quarter was $79.6 million within our guidance range.

The book-to-bill ratio was below 1, but slightly better than the year-ago quarter. We've expect bookings in our upcoming fiscal second quarter to be stronger than the year-ago period. Non-GAAP gross margin was 26.5%, a substantial improvement from the Q4 level.

The improvement was driven by a combination of a stronger mix of product revenue and lower inventory related charges. OpEx was approximately $22 million, down more than 12% year over year and down $1 million sequentially demonstrating the great strides we've made to streamline our operations.

We believe this level of OpEx is sustainable and with further process improvements allows for some new investments. Year over year, we've reduced our losses by more than half reporting a non-GAAP EPS loss of $0.02 compared to a loss of $0.06 cents.

And successfully meeting our fiscal Q1 guidance we reported adjusted EBITDA of $700,000 and positive cash flow from operations of $1.8 million. For the first time in several quarters, we increased our net cash balance. We also expect to generate operating cash flow for the fiscal year.

Now to an update on customer activity in the quarter, starting with our mobile operator base. The core of our mobile operator customer base consists of 8 Tier-1 operators across the regions we serve, two more than at the beginning of 2015.

These customers range from two Tier-1 operators in the United States, to MTN in Africa, to Globe in the Philippines. We are confident in the position we've established with this customer base and also see opportunities to grow over time.

As an example, we recently completed a new framework agreement with the Tier-1 operator that has networks in Europe, Russia and Asia. While we worked with this customer in the past in Russia following success trials of the layer 3 capabilities of our CTR platform, we are now able to engage with their network operations in several other regions.

Meanwhile, our public safety and private networks business continues to be robust. While quarterly revenue can fluctuate based on project implementation time scales, we are maintaining a strong backlog and have a healthy pipeline of new opportunities.

In fiscal Q1, we continued deployments in numerous public safety networks with larger projects in California, Washington and Oregon as well as for a Florida-based water management company.

We recently were awarded a significant piece of new business in conjunction with a large systems integrator for a Midwest states public safety network where we will supply a complete microwave network with MPLS including network design, services and deployment.

We were also granted a new sole source award from another state for the second phase of a microwave network modernization and transition to IP that will support services for multiple state and federal agencies. This first phase was won face via competitive bidding three years ago.

Overall, our overall value proposition, including microwave and IP networking is expanding our scope within these verticals and leading us to an increased pipeline of opportunities. Moving onto an update on our products. We continued to enhance our CTR platform, and introduced a new CTR 8380 for all-outdoor applications during fiscal Q1.

We see a growing interest in this solution as network densities increase and more rooftop installations are required. The software-defined functionality of the CTR platform allows us to expand its networking capability over time and create further revenue generating software releases.

We have now commenced lab and field testing of the next major release of CTR software with our largest customer and expect to finalize this testing within a few months. As I mentioned earlier, recent successful validation of the CTR’s networking capabilities with another Tier 1 customer will expand our addressable opportunities in that account.

Overall, our product strategy is strengthening our position. Now, I will turn the call over to Ralph 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 today. The release contains Aviat’s 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 fiscal Q1 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 fiscal Q2 of 2016.

Revenue for fiscal Q1 came in at $79.6 million, down 9% sequentially and 3% year-over-year. Product revenue was 67% of sales and services was 33% of sales compared to product revenue of 63% and service revenue of 37% of sales in fiscal Q4. Cash generated by operating activities was $1.8 million in fiscal Q1.

The company ended the quarter with a cash balance of $35.8 million compared to $34.7 million at the close of fiscal Q4. Gross margin for fiscal Q1 was 26.5% of sales, a strong improvement over that 21.4% fiscal Q4 gross margin. As Mike stated, the improvement was driven by product mix.

In addition, the inventory and project expenses that held margin down last quarter did not recur. For fiscal Q1, our operating expenses totaled $22.2 million, down from $23.2 million in fiscal Q4. This sequential decline was driven by the implementation of our expense reduction measures.

Fiscal Q1 operating expenses were down more than 12% year-over-year. Our loss from continuing operations for fiscal Q1 was $1.3 million or $0.02 per share compared to a loss from continuing operations of $3.7 million or $0.06 per share in the year-ago quarter.

Fiscal Q1 adjusted EBITDA was $700,000 compared to a loss of $1.5 million in the year-ago quarter and CapEx in the quarter amounted to $400,000. Free cash flow, which includes cash used in operating activities plus CapEx was a positive $1.4 million for the quarter.

Now, moving to working capital, DSOs were 101 days compared to 91 days last fiscal quarter. While our risk for bad debt has not increased our payment terms are relatively unchanged, the timing of collections has been impacted by the mix of customer and currency related issues. Inventory turns during fiscal Q1 declined a 5.9 from 7.1 in fiscal Q4.

Our radio segments in fiscal Q1 were at their highest unit volume in more than a year, but a significant part of these went to projects where revenue depends on deployment rather than delivery and thus was deferred. This contributed to a higher level of deferred revenue driving up inventory and payable accounts.

This will extend through fiscal Q2, but based on our latest customer forecast, we expect the deployment rate to increase in the second half of fiscal 2016.

While there is a near-term negative effect on working capital metrics, the volume of this project business strengthens our backlog and should help improve the top line in the second half of the fiscal year. I now like to turn your attention to guidance for fiscal Q2 of 2016. We expect revenue in the range of $68 million to $73 million.

As I mentioned, fiscal Q2 has been impacted by delayed deployments of equipment shift. Based on the fiscal Q2 revenue level, we expect adjusted EBITDA at a slight loss to breakeven and breakeven to modestly positive cash from operations.

Although our fiscal Q2 top line guidance is substantially lower than the prior fiscal year Q2, we expect to generate a similar level of EBITDA or better. This is another indication of the focus we’ve had in improving our business model in spite of a challenging macro environment.

Lastly, to address the control issues identified during our recent audit, we have implemented a comprehensive remediation plan. We are making progress against this plan and expect to fully remediate these control issues in fiscal 2016. I would now like to turn the call over to Mike for some additional remarks..

Thanks, Ralph. This quarter's results reflect the operational progress we've made to improve our business model and although there is more work to be done, we remain confident that we can protect our cash balance and generate breakeven to positive EBITDA on a going forward basis. We have a very strong base of marquee customers from around the world.

We feel secure about our position with these customers based on several factors, which include our track record of delivering high-quality products and locally focused services, our innovative product offerings, as measured by TCO benefits and our vision of the future, as represented by our product roadmap, which we share proactively with this customer base.

In the near term, mobile operators’ investment plans continue to be affected by macro headwinds, FX and network rollout challenges, which lead to choppy buying patterns.

Over the medium to longer term, we expect the level of investment with these customers to improve and normalize, dictated by strong demands for network capacity and the ability to add new revenue sources such as broadband, enterprise services and others such as mobile payments, healthcare and machine to machine applications.

As we look forward, we’re optimistic regarding an improving bookings profile, which will lead to higher revenue. With topline growth, we have a tremendous opportunity to leverage the improved business model and generate higher cash flow and profitability. Operator, we’ll now open the line for questions..

End of Q&A:.

Q - :.

:.

[Operator Instructions] And it appears that we have no questions at this time. And we would like to conclude the Aviat Networks fiscal one 2016 financial results conference call. Thanks for your participation. You may now disconnect. Have a great day..