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

Analysts:.

Good day, and welcome to today’s Aviat Networks' First Quarter 2017 Financial Results Conference Call. Today's conference is being recorded. At this time I'd like to turn the conference over to your host for today’s call, Glenn Wiener, Investor Relations. Please go ahead..

Thank you, operator, and welcome to Aviat Networks' fiscal 2017 first quarter results conference call. We issued our press release, and filed our Form 10-Q after the market closed yesterday and will be posting an updated investor presentation shortly. All documents can be found on the IR section of our website.

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.

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 Relations section.

Our call today is being broadcasted live over the internet and the webcast will be archived on the Investor Relations page of our website for those who are unable to join us. 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..

Thank you, Glenn. I’d also like to thank everyone joining us on today's call. Let me start by saying that across the board we are very pleased with our first quarter results. Our bookings, revenues, expenses and cash are tracking to expectations while our gross margins through the first fiscal quarter have exceeded our internal goals.

Our focus on addressing the highest quality customer opportunities combined with the aggressive actions we have taken to efficiently streamline our operations are paying off and have given us a heightened sense of confidence in our business outlook.

As such, since our last public remarks in September, we have a better view towards generating positive adjusted EBITDA for the full fiscal year starting with the current quarter. Our fiscal first quarter results reflect excellent execution by our team in the face of ongoing macro-economic headwinds.

We posted revenue of $58.2 million, essentially flat compared to the prior quarter as we expected. Our non-GAAP gross margin rate of 29.9% was up 420 basis points sequentially and 340 basis points year over year. This represents the highest gross margin rate we've had in over three years.

To put this in perspective, though, relative to our plan, first quarter gross margins reflect a favorable mix of higher margin projects which tends to vary quarter to quarter.

Putting mix aside though, we still had a number of positive elements to our margin performance, including greater efficiencies in our services business and within our supply chain operations which we believe are sustainable. Similar to last quarter, our book-to-bill was well above 1.

Given the nature of our private networks business, it’s not unusual to see fluctuations in our quarterly bookings. However as we have been winning large multi-year awards in North America, our backlog has strengthened considerably and as such we are far better positioned for more consistent and predictable revenue generation moving forward.

In the quarter we reported non-GAAP operating expenses of $19.7 million, a reduction of $1.4 million or 7% sequentially. And on a year-over-year basis operating expenses are down 11%.

We've been diligent in managing our expenses and the Lean Six Sigma and process initiatives are leading to better operational performance which again has been illustrated in our gross margin and operating expense performance.

We reported a non-GAAP operating loss reduction of $3.8 million dollars sequentially, and we posted an EBITDA loss of only $600,000, also a significant improvement compared to the fourth quarter. While we are pleased with the progress made, we will not be satisfied until we are EBITDA positive.

As stated earlier, we are in an excellent position to achieve positive EBITDA this quarter. As for business momentum and some key takeaways. Those who follow our industry know that the international market has been and continues to be challenging. And as a result, we are maintaining conservative approach.

Having said that, there are some bright spots emerging. During the quarter we added a new mobile operator customer in the Asia Pacific region. Also our focus on our CTR microwave router platform and its differentiated capabilities is beginning to bear fruit.

We are seeing increasing momentum in our mobile operator customer base for the IP/MPLS software license packages and now have wide network deployments with growing interest from a number of customers internationally, both new and existing, particularly in Asia and Africa.

We also further leveraged the networking features of the CTR platform and winning new private network projects in the Middle East and Latin America. As for North America, this continues to be a driver for our business and we exceeded our internal Q1 bookings forecast. I talked at length on our year end call about some significant wins.

And we've issued a few major customer announcements since. We have a robust pipeline of private network deals and similar to our win with the state of Colorado, we have a few on our own that represent the size of a typical tier 1 mobile operator contract. The key takeaway is that our track record of winning against the competition remains high.

With prior awarded business and some of the high probability opportunities we are pursuing we expect to see both bookings and revenue growth in our North American business year over year. Additionally we continue to have a solid position with our North American mobile operator customers and are getting steady business as a result.

We believe we are well positioned and remain relentless in our pursuit of new mobile operator customers across the board. I'm going to turn the call over to Ralph and will follow up with a few closing comments after this remarks.

Ralph?.

Good morning everyone. And thanks for joining us today. Mike provided an overview of our fiscal 2017 first quarter results but I will make a few additional comments and then discuss our balance sheet.

