Glenn Wiener - Investor Relations, GW Communications Michael Pangia - President and Chief Executive Officer Ralph Marimon - Senior Vice President and Chief Financial Officer.

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aviat Networks’ Fiscal Year 2018 Third Quarter Results. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. Mr. Glenn Wiener, Investor Relations, you may begin your conference..

Thanks, Rob, and welcome to Aviat Networks’ fiscal 2018 third quarter results conference call. We just filed our Form 10-Q, issued our press release and posted an updated investor presentation on our website. 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 and will be available during the Q&A portion of this call.

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.

Additionally, during today’s call, management will reference both GAAP and non-GAAP financial measures. Please refer to our press release and the financial tables therein, which include a GAAP to non-GAAP reconciliation and other supplemental financial information. Now before I turn the call over to Mike, few updates on the Investor Relations front.

First, Aviat will be presenting at the 19th Annual B. Riley FBR Institutional Investor Conference on May 24. The conference will be held at the Loews Santa Monica Beach Hotel.

Second, Aviat will be presenting at the Ladenburg Thalmann Technology Expo 2018 in New York City on Thursday, May 31, and will be scheduling investor meetings throughout the day and most likely the day prior to.

If anyone is interested in attending and/or meeting with management, please feel free to reach out to the conference teams at each of the respective firms, and as always, you can contact my office accordingly.

We also intend to get out on the road and market our story over the coming quarters, and you can reach out to either myself, Glenn Wiener, or my colleague, [indiscernible], and we will coordinate everything accordingly. I’d like to thank you all for your interest and support, and we look forward to updating you on our progress.

At this time, I will now turn the call over to Mike. Mike, please begin..

Thank you, Glenn, and welcome all to our third quarter conference call. We continue to make significant progress on several fronts, which we expect will have a very positive effect in the coming quarters.

We’ve added new customers, expanded successfully into new verticals and the initial demand we are experiencing with our new products is extremely encouraging. I’ll provide further color on that later.

As you saw from our press release, our Q3 results were somewhat mixed, while revenue was in line with our prior guidance, we hit a few speed bumps along the way. Gross margins came in about 100 basis points lower due to an unfavorable mix within our private networks projects and lower services volume relative to our fixed cost capacity.

Further, operating expenses were negatively impacted by foreign currency exchange rates and we also saw a spike in benefit-related expenses. These effects skewed comparisons versus our prior outlook. We do expect that our mix and margins will improve this quarter and we don’t anticipate these other issues to have the same recurring effect.

Ralph will provide more details on the numbers shortly. Over the last few quarters, we’ve made significant strides towards strengthening the overall competitive position of our business. The introduction of the WTM 4000 platform has opened opportunities for us that previously were not part of our addressable market.

5G is on the horizon and is driving operators to look at new generations of technology for near-term decision making, so the introduction of this platform is proving to be very timely. Beyond the reported numbers, here are just a few examples of the progress that we have made since our last earnings call.

We were selected as a pre-approved provider of trunking solutions for a large international Tier 1 service provider. This is a new customer for Aviat with significant growth potential in our agreement will enable us to address the requirements of subsidiary operations in a number of different countries.

We’re involved in a substantial 5G network RFP for another international Tier 1 service provider, and we expect the award to be decided by the end of this calendar year.

Our agility and product flexibility allowed us to create new hardware and software product concepts not available from other vendors and we successfully demonstrated these attributes during proof-of-concept trials for this customer.

We successfully completed proof-of-concept evaluation of the software-defined networking and rest the end capabilities in our new products with a third large international service provider, which positions us well for consideration in their future network investments.

Additionally, we received new orders from a longstanding customer in the Asia Pacific region for our newly released all-outdoor trunking solutions. The new network will deliver the highest capacity, long-distance microwave system ever deployed, and this is leading to other opportunities, both within and outside of the region.

These milestones represent encouraging signs for our international business and we have more opportunities in process for the coming quarters. Now on to North America. As I mentioned on our Q2 conference call, our private networks business is firing on all cylinders and we continue to add new accounts.

We’re seeing increased volume of projects from cities and counties across the U.S., where we have state contracts in place and customers who continue to align with state-wide standards. We are currently pursuing opportunities with several new state-wide networks with a realistic goal of adding two or three new wins by the end of the next fiscal year.

Next generation features, increased focus on security surveillance and data centric applications, which require higher capacity are driving many of these new opportunities. In April, we announced a $4.5 million of new business with a large Nevada County government to support county-wide first responder communications.

