Glenn Wiener - President and CEO, GW Communications Mike Pangia - President and CEO Ralph Marimon - CFO.

Jim Kennedy - Marathon Capital.

Good day, everyone and welcome to the Aviat Networks’ Earnings Conference Call. Today’s conference is being recorded. I would like to introduce today’s host, Glenn Wiener. Please go ahead, sir. .

Thank you, operator, and good morning to all. Welcome to Aviat Networks’ fiscal 2016 second quarter results conference call. My name is Glenn Wiener, I am President and CEO of GW Communications, and I recently came on board supporting Aviat and its communications initiatives.

My contact information can be found on the company’s result announcement, which was issued yesterday after market close, and by all means, please feel free to reach out to me should you have any questions. 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 our 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 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.

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 in the Investor Relation section.

I would like to thank you all for your interest and support of Aviat, and with that, I will turn the call over to Mike..

As I am sure you saw from our announcement yesterday, our revenues were within the range we provided last quarter and our adjusted EBITDA loss was slightly higher than we expected, primarily as a result of lower margins, which Ralph will touch upon a bit later.

We continued to manage our costs reducing total expenses by approximately 23% compared to last year and we generated cash increasing our net cash position $3.7 million sequentially and $4.8 million over the past two quarters.

We continued to focus on improving our working capital management and better aligning both our customer-facing and back-end support structures and have aggressive plans to drive continuous improvements. We’ve been winning business in building our pipeline, though in some cases conversion into revenues has not materialized as quickly as we had hoped.

To start, I am concerned with the uncertain spending outlook within the mobile operator side of our business. Overall, we have seen a slowdown in capital spending with projects being delayed and pushed to the right.

In response, we've done a lot over the past year to solidify our position with our mobile operators and sales, product development and increased focus on service and support. We remain well-positioned and believe we can sustain the current revenue run rate for this part of our business for the next few quarters.

We expect that in the quarters or after, as the transition to the next technology cycle begins, whether it’s LTE or 5G, more consistent and predictable growth with mobile operators will resume, and we continue to explore opportunities with other Tier 1 operators.

In the private network vertical, we continue to book a steady business and have experienced growth on a year-over-year basis through the first six months of the fiscal year. However, as we have indicated in the past, this businesses is typically large project driven, with higher services content and conversion cycles are longer.

Based on our Q2 bookings, private networks now represents approximately half of our business as opposed to 30% to 40% historically and we're feeling the effects of the slower conversion as compared to the service provider vertical.

At the same time, we’re very encouraged by the funnel of opportunities in front of us with several multi-million dollar projects on the horizon. This should have a positive impact on the revenues and margins in fiscal year 2017. So we're focused on what we can directly control.

Our goal remains to generate cash and be profitable irrespective of quarterly fluctuations in our top line, margin expenses and our structure are all areas we can improve to become more efficient. I’ll provide more on this later, but first a review of our top line results.

2Q revenues of $7.4 million were within the range provided last quarter and our book-to-bill was greater than 1. Revenues were down year-over-year in all regions, excluding Africa and the Middle East, and sequentially in all regions except Asia.

Our bookings compared to last year were down slightly, but up sequentially driven by both North America and our progress within the private networks vertical, and Africa bookings were essentially flat. To add, while bookings from mobile operators were down comparatively for the quarters, our private networks bookings were up.

Now looking closer at top line results by sector. Africa and Middle East revenues were up close to 10% this quarter, and up over 10% through the first half of the year versus last year's comparables.

It’s important to point this out, as Africa has been an area frequently raised by investors, and our revenue in Africa, excluding the Middle East, is up year-over-year. Notwithstanding our steady performance year-to-date in this sector, it’s difficult to predict the top line disposition.

We see several near-term growth opportunities and things could materialize faster or slower than planned. Longer-term, this market remains very attractive for us. LTE deployments are still in the early stages and as this evolves, this would require a lot of capacity and thus more microwave technology.

As part of our growth strategy, we’re going to leverage our strong infrastructure in Africa, services, distribution, logistics, customer relationships, local presence and partnerships to increase our share of wallet while also pursuing growth with private network customer accounts.

