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

Analysts:.

Welcome to the Aviat Networks' Fiscal 2017 Fourth Quarter and the Year-End Financial Results Conference Call. I'd now like to turn the call over to Mr. Glenn Wiener. .

Thank you. I'd like to welcome you all to Aviat Networks' fiscal 2017 fourth quarter and year-end results conference call. We filed our Form 10-K, issued our press release and posted our updated investor presentation on our website and all documents can be found in the Investor Relations section.

Today we will have prepared remarks from Michael Pangia, President and Chief Executive Officer; and Ralph Marimon, our Chief Financial Officer. Shaun McFall, Senior Vice President and Chief Marketing and Strategy Officer is also with us today and all will be available for questions and answers.

During today's call, management may make forward-looking statements regarding Aviat's business, including but not limited to 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. Please refer to our press release and financial tables, which include a GAAP to non-GAAP reconciliation and other supplemental financial information.

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

Thanks, Glenn. And I'd like to thank you all for joining. I'll begin with the recap of our fiscal year and then discuss the key drivers that paved away for our outlook. Ralph will cover our fourth quarter results and balance sheet and we will then open the call for questions.

To begin, I am very proud of what we accomplished in fiscal 2017 and I would like to sincerely thank our employees. While there are still some challenges for the industry as a whole, particularly in the international markets, we have successfully strengthened our business.

We've generated positive operating income and adjusted EBITDA over the past three quarters and drove significant bottom-line improvements when comparing fiscal 2017 and fiscal 2016.

Last September, on our year-end conference call, I talked priorities and our goals for the coming year and as I look back at our accomplishments and results, we executed on our plan. We said we would focus and allocate more resources to capitalize on growth opportunities in North America and we did. North America revenues increased $6.6 million or 5%.

We said we would aggressively go after new private networks deals or technology and services or highly differentiated and we did. We won several new state and local government contracts and increased our reach within the financial services vertical.

Our private networks revenue grew year-over-year and now represents more than half of our total mix and our pipelines continues to grow. We talked about R&D and our focus on extending our technology leadership for private networks and maintaining investments to support our large mobile operator customer base with the long-term view in mind.

Entering fiscal 2018, we have a significantly improved solution set, that expands the range of customers and applications that we can address, while also giving us the ability to offer upgrades to our installed base. We launched the WTM 4000, the highest capacity microwave radio ever made.

This product increases our addressable market, allowing us to pursue new accounts, as well as new business inside existing accounts. Initial opportunities include several new customers, some currently being served by one of our distressed competitors.

With our recent RAC70 product release, our customers have the opportunity to more than double the over the air capacity of our Eclipse Radio platform.

We also further enhanced our low latency solution, which enable us to upgrade a number of existing low latency networks this fiscal year and we continue to enhance our IP/MPLS capabilities and leverage this to win new private networks business, as well as strengthen our solution for our mobile operator customers.

We also significantly strengthened our services portfolio with AviatCloud. All of these technology enhancements drive much of our optimism for the coming years. Due to our strong differentiation and ability to continue to lower our customers’ TCO. We talked about process excellence, and in still in this mindset throughout the company.

This entails a realignment of our business structure and processes, investments in lean and automation in a more efficient way of running our business and we delivered. As evidenced by the significant improvements in non-GAAP gross margins up 650 basis points and the 13% reduction in non-GAAP operating expenses.

Furthermore, following years of losses, we were profitable on both the non-GAAP operating and net income basis with year-over-year improvements of approximately $20 million for each. Process excellence initiatives also had a positive impact on our balance sheet and virtually all working capital metrics.

Cash and cash equivalents increased by $5.2 million, we generated $9.4 million in positive cash from operations and our cash conversion cycle is near a historical low. As we enter fiscal 2018, we believe we are positioned for both top and bottom-line improvements, which I will cover momentarily, when I address our outlook.

Looking closer at our year-over-year financial performance, total revenue of approximately $242 million declined by 10%, which is more than anticipated and directly attributed to our international business.

We and everyone in our industry were hopeful of a market rebound, but as I had said before, we were not banking on it and we managed our business with this in mind. Non-GAAP gross margins of 31.4% increased by 650 basis points.