This customer is leveraging our hybrid radio platform and sold turnkey services as they migrate their network to Internet protocol. Also, on our Q2 call, I noted that we were laying the groundwork to expand into other verticals, such as transportation and education.

Recently, we signed a contract to deliver microwave solutions to one of the – to one of America’s largest transportation companies, another new customer, which is expected to be up to $10 million of new business over a five-year period, and we expect to receive the first order from this project during this fiscal quarter.

We believe this award will further strengthen our position with other transportation companies that we are pursuing. We’re excited about this deal, because we knocked out the incumbent and beat other competitors actively seeking this business. Also last week, we publicly unveiled a major upgrade to our flagship product for North America, the IRU 600.

The enhanced product will enable capacities of up to three times the previous version, and when combined with our industry leading output power and reliability, we continue to provide the most compelling TCO available within this segment.

The momentum we’re building in North America has been driven primarily by product differentiation, our strong services capabilities and an increase in marketing, inside sales and lead generation programs.

Our success in North America private networks and renewed momentum with international service provider accounts, coupled with our new solution set is also an enabling several partnering opportunities in the pursuit of new growth prospects, which previously were not options for us.

We’re in the process of formalizing a few of these opportunities, which should bode well for our fiscal 2019 aspirations. I’m now going to turn the call over to Ralph to cover our financial results in more detail.

Ralph?.

Thanks, Mike. Third quarter revenue of $62.1 million was within the range we provided and up modestly on a sequential basis. Year-over-year, revenue in Q3 increased almost 6%.

Our book-to-bill for the quarter was just under one, but through the nine months period, we remained comfortably above one-to-one and significantly better on a year-over-year basis, and we were up both in North America and internationally.

Our Q3 non-GAAP gross margin of 29.1% was approximately 100 basis points lower due to the reason Mike covered earlier. Through the first nine months, our non-GAAP gross margins were 31.8%, up 130 basis points compared to fiscal 2017, based on a favorable mix shift in North America and improved services margin.

Non-GAAP operating expenses of $19 million came in above our prior guidance of $18.3 million to $18.7 million. The main contributors to higher operating expenses were unfavorable foreign exchange rates and a temporary spike in benefits-related costs in North America.

Notwithstanding these two events, non-GAAP operating expenses were right in line with our expectations. As for the bottom line, we reported a Q3 non-GAAP operating loss of $900,000, and for the nine months period, non-GAAP operating income of $2.3 million, up $600,000 over the prior fiscal year nine-month period.

Non-GAAP loss from continuing operations in Q3 was $1.4 million. For the nine-month period, we reported non-GAAP income from continuing operations of over $900,000, also an improvement by comparison with the prior year.

Lastly, adjusted EBITDA in Q3 was $200,000, down $1.8 million compared to Q3 last year and the decline was due to the expense variances mentioned earlier. For the nine-month period, adjusted EBITDA was approximately $5.7 million, compared to $6.2 million in the fiscal 2017 comparable period.

Note that our company has delivered positive adjusted EBITDA results for the past six consecutive quarters. As for our balance sheet. We ended Q3 with $38.5 million in cash, cash equivalents and restricted cash, which represents a $3.6 million reduction from Q2, but is up $2.3 million since fiscal year-end.

Due to the timing issues, we collected approximately $4 million in the week following quarter-end and our trend on cash remains positive. We had approximately $1 million at the end of Q2 that was held by a bank under forward contracts, specifically for the repayment of a dividend declared by our Nigerian entity.

These contracts were settled in January and that cash is no longer restricted. Cash used in operating activities in Q3 was approximately $1.9 million due to the timing issues mentioned. Through the first nine months of fiscal 2018, cash generated by operating activities was $7.3 million.

Accounts receivable of $38.5 million is approximately $4.6 million lower on a sequential basis, although unbilled receivables increased by roughly the same amount. Days sales outstanding or DSOs continue to show improvements coming in at 56 days, compared to 64 days in Q2.

When including unbilled receivables and the DSO calculations, DSOs would be above 77, which was slightly favorable to Q2. When comparing year-over-year, our DSOs inclusive of unbilled accounts continues to improve.

DSOs improved by one day, compared to the fiscal 2018 second quarter and 7 days compared to the fiscal 2018 first quarter, and improvements have been realized in both North America and internationally as we remain focused on improving the cash collection cycle.

Accounts payable of $31.7 million is down $1.4 million sequentially and this was primarily due to payments to our primary contract manufacturer. Our inventory position of $23.7 million was a decline of $2.5 million from the second quarter.