While Africa has held its own, Europe and Russia revenues were down approximately 52% this past quarter versus the year-ago quarter. Macro challenges and currency devaluation had been the primary contributors to this decline.

We do not expect a near-term rebound throughout Europe and Russia and even though we may seem modest improvements in our bookings, we are anticipating flat revenues in the second half of the year for this sector. Russia however continues to represent a potentially large opportunity for us, though the impact isn't anticipated until fiscal 2017.

Beyond our strong position with one of the leading operators, public infrastructure investments are also expected to increase both in Russia and throughout Europe. And moving to Asia, the revenue is down year-on-year, we’re up sequentially and our business remains consistent.

Two of our larger customers have been accelerating network investments to expand their wireless broadband services. In prior quarters, we experienced a surge in orders and shipments with one of these customers. However, the contract term require us to defer revenue until final acceptance. [indiscernible] the conversion cycle from typical norms.

We expect the current phase of business with both of these customers to continue throughout the remainder of the fiscal year. Lastly for North America, our largest market. Second-quarter revenues were down approximately 28% year over year.

Service provider revenue is down year over year given where we are on the technology cycle of LTE now broadly implemented but the bigger impact was with the private network customers given the conversion cycle.

We continue to build our private network’s pipeline and given bookings and opportunities, we believe private networks should drive our second-half performance and help offset operator spending softness. We're currently in 23 of 50 statewide networks and 10 of the 20 of the top 25 city networks in the United States.

We supply products to several federal agencies. And earlier this week, launched a new 4.7 GHz radio under our Eclipse brand which provides an alternative frequency band for federal customers, military and other national governments. This along with our IP/MPLS router products and services capability provides us with a distinct competitive advantage.

Consistent with past remarks, we’ve allocating investment dollars towards product development to grow in public safety with network service providers and with financial institutions. And we're going to continue down this path.

At the same time, we've been ramping up services offering and expect to announce new cloud-based services tools in the coming months. Regarding topline expectations, we believe we will operate at an average quarterly revenue run rate of about $70 million for the next two to three quarters, which could swing by as much as $5 million on either side.

Q3 is expected to come in on the low end of the range and build in the fourth quarter. On the bookings front, we have been expecting to continue to operate at a higher level than revenue and based on the current funnel, are anticipating a strong finish to the fiscal year thus increasing our backlog.

But timing around revenue conversion is less certain and we are also waiting for confirmation on some of the larger RFPs we participated in.

Even though we can see revenue strengthening in the first half of fiscal year 2017 given our booking expectations and increasing backlog, we’re going to structure our business on the cost side with the current revenue run rate in mind and align the organization to generate positive cash flow and profitability at these levels not just to break even.

Now over the past few quarters, we've invested in several process driven programs with the goal of improving efficiencies across all business segments, functions and sectors. We’ve ramped up these efforts in the second fiscal quarter and are looking at efficiency programs focused on enhancing gross margins and lowering expenses.

Some of these investments have already begun to impact our operations possibly as reflected in the cash generation but we still have some heavy lifting areas which will take more time to complete with the bigger financial impact felt throughout fiscal 2017.

This upcoming quarter, we believe gross margins will be within 100 basis points of 25% and are taking steps to improve in the quarters thereafter.

We have identified several areas to improve efficiencies and lower costs in implementation-related services and on the operational side such as warehouse expenses, indirect material costs and expediting fees. With all these levers in play, our gross margin target is to get back to the 28% to 38% range we operated at a few years ago.

This will take some time and we expect to see improvements through fiscal 2017. Non-GAAP operating expenses currently at 30% as a percentage of revenues should come in around this range in the third quarter and we expect it to be down further over the quarters thereafter once we have completed the bulk of our process improvement plans.

Our plan is to structure the business so that Opex is approximately 24% to 26% of revenues at potentially lower over time as revenue growth resumes. Again to be clear, we will not be dependent on top line growth to get these targets and we expect volume-related improvements to accelerate the timing and ultimately get us above these levels.

