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

Analysts:.

Good day, and welcome to the Aviat Networks' Fiscal 2016 Year End Financial Results Conference Call. Today's conference is being recorded. And this time I'd like to turn the conference over to Glenn Wiener. Please go ahead, sir..

Thank you, operator, and welcome to Aviat Networks' fiscal 2016 year end results conference call. We issued our press release, and we'll file our Form 10-K today. And both documents will be available on our Web site in the Investor Relations section.

Additionally, this call is being broadcast live over the Internet, and the webcast will be archived on the Investor Relations page of our Web site. I'm joined today by Mike Pangia, President and Chief Executive Officer; and Ralph Marimon, 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 the company's Web site in the Investor Relation section.

Lastly, Aviat will be relocating its corporate headquarters just a few minutes away from its current location in Santa Clara, California later this month. Just wanted to notify everyone in advance as the new corporate address and phone numbers will change. The company expects to update this information on its Web site on or around September 19.

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

Thanks, Glenn, and to all those joining us today. This has been a difficult year for our industry, and we're not pleased with our results. However, we believe the aggressive actions we took throughout the past fiscal year position us for profitability in fiscal 2017.

We are making significant progress in our turnaround plan, and are diligently building a strong pipeline of more profitable business for the future. This past year we controlled what we could, namely our costs, processes, infrastructure, and cash management.

Our annual expenses were reduced by over $14 million or 14%, and we were able to absorb the impact of the top line reduction versus fiscal year 2015.

Looking ahead, our committed realignment actions will lower fiscal year 2017 annual costs by an additional $14 million to $16 million, and we remain on track to bring Aviat to profitability this fiscal year on an adjusted EBITDA basis.

From a cash perspective, although our balance was reduced by $4 million, we used only a minimal amount of cash on an operating basis, which includes restructuring expenses. We are on track to generate positive cash flow this fiscal year.

The realignment plant that we announced was not only about cost, we instituted a complete change in our business structure and methodologies. We are committed to the implementation of Lean Six Sigma process improvements throughout the company and we continue to identify areas for further efficiency gains and cost reductions.

As for our fourth quarter performance, on an operating basis, the quarter went pretty much as expected, other than cash collections, which Ralph will cover in his remarks shortly.

While total revenues were down modestly on a sequential basis, we posted a 40% increase in bookings, a book-to-bill well above one, and our strongest bookings quarter since Q4 of the prior fiscal year. On a non-GAAP basis our gross margins increased by 170 basis points.

And with OpEx relatively flat, this led to a slight improvement on the bottom line on a sequential basis. In North America, there were several positive trends to build on. Q4 bookings more than doubled over the prior quarter and were up 6% year-over-year.

In fact, fiscal Q4 was the best bookings quarter for North America since the fourth quarter of fiscal year 2014. On the other hand, our International business continues to present challenges with added pressure on cash as several of our international customers are having difficulty converting their local currency to U.S.

dollars, leading to cash collections being delayed. Ralph will provide more color in his remarks. In our North America business, investments in R&D to differentiate our value proposition particularly within private network accounts along with a heightened sales focus are paying off.

We continue to have the best end-to-end solutions that deliver the most secure and dependable mission-critical networks with the lowest total cost of ownership. This has been the foundation for an increase in our win rate.

Over the past few months we've issued announcements on several private network deals domestically; one with the National Park Service, one with a large western U.S. city, and another from a major Texas electrical utility. This is just the tip of the iceberg. Today we are pleased to announce two new awards with a value of approximately $38 million.

The first is a three-year contract with a large western state with a value of approximately $28 million. This is a brand new customer and we will be supporting all state-wide mission-critical communications for public safety, first responders, and various state agencies.

As part of the award, we will be supplying IP/MPLS routers, management software, and full turnkey services. The second is a $10 million award with another large state for a network upgrade. We won this competitive deal based on our solutions and services offering, which lowers this customer's TCO.

The deal included our IRU600 radio, CTR microwave routers with IP/MPLS, our new AviatCloud automation platform, and other services. Of these awards, only $11 million was booked in fiscal 2016.

Also note, these new awards are an addition to the key utility wins announced, and additional public safety contracts we are gaining through one of our major strategic partners. Based on booked business and the high probability pipeline, we expect to deliver year-over-year growth in North America this year.

