Michael Pangia - President, Chief Executive Officer Stan Gallagher - Chief Operating Officer Shaun McFall - Senior Vice President of Corporate Development Glenn Wiener - Head of Investor Relations.

Good day ladies and gentlemen. This is your conference operator. At this time I would like to welcome everyone to the Aviat Networks, Fiscal 2019 Third Quarter and Nine Months Results Conference Call. 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. I would now like to turn the call over to Glenn Wiener, Head of Investor Relations. You may begin your conference. .

Thank you, Loraine and welcome to Aviat Networks, fiscal 2019 third quarter and nine months results conference call. We just filed our Form 10-Q and issued our Press Release and our updated investor presentation has been posted to your website. All documents when available can be found in the Investor Relations section therein.

Speaking from management today will be Michael Pangia, President and Chief Executive Officer; and Stan Gallagher, Chief Operating Officer. Shaun McFall, Senior Vice President of Corporate Development is also with us and will be available during the Q&A portion of this call.

With respect to Safe Harbor, 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 Financial tables therein, which include a GAAP to non-GAAP reconciliation and other supplemental financial information. I'd like to thank you all for your interest and support.

We look forward to updating you on our progress. If anyone has any questions, please feel free to asking during the Q&A portion of the call following managements remarks and as always, should you have any follow-up questions after the call, you can reach the Investor Relations department at 212-786-6011.

Thank you again, and I would like to like to turn the call over now to Mike Pangia. Mike. .

Thanks Glenn. Before I cover results, I’d like to make a few statements about our current expectations and why we remain optimistic about Aviat’s potential to drive better results and enhance shareholder value.

As I’ve highlighted in the past, our progress is best measured in half year chunks due to the lumpy nature of our business on a quarter-to-quarter basis. We’re anticipating a very strong fourth quarter and second half and expect to finish the year with higher revenue and profitability than in fiscal 2018.

While our second half expectations for the company remains strong, our near term view of Africa has changed due to revised outlook for business with MTN. The situation is the primary driver of narrowing our full year top line guidance by approximately $5 million and accordingly reducing our adjusted EBITDA by approximately $1 million.

While MTN will continue to be one of our most important customers in terms of revenue and focus, they have and we expect will continue to reduce our CapEx intensity while actively leveraging for our largest Managed Service Providers to improve their unitary pricing in a few select Opco markets.

At the same time, they are also working with their key suppliers, all of their key suppliers to develop new strategic initiatives that can help drive their performance in targeted growth areas.

While it may take some time to implement, we are encouraged by the opportunity to develop new business models, utilizing our large installed base, automation and networking software, services and logistics expertise and network planning tools.

Over the next few quarters, we expect the rest of our business in Africa to improve as we are actively pursuing new opportunities with two other leading operators. Let me now touch upon key highlights across North America and other international markets before I turn the call over to Stan. Let me start with North America.

Q3 revenue in North America was down by $3.2 million on a year-over-year basis, but of this virtually all was due to a component shortage which has since been resolved. The fourth quarter is expected to be exceptionally strong and we expect growth for the full fiscal year.

In the third quarter, we continue to expand share, adding 20 new customer accounts with a vast majority in the growing utilities vertical, which has been the biggest bright spot for us in 2019 and bodes well for our future.

Additionally, as some may recall our goal entering the fiscal year was to add two new state contracts and during the quarter we announced our second with the state of Alaska who will be purchasing our all indoor Microwave Radios and Transport Routers to support their mission critical public safety projects.

This follows our announcement of Florida, another new state added through Motorola earlier in the year. Important to note is that the state of Florida project has been delayed due to an ongoing appeal process. Once the contract is completed, it should have a positive impact on future results. Switching over to the Service Provider market.

Service provider revenues year-to-date North America are essentially flat. We do not build any 5G specific projects into our fiscal 2019 forecasts, as we believed 5G North America would be more of a 2020 to 2022 phenomenon.

With that said, and as noted in our Press Release this morning, we're starting to see G5 materialized into real deployments as one of existing customers is utilizing our Microwave solutions to support their 5G rollout.

As for the Aviat Store, against anyone in North America, which was launched in late August, this was established as a self-service online marketplace for our WTM product suite, along with associated antennas, accessories and software that was specifically designed to capture new share in the all-outdoor radio segment.