We recognize that we must do more to get ahead of the curve. Does not to say this will all be achieved in a quarter or two. We’re going to be quick but at the same time smart without impacting our customers.

In fact, we believe that we will be able to strength our services and sales relationships with customers and improve our technology roadmap and execution. When all is said and done, we will have an organization that is leaner, more agile and build to scale. Ralph will now address the financials for the quarter. Ralph..

Thanks, Mike, and good morning. I will begin with a review of our Q2 results on a non-GAAP basis and then make a few remarks around our cash position and balance sheet.

You can refer to our press release which is up on our site in the Investor Relations News Release section for our audited GAAP financial statements along with a reconciliation of non-GAAP financial measures. Revenue for fiscal Q2 came in at $70.4 million down 11.6% sequentially and 22.6% year-over-year.

This was expected and, as Mike noted, within the guidance range we provided last quarter. Product revenue was approximately 63% of sales and services was 37% of sales, compared to product revenue of 67% and service revenue of 33% in fiscal Q1. Non-GAAP gross margin was 23.3% as compared to 26.4% in Q1 and 26.4% in Q2 of fiscal '15.

Product gross margin of 25.4% was below the 30.7% reported in Q1 and 26.4% reported in Q2 last year. Services gross margin was 19.7% which is up sequentially from 17.4% in Q1 and down from 26.4% in Q2 last year.

The declines in both product and service margin is due primarily to lower volumes which have prevented us from absorbing relatively flat supply chain costs. For fiscal Q2, our non-GAAP operating expenses totaled $21 million down approximately 5.4% sequentially and 22.8% compared to Q2 of fiscal '15.

On a year-over-year basis, we had a substantial decrease in selling and administrative expenses, down $4.9 million or approximately 23.6%, primarily a result of the cost control measures we implemented as well as reduction in professional fees.

R&D spend declined by $0.4 million sequentially and $1.3 million versus last year's second quarter, though as a percentage of sales, it remained around 7% to 7.5%. As compared to last year, the decline in R&D is primarily related to a reduction in personnel and facilities expenses as a result of the restructuring programs we implemented.

We continue to place great emphasis on product development and have prioritized investments around initiatives we believe will generate the greatest ROI near term. We had no restructuring charges taken in the fiscal second quarter.

Our non-GAAP loss from continuing operations for fiscal Q2 was $5.1 million or loss of $0.08 per share versus a loss of $1.3 million or loss per share in Q1 of $0.02. This also compares to the second quarter of fiscal ’15 when we reported a net loss $3.8 million or $0.06 per share.

Fiscal Q2 adjusted EBITDA was a loss of $3 million, compared with to adjusted EBITDA of $7 million in Q1 and a loss of $1.2 million in the comparable year-ago period. This was the result of lower revenues and gross margin offset by improved expense control. CapEx in the quarter amounted to $400,000 consistent with Q1.

Free cash flow which includes cash provided by operating activities of $4.6 million plus CapEx of $0.4 million was a positive $4.2 million for the quarter. The company ended the quarter with a cash balance of $39.5 million which is up $3.7 million from Q1 and $4.8 million from fiscal year-end close.

The increase in cash is primarily due to decreases in accounts receivable and inventories and advance payments received from customers for revenue that will be recognized in future quarters. This increase in cash was partially offset by a reduction in accounts payable. Now moving to working capital, DSOs were 99 days as compared to 91 days in Q1.

The increase in DSOs is due primarily to slower payments coming from some customers in countries where currencies have weakened. We do not see any issues at our exposure and more a question of timing and we're working to address this. Our inventory position of $37 million is in line with our plan and approximately $3 million below Q1 levels.

Inventory turns in Q2 were 5.9 and consistent with Q1 levels. As noted in my remarks last quarter, 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 field deployment rather than delivery.

We have arranged payment terms with many of these customers to allow us to bill and collect at the time we deliver equipment allowing us to match customer payments with vendor payments and maintain cash equilibrium.

We are within all covenants related to credit facility, have a strong working relationship with our lenders and improvements in free cash flow coupled with anticipated savings from process improvement programs provide us with sufficient resources to execute our strategy and deliver long-term value.