As some you may recall we initially had targeted gross margins in the high 20s with the long-term objective of reaching and then surpassing 30%. Throughout the year we consistently exceeded margin targets, which helped drive the bottom-line.

Non-GAAP expenses of approximately $74 million declined by 13%, we tightened spending controls and realigned our organization and processes to drive efficiencies and reduce waste, which in turn contributed to lower spending.

As I mentioned earlier, fiscal 2017 non-GAAP operating and net income improved by approximately $20 million year-over-year and adjusted EBITDA of $7.6 million was up $19.3 million compared to fiscal 2016. So while the top-line was down we delivered on every other metric with better results anticipated in fiscal 2018.

I’d now like to spend a few minutes discussing the markets, what we experienced and what we see on a go forward basis. Let’s start with the communication service provider space. As we look back on the year, I am pleased with how we maintained our position with our customers.

Given uncertainty around CapEx spending globally and the fact that the industry was still in between network upgrade cycles, we focused on service and support ensuring we maintained positive customer relationships and that we delivered for them.

In fiscal 2017, we made a number of organizational and process adjustments that improved our pipeline development, allowing us to expand our sales focus. As noted earlier, our enhanced product portfolio is leading to new customer engagements and overall we are optimistic about future opportunities with service providers.

While we are not yet in a period of growth I do believe that we are in a position to capture more business when mobile operators are ready to increase investments in their networks.

With respect to private networks, this has been an area that we have focused on aggressively over the past two years and we have been very successful investments in enhanced IP/MPLS solutions for our CTR microwave router platform, our high power IRU radios and our service and support capabilities have enabled us to win significant new business.

As we stated earlier some of the fiscal 2017 highlights include large state contracts with Nevada and Colorado, several wins from public utility customers, international wins with government customers in Latin America and in the Middle East and several large federal agencies.

We also continue work closely with Motorola Solutions on a number of projects as recently evidenced by our announcement with Broward County Florida. The mission critical nature of public safety in first responder networks aligns perfectly with our capabilities to deliver robust and reliable networks, even in the most remote locations.

Demand for mission critical radio systems, as well as new LTE enabled communication services will continue over the long-term with FirstNet bringing an additional layer of investment to this market. Looking at the total private network segment on a global basis, we are very encouraged by the activity level we see.

Our bookings in backlog are growing and we remain optimistic that we can build on our fiscal 2017 momentum and expand our market leadership position. I'm going to turn the call over to Ralph now to discuss Q4 results and our balance sheet. And then I'll have some closing remarks with respect to our positioning and outlook.

Ralph?.

Thanks, Mike. I'll cover our fourth quarter performance and balance sheet, after which Mike will provide a few additional comments as it relates to our outlook. Consistent with our guidance, our bookings for the fourth quarter were significantly improved over the Q3 level and our book-to-bill was above one.

This was driven by continued strength in North America. Our revenue for the quarter came in at $56.4 million, which was just under our guidance and this was the result of the continuing challenges we see with the timing of customer project.

North America revenue was up close to 12% compared to Q4 of last year and international revenue was down as expected. North America comprised approximately 62% of our total revenue for the fourth quarter compared to 54% in last year's Q4.

The mix between product and service revenue was 60-40 compared to the prior year where the split was 57% product and 43% service. Non-GAAP gross margin was 34.1%, up 840 basis points compared to last year and 390 basis points sequentially.

The increase in margin was driven by a higher concentration of North America business, as well as continued improvements in operational efficiencies. In addition, certain favorable service project timing and warranty variances both of which were unique to the quarter contributed approximately 200 basis points.

Excluding these events, gross margins were still in excess of 32%. Non-GAAP operating expenses were $19.1 million in Q4, which was higher than initially anticipated.

The primary reason for the increase were higher engineering cost in support of our new product introductions and higher sales commission as we exceeded our bookings expectations in North America relative to international.

Other expense levels were consistent with the ranges we provided and we expect the engineering and sales expenses to return to their normalized levels. We were profitable on a non-GAAP operating basis reporting operating income of $200,000, which is up $6.3 million year-over-year and just above the guidance we provided.

Non-GAAP net loss was $100,000 or close to breakeven, also representing a $6.3 million improvement over Q4 of last fiscal year. Adjusted EBITDA of $1.4 million was up $6 million year-over-year.