Staying within North America but shifting to the mobile operator segment, we are in a low point of the investment cycle with the relative maturity of LTE and the next investments for 5G remaining in the future. With that said, we secured a new Tier 1 mobile operator in late-2015, and our volume with this customer had been steady.

We are pursuing opportunities for upgrades, fixes and services, and are working to expand our overall footprint and share in this segment. Moving on to the International mobile operators segment, we are continuing to invest with a longer term view in mind.

We believe our large installed base combined with the ability to seamlessly migrate/upgrade, and enhance our customers' networks to support LTE data growth is of tremendous value and we intend to maintain our position with our key accounts. Our customers recognize this value as they assess their TCO.

Although we have improved our processes and become more efficient in supporting this market, the reduction in volume is making it increasingly difficult to maintain this investment while still driving to meet the objective of returning the company to profitability as soon as possible.

As such, we are evaluating several strategic options to improve and optimize our valuation, while keeping the longer-term view intact. Speaking of the longer term, I'd like to highlight a few recent initiatives that move us beyond hardware and into software and new services.

We announced strategic partnerships with software vendors and a research institution to leverage SDN for the automation and an advanced control of microwave networks.

Also, a recent industry report from IHS highlighted AviatCloud and how it can reduce the planning/deployment, and operational complexity on microwave links saving customers time and lowering their costs. This is all about innovation and investing in technology that will help our customers succeed and continue to differentiate us from the competition.

In summary, North America order volume has recovered from a much slower fiscal year 2015 and we expect to see continued growth based on the positive performance in fiscal year 2016. This would predominantly be driven by private network accounts.

Internationally we are not anticipating growth, and we are taking what we believe is a conservative approach in our outlook.

Given lower contribution as a result of reduced international volumes, we are realigning investment dollars to expedite growth with private network accounts in North America, while maintaining our strong global support and service to existing customers worldwide. And as mentioned earlier, we are exploring alternatives that will enhance our valuation.

We expect the net result of our efforts will lead to positive EBITDA and cash generation this fiscal year. I'm going to turn the call over to Ralph now, but I have a few remarks on fiscal 2017, before we open up the call for questions.

Ralph?.

Good afternoon everyone, and thanks for joining us today. I'll provide a brief recap of our fiscal fourth quarter and year-end results on a non-GAAP basis. And then make some comments regarding our balance sheet. Additionally, you can view the reconciliation of GAAP and non-GAAP financial measures in our press release.

For the 2016 fourth quarter, we reported revenues of approximately $58 million, a decline of 3.5% sequentially. Revenue in North America increased 15%, but was offset by a decline, primarily in Africa, due to the continued weakness in the mobile operator market.

Non-GAAP gross margins at 25.7% increased by 440 basis points from the prior year and 170 basis points sequentially. Lower supply chain costs and more effective management of our resources were the primary drivers.

Total non-GAAP operating expenses for the fourth quarter were approximately $21 million, a reduction of close to $2 million or 8% year-over-year, and essentially flat sequentially. When comparing the 2016 and 2015 fourth quarters, our R&D spend was reduced by almost $1 million primarily driven by improved efficiencies and lower overhead costs.

Our SG&A expenses were also reduced by $1 million or close to 6% driven by lower personnel costs, and a continued focus on lowering our overhead structure. Also note that in Q4 we incurred $1.6 million in restructuring charges.

Our non-GAAP loss from continuing operations for Q4 was $6.4 million, this compares to a loss of $4.9 million in Q4 of 2015, and a loss of $6.7 million in Q3 of 2016.

Our Q4 adjusted EBITDA was a loss of $4.5 million compared with an adjusted EBITDA loss of $2.4 million in Q4 of last year, sequentially our adjusted EBITDA loss improved by approximately $200,000. CapEx in the quarter amounted to $277,000, in line with our plan. During Q4 we reported a reduction in our cash balance of approximately $9 million.

This reduction was the result of several factors, including the June devaluation of the Nigerian naira which has a negative $1.5 million impact. In addition, we had approximately $5 million in expected collections pushed into Q1 primarily due to international currency-related issues, as certain customers have had difficulty obtaining the U.S.

dollars to pay our invoices. These late payments are timing issues, and are not bad debt problems. Since the end of the fourth quarter, we have received several of these late payments, and continue to focus our efforts on collecting the remaining outstanding receivables.