And now I'd like to turn the call over Mike for some additional remarks..

Thanks, Ralph. One other item I'd like to address before opening up the call for questions is our listing status. As we've announced in our Form 8-K filing in January, the company received a delisting notice from NASDAQ based on the trading of our shares and some $1 status.

The board and management team place a great emphasis on shareholder communications and we are not pleased with trading over the past several quarters and our current valuation.

We are working to address this and have 180 days from the time we receive the notice to bring the stock price over $1 or follow-up plan with NASDAQ regarding our plans to do so. We're focusing on our business and addressing areas we can improve upon, so the company's financial results and financial position improves.

Concurrently, we're going to be more active in telling our story and meeting with shareholders and prospective investors over the coming quarters. The board will explore any and all avenues that will enhance shareholder value and we will provide you all with any material updates as they occur. Operator, we're now ready for any questions..

[Operator Instructions] And we'll take our first question from Jim Kennedy with Marathon Capital. Your line is open. Jim Kennedy with Marathon Capital, your line is open..

Hi, Mike..

Hi, Jim.

How are you?.

Good. Congratulations on the great cash management. Question for you.

As you implement your expense controls and reductions, can you talk a little bit about, you referenced Next-Gen technology coming in ’17, ’18, should we be concerned at all or how are you positioning yourself from an R&D standpoint to be ready to benefit from either upgrades or improvements in the technology itself?.

Thanks, Jim. So we have a very compelling roadmap that we continue to invest in. Our roadmap is very much aligned with our customer expectation. This is across all of our segments.

And we’re very excited about the continued evolution and innovation in our roadmap and when we’re focusing in around our investment priorities, this is an area that also we’ve invested in process improvements to improve our utilization and the effectiveness of the resources we have that are doing the development, which actually should improve the confidence that we have in meeting the milestones associated with that roadmap..

Good.

And second question relative to the private sector, I’m assuming that you’re throwing the public safety into that sector as opposed to the carrier sector, is that correct?.

Yeah, absolutely..

Can you talk a little bit about, I noticed I believe it was Motorola who was 10% customer, can you talk a little bit about what you are delivering or doing in that space that, say, positions you well, why you, why not other people, are you one of five choices and just establish to be the quarter or two for Motorola?.

Yeah. No. We’ve got a long history with, not only with Motorola, but with other large integrators in the public safety domain. And as I mentioned in my prepared remarks, we’ve seen a significant increase in our private networks business, the funnel continues to be strong.

Several of those end user accounts are all -- are prime for those accounts, our companies like Motorola and we work effectively with them, we have for years and that would put us in a leading position with them as it relates to the public safety area.

And our strength, our core strength in this space is we have been in this particular vertical for several years, our products are built to be mission critical, but high on security and we also have a strong services portfolio that would complement the capabilities of a partner like Motorola.

So, connected to the opportunities we see in the public safety area and our relationship with them isn’t just in North America, but on the international front..

Got you.

Could you talk to us briefly about what’s driving the public safety -- the increase in public safety spending, is it mandates from Congress, is it being done at the state level, where is that money coming from?.

Yeah.

I mean, I think the money is coming from different sources, but it’s all about ensuring that first responder networks are built to be suited to address any major activity that could take place and I think these are the areas where as budgets are developed for state and local agencies, the priority for these areas remains intact, despite any pressure there may be on reductions..

Got you. Okay. Thanks, Mike..

Thank you, Jim..

[Operator Instructions].

And operator, while we pause, just one clarification in the financial remarks, the adjusted EBITDA in the first quarter of fiscal ‘16 was 700,000, not 7 million, if we can just have that corrected..

And it appears we have no further questions at this time. I’ll turn the call back to our presenters for any closing remarks today..

Ladies and gentlemen, thank you for all for joining us. We appreciate the interest and as I said, if you have any follow-up questions, by all means, feel free to reach out to me directly and on behalf of Mike and Ralph, thank you and we’ll speak with you shortly. Take care..

Thank you..

This does conclude today’s program. Thank you for your participation. You may disconnect at any time..