This is an instrumental catalyst for growth in the ISP and rural broadband markets. We are increasing our investments and addressing these segments and we believe this will have a positive impact on our business in fiscal 2020. Through the first nine months we've added 50 new accounts that will soon be serving more than half of the statewide networks.

The investments we’ve made in our product portfolio and fulfillment and service tools, especially with automation to further enhance the customer experience have been key to our success and we remain positive about our prospects moving forward.

Moving on to our international business, overall our international revenues in Q3 were down approximately $5 million due to the declines in Africa which I've already covered. Asia was a bright spot with Q3 revenue up 38% and orders up over 50%. Globe represented a greater than 10% customer for us and is a foundation to our success in the APAC region.

This is a relationship that began in 2015 when Aviat signed a multi-year agreement for equipment and services in the Philippines. Over time this relationship has expanded and today we are meeting their products and service needs, helping support their network expansion and subscriber acquisitions plans.

As evidence of Aviat’s strong position in Globe, we were recently awarded their Telecoms Solutions Vendor of the Year Award for 2018 for outstanding performance and invaluable support to Globe Telecom. We expect Asia revenue to be up significantly for the full year and momentum is positive with new customers coming on board.

In fact we recently signed a Global Frame Agreement with the Ooredoo Group, an International Telecom Company in Qatar with 10 operating companies in the Middle East, North Africa and Southeast Asia. This agreement enables all Ooredoo operating entities around the world to purchase our complete portfolio of wireless transport solutions.

A press release on this agreement will be forthcoming shortly. The new products introduced over the past year to strengthen our solutions portfolio are paying dividends and opening up new opportunities for us internationally.

Our high capacity Trunk Radio Platform in particular has resonated well with customers, needing to maximize capacity in areas where they cannot deploy fiber. We are continuing to invest in this area and plan to introduce enhanced Trunking Solutions in the coming months.

The international business landscape across the primary regions are not the same for each service provider as they utilize different financial models.

In some cases mobile network operators are investing more and moving to 4G or 5G as they see attractive returns leveraging their mobile platform to deliver IoT, industrial applications and mission critical services, while others are still building out 3G and rural sites to enable basic subscriber connectivity.

We are in the process of modifying our international model to better address these differences. One additional point which relates to both our domestic and international business, work continues in the development of our partnership with leading optical specialist.

End-to-end transport solutions are gaining traction and receiving growing interest from markets and specific accounts where we historically have not played. This growing trend was reinforced through several conversations I had while in Barcelona and Mobile World Congress. I would expect to have more updates on this in the next fiscal year.

I'm going to turn the call over to Stan now and will close with a few comments on our full year outlook. Stan..

Our cash usage also included $1.9 million spent on share repurchases year-to-date, as well as approximately $1 million related to restructuring and other strategic activities. With respect to our balance sheet, you'll see in the Form 10-Q the adjustments due to the new accounting rule ASC 606 which we previously discussed at length.

The biggest impact assets is in inventories, unbilled receivables and net accounts receivable with other minor adjustments, and for liabilities the biggest impact related to advance payments and unearned revenue.

Note that the only debt held on our balance sheet relates to our credit facility which is on the books at the end of the quarter and repaid in full after each quarter to maintain a line for added flexibility when needed.

We have a number of process improvement programs under way as well which help reduce variable expenses, reallocate savings to R&D and fund working capital requirements.

These include the implementation of Lean Six Sigma projects which are having a real impact on reducing manual processes, lowering cost and driving more automation, the streamlining of our business process as a result of restructuring and a development of new tools that create both internal efficiencies and an enhanced customer experience.

Further, additional substantial opportunities to simplify our business, mostly in the back-office and internationally are becoming visible and actionable as we continue to peel the onion back and consistent with our past remarks. We anticipate additional savings that will fall to the bottom line in fiscal 2020.

This concludes my remarks, and I'll now turn the call back over to Mike. .

Thanks Stan. We are expecting a very strong fourth quarter and expect to finish fiscal year ’19 posting top line growth for the second year in a row and improve profitability for the third year in a row. We are proud of what we've accomplished and we know there is still a lot of opportunity to drive higher bottom line results.

For the fourth quarter Q4 revenues are expected to be in the range of $66 million to $71 million compared to $62.5 million in last year's fourth quarter. This would result in total revenue of approximately $246 million to $251 million or growth of approximately 1% to 3%.