During our remarks, I will be referencing non-GAAP financial results and as Glenn noted, you can view the reconciliation of GAAP and non-GAAP financial measures in our press release. Our revenues for the quarter were essentially flat sequentially with increases in all reportable markets except for North America.

However in North America we have significant momentum moving into Q2 as a result of prior contract win. And we expect North America revenues to be up year over year in each quarter throughout the balance of fiscal 2017. Our non-GAAP gross margins of 29.9% were up significantly both on a sequential and year over year basis.

As Mike noted, other than some favorable mix this is a direct reflection of our efforts to improve supply chain management as well as better resource utilization which drove higher services margin performance in Q1.

We reported total non-GAAP operating expenses for the first quarter of $19.7 million which is a reduction of 7% on a sequential basis and 11% on a year-over-year basis. This reduction reflects all the initiatives that were enacted over the last couple of years.

Process improvement is a continued focus for the company and we expect further gains as we move forward. Our non-GAAP operating loss for Q1 narrowed to $2.3 million which represents a sequential improvement of $3.8 million.

Although our year-over-year non-GAAP operating loss increased by $1.2 million due to the decline in revenue, our business model is showing a positive trend as measured by the improved operating margins. The same story holds true when comparing adjusted EBITDA.

We reported an adjusted EBITDA loss of $600,000 compared to an adjusted EBITDA loss of $4.5 million in Q4 of fiscal 2016 and adjusted EBITDA of $700,000 in Q1 of fiscal 2016. Moving on to our balance sheet. Our Q1 cash balance of approximately $31.8 increased $1.3 million sequentially.

As I mentioned on last quarter's call, in July we received a cash tax refund from the Singapore government totaling $3.7 million. This stems from a 2014 tax assessment and the refund is a result of our remediation efforts. We continue to -- we continue to pursue remedies with the Singapore government and will provide any material updates as required.

I am pleased to report that the fiscal 2017 Q1 cash provided by operating activities, excluding the tax recovery, was positive as compared to $7.2 million used in operating activities for fiscal 2016 Q4 and $1.8 million in cash provided by operating activities for last year's first quarter.

Regarding collections, while we still face some timing challenge as a result of ongoing issues some of our customers are facing in converting their local currencies to U.S. dollars, we believe our cash position will increase this fiscal year. DSOs were 78 days compared to 99 days in Q 4f fiscal 2016.

Although this is a significant reduction, I do want to provide some color around this. DSOs are positively impacted by a higher concentration of North America business where collections are less challenging. International DSOs also improved, although collections continued to be impacted by the factors noted earlier.

While the general trend for DSOs is favorable we do expect to see fluctuations based on the geographic mix of revenues. Our focus on process enhancements related to inventory management is yielding positive results. And our inventory position of $26.9 million was $3.5 million lower compared to Q4 of fiscal 2016.

I will now discuss our outlook for the second quarter. We believe Q2 revenues will be in the range of $65 million to $70 million, a 12% to 20% sequential increase. And as we mentioned previously, we anticipate positive adjusted EBITDA this quarter. We also expect our cash position to remain flat or decline modestly based on our working capital needs.

I'd like to now turn the call back over to Mike for his closing comments.

Mike?.

Thanks, Ralph. In summary we had an excellent quarter relative to our plan and the second quarter should be even better. We are making substantial progress in our process improvement and spending efficiency initiatives and are continuing to build a strong pipeline for the future. Our ability to compete has strengthened.

We have highly differentiated solutions. Our radios, routers, software and services continue to drive new business for us and our recently launched AviatCloud automation platform is a testament to past investments in innovation. With a strong roadmap of products and services planned for fiscal 2017 I believe our competitiveness will be even stronger.

One brief comment regarding our strategic process. We continue to explore all avenues that can advance our competitive position, offering and valuation. With that said, there is nothing specific to disclose at this time. In closing, with the actions taken and currently in process, we believe sustainable profitability is well within our reach.

We're excited about our market position, prospects and the anticipated business ahead. Our team has done -- our team has done a remarkable job and I'm really looking forward to reporting on our progress. Operator, we're now ready to open up the call for questions. .

[Operator Instructions] And at this time it appears that we have no questions from the phones. .

Unidentified Analyst:.

End of Q&A.

Okay. Thank you operator. I’d like to thank everyone for their continued support. While the past few years have been challenging, we believe the steps we have taken particularly over the last several quarters, our anticipated results in 2017 will result in increased value both our company and our shareholders. Thank you..

This does conclude today's conference. Thank you for your participation..