Inventory turns increased to 7.4 from 6.1 in Q2, and the increase is primarily attributable to a reduction in our project-related inventory. We continue to manage our AR and AP very effectively and our cash conversion cycle continues to remain at the best level in the company’s history.

Our capital expenditures through the first nine months of fiscal 2018 were $5 million. We anticipate capital expenditures will be approximately $1 million for the remainder of the fiscal year and will primarily be applied towards equipment for the development, manufacturing and support of new products.

We also expect our cash position to increase in Q4 by over $2 million sequentially and end the year with over $41 million in cash on hand, which would mark a $4.5 million to $5 million improvement year-over-year. I’ll turn the call back over to Mike now for his closing remarks..

Thanks, Ralph. I’d like to jump right into our guidance first, as that will help set the stage and give you a clear indication that we remain on the right trajectory to continue to improve our business performance.

With respect to our outlook, we expect Q4 revenue to be between $63 million to $70 million, which would result in fiscal 2018 revenue of $243 million to $250 million. The wide range is dependent on the timing of converting existing backlog to revenue and we’re still in the range of our prior outlook.

For fiscal 2019 based on anticipated year-end backlog and what we see visible today within our existing funnel and growth prospects, we believe we can achieve revenue north of $260 million. As stated earlier, we’re very encouraged by the growth prospects we are seeing in the international service provider segment.

As we rebuild more of this into our mix, the recurring nature of this business should also improve our forecast visibility and sequential linearity. Q4 non-GAAP gross margins should be between 30% and 32%. As stated earlier, we expect to see some recovery from Q3 levels.

For fiscal 2018, non-GAAP gross margins should be approximately 31.5%, representing another year of improvement, and fiscal 2019 should deliver further margin increases based on the impact of new product introductions and continued enhancements in our service and product delivery activity.

On the expense side, non-GAAP operating expenses in Q4 should be at approximately $19 million, assuming foreign exchange is tracking at roughly the same rates and, of course, there’s some variability based on where the top line falls out.

This puts us right in the middle of the range of our previous guidance of $72 million to $75 million for the fiscal year. Based on the current run rate, we expect fiscal 2019 to be at the higher-end of our fiscal year 2018 range. We’re planning to increase our investments in research and development and growth-related areas.

These increases will be offset by actions underway to lower fixed expenses, primarily through more back office-related process enhancements similar to what we’ve delivered over the past three years. From a profitability perspective, using the midpoint of our ranges, Q4 non-GAAP operating income should come in at approximately $1.6 million.

This would result in non-GAAP operating income in fiscal 2018 of approximately $3.9 million. Note, this compares to $1.9 million from last fiscal year. Similarly, Q4 adjusted EBITDA is expected to be 2. – approximately $2.8 million, resulting in a fiscal 2018 adjusted EBITDA of approximately $8.5 million, compared to $7.6 million in fiscal 2017.

As for fiscal 2019, we anticipated growth in our business, modest improvements in gross margins and flat to modest increases in research and development-related expenses, we see a path to achieving non-GAAP operating income of approximately $7 million and adjusted EBITDA of approximately $13 million.

As I said, the real story is what we have done this year to position the company for the future. We are on the right track. Before concluding, I would like to provide an update on our strategic process.

When we first launched the process, our business was in the early stages of a financial turnaround and we were challenged with the scale and growth prospects for our international service provider customer base. While we carefully evaluated several options, none have met the criteria necessary to create value for our shareholders.

Our international business prospects have significantly improved and our financial situation is strong. In the normal course of business, we will continue to assess new opportunities as they arise. I’ll add just three final thoughts before taking any questions.

As we announced in our release today, our Board of Directors has authorized a stock repurchase program, enabling us to purchase up to $7.5 million of our common stock – $7.5 million of our common stock. The program is slated to commence later this week.

Based on our improving outlook and the momentum we have built, we believe our stock represents a compelling investment and we are taking steps such as the stock repurchase program to both support and enhance valuation over the long-term. We intend to be more active as it relates to investor relations.

We have a track record of profitability and a good story to tell, and we’re now moving into what we believe will be a growth trajectory with improved bottom line results and performance. I’m highly optimistic that customers, partners and investors will all be the beneficiaries of our actions over the coming year.

Operator, we’re now ready to open up the call for questions..

[Operator Instructions] There are no questions at this time. Did you want me to delay for a couple minutes, so we can get some calls in the queue..

Maybe another minute to see if anything pops up..

Certainly. [Operator Instructions] And there are no questions at this time. I’d like to thank you for joining today. This concludes today’s conference call. You may now disconnect..

Thank you..

Thank you..

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