The major change for our prior guidance is a reduced outlook in Africa, offset by higher growth versus plant in North America and Asia. We expect Q4 non-GAAP gross margins to be between 35.5% to 36.5% and for the full year approximately 33% consistent with the prior year and our expectations.

Q4 non-GAAP operating expenses are also in line with plans anticipated to be in the range of $18 million to $19 million, with the higher end based on achieving a higher top line due to selling expenses primarily.

This would result in FY ‘19 non-GAAP operating expenses of $73.5 million to $74.5 million, better than our initial forecast due to ongoing savings from our restructuring and process improvement initiatives, lower variable expenses, while investing more in research and development.

Non-GAAP operating income is anticipated to be approximately $6 million in Q4 versus $3 million in last year's fourth quarter and for fiscal 2019 we expect non-GAAP operating income of approximately $7.5 million compared to $5.4 million in fiscal 2019. If our plan is achieved, this would represent over a 35% improvement year-over-year.

Adjusted EBITDA in Q4 is anticipated to be approximately $7 million and the full year guidance of $11 to $12 million takes into account some variability on the top line and expense side. Again, we expect another year of bottom line improvements as we reported adjusted-EBITDA of $10.1 million in fiscal 2018.

Looking ahead, we are expecting North America to continue to grow and we will be allocating more resources to capture significant opportunities in all verticals to increase our share. We also see new private network opportunities in select international markets and are targeting further growth in Asia.

At this time we do not expect in the near term any significant rebound with MTN, but we do see new customers coming on board. In the long run Africa, including MTN should still represent great opportunities for us.

Our focus on profitability will continue and while we're not yet providing guidance for next fiscal year, we feel confident in our ability to improve the bottom line this fiscal 2020, while further strengthening our balance sheet. Operator, we are now ready to open the call for questions. .

[Operator Instructions]. We have a question from the line of Michael Staiger from Odeon Capital. Please ask your question. .

Hey, good afternoon guys. Thanks for letting me take a question or ask a question.

You know I think that one of the things that might be of interest, I know there is some variability in your business and sometimes the order patterns are lumpy and you have done a phenomenal job with respect to controlling costs and it looks like what $1.9 million in share repurchases.

What’s the thought process about, with respect to all the new products and substantial opportunities and new carriers, why wouldn’t we think about taking the share repurchase dollars and potentially expend sales and marketing to address those opportunities to maybe smooth out some of the variability in the top line. .

Yes, so I’ll just take the first part, just around where we are investing.

We absolutely are investing more in the sales and marketing area, again primarily North America with some select focus in certain markets that we do see continued growth, while also investing more in R&D and taking the costs out in what I would call those back off areas that are there to support growing the business.

As far as the buyback is concerned, Stan you want to touch on that?.

Sure, so I mean you're right, there's – and thank you for that comment. We continue to look at capital allocation or use of cash and where we are going to deploy that. So I think that you know certainly that's a topic that we continue to discuss.

We do have a share purchase program that is in place and we continue to consider all the alternatives in terms of where we need to invest in the market to continue to grow. .

Got it, and then on the service provider press release, is there any more color, is that private network with an existing contract or just an entirely new opportunity?.

It's an existing customer that we served. This is specifically for projects where they are rolling 5G out, and that's how we are supporting this particular customer. I mean we have other service provider customers in the U.S.

who are also using our equipment to deploy by 5G, but not specific – this is specifically for a program that this one customer had put in place. .

Alright, great! I look forward to catch up with you a little bit later. I’ll jump back in the queue..

Thank you. .

Your next question comes from the line of Steve Busch from Everglades Resources. Please ask your question. .

Hey, good afternoon guys, thanks for taking my call. So a few questions here; in our February call you know Africa was doing well and expected to do well.

Can you just kind of add some color, shade on what exactly happened, when it happened, and what MTN’s issues are?.

Yeah so actually even our business with respect to MTN specifically, up until around the second quarter was pretty much in line with what we expected.

MTN annually goes through a process where they look at all those existing suppliers and it’s almost like an RFP that’s done with existing suppliers in terms of any new projects or any new areas of focus that they have.

Over the past year or two there have been some significant impacts by a couple of their larger suppliers, the far eastern ones, where they’ve had experienced some issues which we are pretty much aware of, and that put the customer in a difficult situation, and in this particular case these suppliers were very aggressive and positioning some bundled offers as part of being a managed service provider and given where MTN has had a focus around reducing their CapEx and in certain markets they have leveraged their service provider to serve them where we had traditionally been the supplier of microwave.

So that’s had a negative impact on our business with them. At the same time we still continue to be a key supplier to them, in various other Opcos, including ones that they are showcasing and deploying some of the new technology. .

I see, that’s a good answer I guess.

So when you say they are not you know expecting any kind of rebound, are you expecting revenue to keep dropping with MTN or is it kind of like in a steady state at these levels or was there any…?.

I think we expect our business with them to be in-line with the current run rate levels which are lower than we had anticipated and lower than we were last year, and I think they will continue to be a large customer for us.

The other opportunities we are working on do look very promising and I would expect them to kick-in some time you know in the mid next fiscal year latest. I think the net effect may be a reduction in our business in Africa, but from a profitability perspective we do expect to improve the contribution of the Africa sector. .

Okay, that’s good news. The State of Florida contract, delayed.

What has exactly happened there? Any kind of update our color on timing to start it up?.

Yes, so that's been an ongoing appeal process where the incumbent has challenged Motorola in terms of the award or the contract. That has been going on now for approximately six to eight months in that timeframe. The project itself is still expected to be kicked-off in the second half of the calendar year.

So we think that the closure of the process is imminent, but until that's done we can’t start with the contract and the awards. So we are still waiting on that. I expect that to be resolved again in the not too distant future. .

Okay, that's good.

What was the component shortage, can you comment?.

Stan?.

So it is an MLCC specialty component shortage and it was basically some supplier missed commitments and they had pushed that out by approximately 60 days. In the course of that time obviously we made all necessary actions to rectify that, including what our future supply would look like and I'm very happy to say that that was resolved.

Unfortunately not in time for us to go in and convert those to orders in the third quarter. .

Right, so have they been pushed out kind of in the first quarter next year?.

No, the ones that were subject to the component shortage, we’d be carrying over to the fourth quarter of this year and we'll catch up here, so that’s part of our outlook. .

Okay, good to know.

And are we still on for the estimated cash balance being higher than the beginning of the year or equal to the beginning of the year?.

So it will be pretty close to what the beginning of the year look like, that's what our current forecast are looking like. Obviously we have some cash deployment as we said in the capital allocation. So our goal is to have at least what we had at the beginning of the year and work to make it even better. .

Okay, and then my last question and I’ll hop off.

Anything in the pipeline for acquisition, accretive type acquisition growth or product lines?.

I think as we stated a few quarters back, we are going to be looking as part of running our business at opportunities where there might be a fit leveraging our installed base, our go-to-market activities. So we’ll always be looking for those possible opportunities. .

But nothing eminent?.

There is nothing for us to be reporting on this, on this particular....

Alright, thank you and good luck..

Thank you..

And we have a question from Michael Staiger from Odeon Capital. Please ask your question..

Sorry about the – I just wanted to clarify one thing. You mentioned – when you are talking about new opportunities, you kind of mention software in the pipeline somewhere.

Is this imminent, you know add on or is this something to think about in 2020, anymore color there?.

Yeah. We have products that we've already shipped into the market that are part of the installed base with several of our customers. We have IP/MPLS Layer 3 routing capabilities.

It's a software license that several of our customers have utilized, but there is still several that haven't yet, that's what we mean by the ability to utilize our software to provide networking capabilities in their network without adding additional hardware. .

And then in the penetration, the public utility side, are those orders that are potential orders that you are looking at or are they like kind of baked in for ‘19 as a part of the guidance or is that more of a 2020 view, and that’s it thanks. .

So both - bookings revenue this year, we’ve seen an improvement in our utilities business, that’s going to be reflected in our expectation that North America will grow this year relative to last year and that's in both bookings and in revenue.

As we look forward into the future we see the utilities vertical continue to be an area where there'll be ongoing investment. So I would expect our share to continue and improve above and beyond what we are today in that vertical. .

[Operator Instructions]. There are no questions at this time. Speakers, you may continue. .

Great! So thank you everybody for your time today and we look forward to continue to report the progress that we are making. Have a wonderful day and rest of the week. Thank you. .

Thank you. .

This concludes today's conference call. Thank you everyone for your participation. You may now disconnect..