Moving to the balance sheet, our cash balance at the end of Q4 stood at $35.7 million, which is up $5.2 million versus the end of last year, but down from Q3 level.

Collections during the quarter were lower than expected primarily due to a delayed $5 million payment from a customer in Africa, who was impacted by revised local foreign currency control. We expect to receive the majority of this cash during Q1. Our DSOs were 74 days, which was a 25 day year-over-year improvement.

When comparing against Q3 it was up modestly, but this was due to the international customer I mentioned earlier. Inventory remains at historically low levels and our overall cash conversion cycle also continues to be very healthy.

Overall I am pleased with the progress we made in fiscal 2017, we achieved profitability and our balance sheet is stronger. I am going to turn the call back over to Mike now for his closing remarks and we can address any questions you might have thereafter..

Thanks, Ralph. First a few comments with respects to our outlook for fiscal 2018. As mentioned earlier, we are positioned for growth this fiscal year. We expect to see continued growth in North America and anticipate our international mobile business to improve after several years of decline and expansion of our international private networks business.

Overall, our plan calls for revenue of $245 million to $260 million, which on the low end would be up modestly versus fiscal 2017 and up 8% year-over-year at the upper end. The upper end of this range is dependent on some of the international opportunities coming to fruition.

As for gross margins, we expect full year margins ranging between 31.5% and 32.5% with the second half of the fiscal year stronger than the first, based on higher volume, new licensing revenue, the ramp of new products and continued process enhancements driving cost reductions and supply chain efficiencies.

Non-GAAP expenses are expected to be in the range of $72 million to $75 million, putting variable expenses aside, we continue to focus on lowering our fixed costs across the company.

Taking the low end, high end or midpoint, we believe non-GAAP operating income will be between $5 million to $7 million or roughly a $6 million year-over-year improvement. And this would equate to adjusted EBITDA in the range of $11 million to $13 million, anywhere from a 45% to 71% increase versus fiscal 2017.

We also anticipate positive cash from operations and continued improvements in working capital. As noted in our press release, we expect fiscal 2018 first quarter revenue to be in the range of $57 million to $60 million consistent with our revenue over the prior two quarters.

We do expect to see sequential top-line growth beginning in our fiscal second quarter. Non-GAAP gross margins are expected to be between 30% and 31%, down slightly from the normalize level in Q4 and this is primarily due to geographic mix. Non-GAAP expenses should be in the range of $18.2 million to $18.5 million.

This would result in positive adjusted EBITDA in the range of $500,000 to $1 million. We also expect to increase our cash position by up to $3 million. Lastly, with respect to the strategic process, we are making progress.

When we started we were looking at multiple options and the over the past quarter we have narrowed this down and are now in the later stages of this process.

We are being diligent and want to make sure we structure the best outcome for our company and our shareholders, one that will help us take advantage of our strengths, address gaps in our offering and drive value. Irrespective of the outcome, we remain focused on running our business.

In closing, although we believe we're positioned for growth this fiscal year our focus remains on improving profitability and cash generation. I want to thank all of you for continued support and with that we will now open the call for questions.

Operator?.

[Operator Instructions] And we do have a question from the line of Mel Coffey..

Hello, how are you guys doing today?.

Good, thank you. .

I'm a broker I have 200,000 shares of the stock and really hasn't been performing with the market.

Can you expand a little bit more on the strategic process that you spoke about?.

That probably would be difficult to give you anything more that I provided again. We have made progress we are at the later stages of the process. And as more information becomes available to the extent that -- and we will disclose it accordingly..

Are you guys getting out there trying to introduce the company to other broker dealers or other investors so the volume isn't so anemic?.

Yes, that's definitely something that we have been working on in terms of providing more exposure to the company. We did attend a conference in a couple of months back the ROTH Conference. And we do expect to continue increasing our pace with relative to exposure of the company moving forward.

And obviously as we participate in any conferences or any other events moving forward, we'll obviously disclose that information as well..

All right, thank you. .

You're welcome. .

You have no further audio questions at this time..

Thank you for everyone joining today's call. And look forward to speaking with you in the future. Thank you again..

This does conclude today's conference call. You may now disconnect your lines..