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

Analysts:.

Good day, and welcome to the Aviat Networks’ Financial Results Conference Call. Today’s conference is being recorded. And this time I'd like to turn the conference over to Mr. Glenn Wiener. Please go ahead, sir..

Thank you, operator. And welcome to Aviat Networks’ fiscal 2016 third quarter results conference call. We issued our press release and filed our Form 10-Q today and both documents can be found on our website in the Investor Relation section.

Additionally this call is being webcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of our webstie. I’m joined today by Mike Pangia, President and Chief Executive Officer; and Ralph Marimon, the Chief Financial Officer.

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 our website, again, in the Investor Relation section.

I want to thank you all for your continued interest and support of Aviat. And with that, I'd like to turn the call over to Mike..

Thanks, Glenn. And good afternoon to all joining us today. We provided a lot of information on our last quarterly conference call in February regarding our financials, operations, process improvement initiatives and outlook and since the quarter end we've provided further updates on our plans.

I'll start by highlighting our fiscal Q3 performance and then focus most of my remarks on the market and what we're doing to position the Company for profitability and, equally important, to stabilize our top line. First, in regards to the fiscal third quarter. Our revenues came in at just over $60 million which is lower than what we had expected.

The variances related to project timing in our private network business and slower than forecasted roll-outs with mobile operators. Our book-to-bill was just under one, impacted by ongoing lower mobile operator spending globally and the timing associated with securing some larger private network deals and I'll come back to this shortly.

Some of the steps we've taken to enhance margins are beginning to show, primarily in our services operations and as such, we posted a 250 basis point improvement year-over-year and a 70 basis point improvement sequentially on a non-GAAP basis.

Consistent with my remarks last quarter, our goal in the near to medium term is to get gross margins back to the high 20s with additionally improvements thereafter. Strong expense controls also yielded improvements as we reported a $3 million or about a 13% decline in non-GAAP operating expenses versus last year's third quarter.

Combined with the actions we just announced, our overall spending will be $14 million to $16 million lower when comparing fiscal year '17 to fiscal year '16 and we see opportunities to lower expenses further. We expect sequential improvements in the fiscal fourth quarter with larger gains in the front half of the next fiscal year.

Although our revenues are lower year-to-date, we've reduced our losses and we have a strategy to get to profitability and enhance our foundation to sustain it. Performance on cash remains solid, and as of the quarter end our cash position stood at $39.7 million, up $200,000 sequentially and up $5 million since the prior fiscal year end.

This also marked the fourth consecutive quarter of positive cash from operations. We do expect to use cash in support of our realignment initiatives in the fiscal fourth quarter, and Ralph will provide further details in his remarks shortly.

Two weeks ago we provided some updates in regards to our outlook and the market and here's where I want to focus my next remarks. Mobile operator spending in the markets we primarily serve has not shown the improvement we assumed. The market still has several positive trends but spending is not one of them.

This is one of the key drivers behind our accelerated reforms. Telecom infrastructure spend and the varying CapEx cycles have been impacted by economic headwinds, foreign exchange pressures and customer specific challenges, all factors that make the timing of predicting growth in this market uncertain.

The long-term drivers are still there and we're adding new customers, while remaining well entrenched with our existing accounts. We're taking steps, particularly in product development to ensure that when spending does pick up, we remain positioned to benefit. On the other hand our performance in private networks has been very encouraging.

Although the overall market has been relatively flat, we are clearly strengthening our position with deals we secured over the past several quarters and others that we're progressing with now.

This is because we have tremendous differentiation in both our products and services offerings and see increasing opportunities with multiple industry segments. Public infrastructure and public safety projects, with utilities, government, and energy companies and with financial services institutions looking for low latency solutions.

While the convergent cycles for private networks revenues are longer, our bookings, in this segment, are up through the first nine months compared to last fiscal year and we expect this trend to continue in the fourth quarter.

With the new notice of awards received since quarter end, we expect to show significant bookings growth in our fiscal fourth quarter versus the third quarter, and a book-to-bill for the overall business back above one to one.

We're excited about our private networks business and believe we're well positioned to grow with our existing customer base and capture new accounts. So given the market outlook, let me talk about our plan of action. We will continue to have a relentless focus on our cost structure, one of the primary areas within our control.

As we recently announced, we're reducing headcount, consolidating our office footprint, and improving our processes. Combined, the initiatives underway are expected to lower expenses by $14 million to $16 million in fiscal year '17 versus this fiscal year.

We're increasing our focus in the private networks business globally and have the solution sets in place that provide us with a clear competitive advantage to take share. We're also increasing our investment in our sales support and services functions and aligning R&D to successfully address the opportunities in front of us.

We will defend our position with our mobile operator customers and remain committed to this space. And we're continuing to invest in product development to improve our customers' network and business performance.

Our revised business model does not assume any significant up-tick in near term spending, so any increase in volume would, of course, have a positive impact on our expected results.

In regard to gross margins, we continue to take steps to improve our overhead and supply chain, and with the recent introduce of our Aviat Cloud platform, we should see more benefits within our services business.

These new tools will improve our efficiency in addressing operational challenges around planning, deploying and maintaining our customer’s networks. Increased software licensing will also support margin improvement. As stated earlier, the next step is to get our gross margins towards the upper 20s without a dependency on top line growth.

Our process transformation will continue, and it's not just about costs. It's a change in our culture. It's a shift in how we operate. We are evolving towards a continuous improvement mindset and are implementing Lean and Six Sigma Principles across the board.