Looking into Q1, even though our international cash conversion cycle is stretched out we expect to be cash neutral or positive on an operating basis. During July, after years of negotiation, we are pleased to report that we received a cash tax refund from the Singapore government which totaled $3.7 million.

During fiscal 2014, we received an assessment from the Singapore tax authorities and made a prepayment of $13.2 million against this assessment. The refund of $3.7 million represents an initial recovery against the assessment, and we continue to pursue remedies on the remaining balance.

Moving to working capital, DSOs were 99 days, which was consistent with both our second and third quarters in fiscal '16. DSOs continue to be impacted by slower international customer payments, as I just noted.

Our inventory position of 30.4 million declined by over 6 million sequentially while turns increased, although we continue to see improved efficiencies in our inventory management, in Q4 we did record a $5 million inventory adjustment which was related to an older product line.

Lastly, I'd like to make a few comments regarding our fiscal Q1 and 2017 outlook. We expect Q1 revenues to be flat-to-slightly-up from Q4. With improvements expected in margins and spending, we anticipate our losses will lessen significantly from the Q4 levels.

As Mike noted, we expect to be profitable on an adjusted EBITDA basis in fiscal '17, and believe based on our current outlook that we will achieve breakeven or positive adjusted EBIDTA by the end of the first half of the fiscal year.

I do want to note, based on some questions that have been raised by investors over the past few months that anticipated savings of $14 million to $16 million of fiscal 2017 will be recognized in both our costs to goods sold and operating expenses.

One other note before I turn it back over to Mike, we are very pleased to report that we have fully remediated the material weakness that were previously identified in fiscal 2015.

We put in place and executed our control activities which were successfully tested and we consider our internal controls over financial reporting to be effective as of our fiscal 2016 year end. We are confident that we have the processes, controls and key employees in place to remain in compliance as we move forward.

I would now like to turn the call over to Mike for some additional remarks..

continued support of our key existing customers and their networks, win new targeted mobile operators, and ensure we are positioned to capture volume when the next upgrade cycles occur in both markets.

Now it's too early to provide full year guidance, but with the SG&A improvements year-over-year anticipated increases in gross margins and a growing business in North America, we are confident that fiscal 2017 will be much better and we will be profitable on an adjusted EBIDTA basis, while increasing our cash.

To start the year with the key private network contracts which for competitive takeaway wins coupled with a growing pipeline in North America, we feel much better about our market position and remain optimistic. We got lot of opportunities ahead of us, and I look forward to reporting on our progress throughout the year.

Operator, we are now ready to take questions..

Thank you. [Operator Instructions] And our first question we will hear from Will Cunningham [ph]..

Yes, good afternoon everyone.

I just have a question -- you had something in your remarks about strategic alternatives and enhancing the valuation, I was just wondering if you could explain that a little bit more, does that mean, for instance that you would be looking to acquire a company or be merged with a company or something like that?.

So, any more details at this point probably not worthwhile. I think the best way to state is we are open in exploring all opportunities strategically to improve our position as well as our valuation. So, there is nothing that we are not going to be looking at per se from a strategic perspective..

Okay. So there is nothing -- you are just starting the process. Is that a good way to look at it as far as….

Again we are exploring all strategic, all options and alternatives to enhance our valuation and to improve our business..

All right, okay. That sounds good.

I have another question just that competitors and like public service bidding, you come across like Ceragon, or who are some of the main competitors you might come against?.

Yes. So, I think if you take a look at our business globally, we do compete against all the players that are in the microwave business, the specialists, you just named one of them being Ceragon as well as some of the large generalist companies like Nokia, Huawei, Ericsson, as examples.

However, if you take a look at the markets that we operate in, that we address, primarily on the private networks area we are going up against the larger suppliers and in the international mobile arena in the key markets that we operate in, again we are primarily going up against the larger generalists..

Okay, appreciate that, thanks. No more questions..

[Operator Instructions] And our next question we will hear from Keith [indiscernible], Private Investor..

Hi, thanks for taking my question.

My question is just back on the strategic alternatives, you guys mentioned, I know that it's pretty general in terms of what you are telling the public, but have you hired someone as a third-party to help support that or is that all being done internally?.

Yes, I am not going to provide any more details on what I have already stated in that topic..

Okay. No further question..

Thank you..

And at this time, there are no further questions..

Very good. Thank you to everybody for listening to our call today, and I look forward to speaking to you in the not too distant future. Thank you..

And that will conclude today's call. We thank you for your participation..