The steps we're taking will result in lower costs in waste elimination, but more important they will enable us to build a foundation where we can quickly scale up and down to exceed client requirements and drive innovation. Embedding continuous improvement within our DNA will make us a leaner, stronger and more agile organization.

As for cash management, our performance to date has largely been driven by improvements in working capital, and our focus in this area will continue. Notwithstanding the cash needs for our restructuring, getting the company to profitability will drive sustainable cash generation moving forward.

One other item to address before turning it over to Ralph. It's become evident that our recent financial performance, coupled with our current NASDAQ compliant status, is causing perception issues with several of our customers and suppliers. We've already addressed the financial performance improvement plans.

As it relates to NASDAQ, we filed a proxy statement on April 29 to seek shareholder approval for a 12 to one reverse stock split. Subject to successful outcome at our special meeting of shareholders, we would expect to revolve this NASDAQ issue by June end.

Ralph?.

Good afternoon, everyone. Mike provided some color around our Q3 results and I'll briefly provide some additional details along with a few remarks around our cash position and balance sheet. I'll highlight our non-GAAP results and similar to prior quarters, you can view our press release for a reconciliation of GAAP and non-GAAP financial measures.

We reported revenue of over $60 million, down approximately 19% year-over-year, and 14% sequentially. The declines were anticipated, though the top line did come in less than what we had planned on due to the reasons Mike covered earlier.

Revenue declined across multiple geographies with the biggest dollar impacts in North America, Africa, and the Middle East. In regard to North America, the year-over-year impact was primarily in the mobile operator segment.

And while private network volume was a little lower, we expect this to ramp up in the next fiscal year based on prior awards and current activities. Product revenue is approximately 60% of sales, and services revenue was 40% of sales compared to 63% and 37% respectively in fiscal Q2.

Non-GAAP gross margins were 24% as compared to 21.5% in fiscal 2015 third quarter, an increase of approximately 250 basis points and up 70 basis points sequentially. The gross margin percentage improvement was primarily driven by improved services margin and lower supply chain costs.

Non-GAAP total operating expenses were $20.8 million, down $3 million year-over-year and down $200,000 sequentially. The annual improvement is due to our strong focus on reducing our overall cost structure. Selling and administrative expenses declined by $1.6 million year-over-year and were essentially flat with Q2.

The year-over-year declines were primarily related to lower personnel costs and lower professional service fees. We also had a decline in R&D expenses of $1.4 million year-over-year. While our overall R&D spend has declined, our investment in specific product development activities has increased as we become more efficient in overhead related areas.

Our non-GAAP loss from continuing operations for fiscal Q3 was $6.7 million or $0.11 per share versus a loss of $8.1 million or $0.13 per share in Q3 last year, an improvement of $1.4 million. Sequentially our loss increased by approximately $1.6 million due to lower revenue compared to the previous quarter.

Fiscal Q3 adjusted EBITDA was a loss of $4.7 million compared with an adjusted EBITDA loss of $5.8 million in Q3 last year, over a $1 million improvement. Sequentially, our adjusted EBITDA loss increased by $1.7 million due to the lower revenue level which was partially offset by improvements in gross margins and lower expenses.

CapEx in the quarter amounted to 500,000 and we expect to spend approximately the same amount in CapEx in the fourth quarter. We had very good cash management and ended the quarter with a cash balance of $39.7 million, up sequentially, and up $5 million since our last fiscal year began.

Now, moving to working capital, DSOs were 99 days which was flat with Q2. This was primarily due to slower payments coming from some customers in countries where currencies have weakened in both fiscal periods. Our inventory position of $36.7 million was flat with the second quarter, while turns decreased due to the lower revenue.

As noted in my remarks last quarter, a significant part of our equipment shipments went to projects where revenue depends on field deployment rather than delivery and this is reflected in our inventory levels.

We have, however, arranged payment terms with many of these customers that 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.

Looking into Q4 we expect revenue to be slightly down from the Q3 level due to the lower Q3 bookings, although the non-GAAP loss should be relatively flat due to better margins and cost controls. We do expect stronger bookings in Q4, and combined with our realignment initiatives we are anticipating improved financial performance in our fiscal Q1.

As we previously announced, we expect to incur restructuring charges of approximately $4 million, of which approximately 50% will be incurred in the fourth quarter and the balance over the following three quarters. This restructuring plus our loss during Q4 will lower our cash by approximately $3 million to $5 million during the quarter.

We believe we have sufficient resources to execute our realignment and process improvement initiatives and execute our strategy, which should result in greater shareholder value. I would now like to turn the call back over to Mike for some additional remarks..

Thanks, Ralph. To summarize, we entered the year knowing the market would be challenging and it has been. The mobile operator segment even more so than anticipated, and this has impacted our performance.

We've outlined our plans to address improved margins, lower expenses and a leaner business structure, which should bring us to profitability next fiscal year while generating positive cash flow from operations. While this quarter will remain challenging from a revenue perspective, bookings will show strong sequential improvements.

With all that we're working on, we fully expect by the end of Q2 next fiscal year, we'll be generating break-even to positive adjusted EBITDA and profitability thereafter. Operator, we're now ready to open up the call for questions..

Operator:.

Thank you, operator. If anybody does have any follow-ups, by all means please feel free to contact Investor Relations. And once again, we appreciate your continued support..

Thank you..

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation..