Ladies and gentlemen, thank you for standing by and welcome to the Aviat Networks First Quarter Fiscal Year Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's call is being recorded.

And now I would like to hand the conference over to your host, Glenn Wiener, Inventor Relations. Sir, please go ahead..

Thank you Lance and welcome to Aviat Networks fiscal 2020 first quarter results conference call. We filed our Form 10-Q, issued our press release and our updated investor presentation has been posted to the IR section of our website. As you will see, the company had a very strong start to the fiscal year and remains on track with its prior guidance.

Today's call will be led by Stan Gallagher, Interim Chief Executive Officer and Chief Operating Officer; and following his remarks, Shaun McFall, Senior Vice President of Corporate Development; and Eric Chang, Senior Vice President and Principal Accounting Officer will discuss market trends and financial results respectively.

After their prepared remarks, we will then open up the call 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 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. Thanks for your continued interest in Aviat.

And at this time, I will turn the call over to Stan. .

Alright, thanks, Glenn. So our call today will be a little different than those of the past.

My remarks will of course provide highlights around the quarter and expectations which Shaun and I also intend to provide more color around what we are doing to ensure Aviat is positioned to capitalize on the positive trends we are seeing with respect to 5G and increased demand for mission-critical network transport solutions.

First, I am honored in the confidence and trust the Board has placed in me. I take on this new role as Interim CEO with a great deal of excitement and with an eye on amazing transformative change.

We have a great team and significant opportunities to lead the market through innovation, capture share, improve profitability further, and of course, drive shareholder value. My professional philosophy has always been driven by the art of the possible, empowering our people to not only think this way but to go out and achieve it.

And one of the best ways to consistently evolve and succeed is to make sure we have the right tools that simplify processes, and capture and utilize data more efficiently, enabling us to enhance our customers’ business. By better understanding customer needs we will strengthen our position as their solutions partner, not just their product supplier.

We entered fiscal 2020 with significant backlog and momentum, particularly in North America. This is what drove the confidence in our guidance for the first half of the fiscal year. And based on our strong Q1 results and anticipated Q2 performance, I'm pleased to announce that we are reaffirming our prior guidance.

Due to ongoing uncertainty in Africa, we are not providing guidance for the full fiscal year at this time. However, what I can say with respect to fiscal 2020 is that we’ve substantially de-risked our plan, especially related to MTN. We are making solid progress.

And globally our team has been successful in uncovering other opportunities, resulting in new revenue streams this year and positioning Aviat well for the future. For the full fiscal year, we expect stronger year-over-year gross margins, with the first half being exceptionally strong and the second half stronger on a year-over-year basis.

We are also expecting a slight uptick in operating expenses as we continue to invest in new productivity tools and in our talent, which will lead to greater efficiencies and future savings. With respect to the bottom-line, we are anticipating significant year-over-year improvements in non-GAAP operating income and adjusted EBITDA.

And lastly, our cash balance increased in Q1 and is expected to increase throughout the year. I'd like to make just a few comments with respect to our business before moving on to the positive industry trends driving our optimism. Let's start with international.

Last fiscal year, orders from Africa began declining in the third fiscal quarter and really tailed off in Q4. The good news is they picked up again in Q1 and we are forecasting similar rates throughout the year, the revenue is expected to decline.

The APAC region was a big highlight of our international business in fiscal 2019 and we had an exceptionally strong year with Globe Telecom, a leading carrier in the Philippines.

We are optimistic about our long-term opportunities with Globe and other carriers in Asia with more investment anticipated in both fixed and mobile broadband data services and in preparation for 5G.

I want to refer you all to our October 8th press release, as Globe will be one of the first adopters of our newly introduced WTM 4800 E-band and multi-band radio platform which will support their 5G roll out.

This is the industry's first and only single box multi-band solution, which replaces the need for many boxes, lowers customer costs, and improves overall TCO. For Globe multi-band is an important wireless transport technology, which will help them optimize the use of spectrum.

This solution was a big focus for us in last year's R&D spend and should open up new avenues of growth across various international markets preparing for 5G.

Meanwhile, many of our international customers and prospects are still in the midst of upgrading their networks to support 4G services, while beginning to lay the groundwork for future 5G adoption.

To illustrate the point, we hope to shortly announce a new multiyear multimillion dollar contract with a leading and very well known carrier in the APAC region. So stay tuned for more details on that.

To guide appropriately, international revenue will be down in fiscal 2020 given the situation in Africa, lower volume in the APAC region and a relatively consistent with smaller flow on dollar basis in the other markets we address. The future, however, should be a different story. And as I mentioned, our investments are about the future.

Shifting to North America, 5G is beginning now and will build over the next several years. Keep in mind that today the service provider market in North America is a small piece of our overall business. But in years past, as we saw with the migration to 4G for example, it was much larger and a source of growth.

With our WTM 4800 solution, new services and new automation tools, we believe the opportunity to capture more business and more customers on this side is certainly within our grasp.

We continue our tremendous success in private networks, mission critical networks for governments, states, cities, first responders, utilities, and other adjacent markets that need highly dependable and trusted solutions. More than half of our business worldwide today comes from the private networks vertical.

And while our customer base continues to expand, the opportunities to grow further are substantial. We have the specialization and the technology solutions unlike any other in our sector today, and that is why we can continue to allocate savings through process efficiency programs to R&D, innovation can never stop.

Data usage is exploding, and the increase in usage cannot be met by fiber alone. Highly differentiated radios and routers coupled turnkey services are what separate Aviat from the competition. And this is part of the reason we've been successful in winning new business.

There's a lot more I can add with respect to wins, opportunities, market trends and technology innovation. But I'm going to stop here and let Shaun provide a little more color around the positive market dynamics we are witnessing and why we believe Aviat is so uniquely positioned to win over the next few years. I'll pass it over to you Shaun..

Thank you, Stan. Well, as you already highlighted, the fundamental driver in our business is the ever increasing volume of data to be carried across networks of all types. Together with the simple fact that not every location can or ever will be connected by optical fiber.

A good example of this is that the solutions we are delivering today in anticipation of 5G have more than 100 times the capacity of the services we delivered for typical LTE 4G backhaul just a few years ago.

And we're not only seeing capacity needs in service provider networks, the increase in automation, remote monitoring and data analytics is driving capacity needs in utility networks, while increased use of mobile data applications, video and other new emerging technologies and first-responder networks is driving capacity needs there also.

The need for high speed Internet services, especially in rural and underserved areas is also driving demand for higher capacity wireless solutions.

But it's not just the amount of data that's important to our customers, it’s also the types of data and the specific services being provided, some of which are considered to be much more mission-critical than others.

In order to provide the necessary reliability, resilience and performance for every service type, the integration of intelligent routing into our solution has been a significant differentiator.

And our ongoing investment in this area has allowed us to develop a strong suite of software that we continue to enhance, license and in the future migrate onto generic hardware platforms. This is a direction where the industry is gradually trending as software defined networking moves closer to the endpoints in the network.

And we are well positioned to offer solutions whenever needed over the next few years.

Our other opportunities to innovate have materialized the new products such our recently announced multi-bands of WTM 4800 which simultaneously leverages the white bandwidth potential of millimeter wave, frequency bands with the robustness of lower frequency microwave to maintain a high availability under all operating conditions.

Initial orders for the WTM 4800 have now been received. And we expect this product to be a solution in making our customers’ networks ready for 5G.

In the coming quarters, we will release our next step in the revolution of wireless long distance high capacity transport solutions with the introduction of a new generation of products based on our WTM 4000 platform. This solution dramatically reduces the cost per megabit over long distances when compared to current solutions.

We see a strong interest for this type of product driven by the increasing need for network capacity, and for the expansion of mobile services to remote areas. We will share more information on this product in the coming months.

Our investments in our core solutions for network capacity and mission-critical network intelligence are only a part of where we see our innovation opportunities going forward. We're actively engaged in streamlining every step of the end-to-end process of planning, designing, procuring, deploying, and operating wireless transport networks.

Developing software solutions to automate or simplify any and all of these steps is the way to leverage Aviat’s unique expertise and lower the operational costs for our customers at the same time as generating new potential recurring revenue streams for us. With that, I'll turn it back to Eric who will provide more details on our Q1 financials.

Eric?.

Thank you, Shaun. Good afternoon, everyone. This is my first quarter addressing our financials in this type of forum, though I’ve been with Aviat and working with Stan for many years. I'm intend to play the larger role in our Investor Relations efforts and look forward to meeting with our investors, prospective investors and analyst community.

All comparisons relate to our first quarter financial results for fiscal 2020 and fiscal 2019, after the periods ended September 27, 2019 and September 28, 2018, respectively, unless otherwise noted. We reported total revenues of $58.6 million as compared to $60.5 million, a decline of $1.9 million or 3.1%.

Product revenue declined by 6.5%, while our service revenue increased 3%. Our book-to-bill ratio for the quarter was significantly greater than 1 building on our momentum from last year. On a trailing 12 month basis, our book-to-bill ratio is also above 1 one and we expect it to be greater than 1 in fiscal 2020 as well.

GAAP gross margin came in at 38.5% and non-GAAP gross margin at 38.6% for the first quarter representing an improvement of 890 basis points and 900 basis points, respectively.

The mix of business was more heavily weighted towards North America and also had some higher margin international projects, both of which are also anticipated in the second half -- in the second quarter. For the full fiscal year as Stan noted earlier, gross margins both on a GAAP and non-GAAP basis are anticipated to be up year-over-year.

On the expense side, reported GAAP operating expenses of $21 million, an increase of $1.6 million and this includes an increase of approximately $400,000 for restructuring charges. On a non-GAAP basis total operating expenses were $19.5 million as compared to $18.3 million, an increase of $1.2 million or 6.8%.

Non-GAAP R&D expenses increased by approximately $300,000 and non-GAAP selling, administrative expenses increased by $1 million. The increase in our R&D spend was in support of customers projects and to ensure we’re positioned to win new business.

Higher selling, administrative expenses was primarily relate to an increase in sales related expenses, employee-related costs, corporate governance related expenses and investments in process improvement which we believe will lead to efficiencies and saving in the future years.

While we're not providing the full-year guidance as Stan noted earlier, we're anticipating a modest increase in our total non-GAAP operating expenses for the year with an eye on supporting growth related initiatives, internal productivity enhancements, although we are always looking to drive costs lower.

I also want to point out that we have realized the previously identified savings which are helping to support this added investments in fiscal 2020 and support anticipated growth in the future. We reported GAAP operating income of $1.5 million compared to GAAP operating loss of $1.5 million, a $3 million improvement year-over-year.

Non-GAAP operating income was $3.1 million as compared to non-GAAP loss of approximately $400,000, $3.5 million year-over-year improvement. GAAP net income was approximately $100,000 or income of $0.01 per share compared to a GAAP net loss of $800,000 or a loss of $0.14 per share.

And non-GAAP net income was $2.9 million for income or an income of $0.52 per share compared to a non-GAAP net loss of $600,000 or a loss of $0.12 per share. Lastly, we reported adjusted EBITDA of $4.1 million, a $3.2 million year-over-year increase. All these comparisons, once again are for the first quarters of fiscal 2020 and fiscal 2019.

Moving on to the balance sheet. Our cash and cash equivalents stood at $34.5 million at the end of the first quarter as compared to $31.9 million as of year-end, an increase of $2.5 million.

We expect our cash position to improve throughout the remainder of the fiscal year, though as we have seen in the past this could change in any given quarter or as from time-to-time customer payments are received within a few days after quarter end.

We are confident in saying that for the full fiscal year, our cash position will improve even with the investments we are making to support our major projects in North America, process improvements and continued execution of our share repurchase program. During the first quarter, we spent $748,000 in share repurchases.

Under our $7.5 million repurchase program, $4.4 million remained available at the end of the first quarter. Capital expenditure was $1.3 million for the first quarter and we expect to spend approximately $5 million for the remainder of the fiscal year.

Cash is king, and our focus remains on improving free cash flow while continuing to look for ways to further enhance our balance sheet metrics, though we have already made significant progress in continuing to operate at or new historical best.

Our cash flow from operations was $5.6 million for the first quarter of fiscal 2020 compared to cash used in operation of $6.8 million for the first quarter of fiscal 2019, an improvement of $12.5 million.

Our supply chain continues to operate very efficiently, however through the first quarter our industry level increased and our inventory trends declined. This was primarily due to our new NEC partnership in which we are carrying inventory at NEC’s channel partner in North America.

We expect inventory turns to improve throughout the remainder of the fiscal year and we're very comfortable with our working capital performance. Finally, in the first quarter, we adopted a new accounting standard related to leases, which requires us to recognize most leases as assets and liabilities on the balance sheet.

The right to use assets was $6.7 million and associated liabilities are included in current and other long-term liabilities. These balances primarily represent our operating lease obligations for facilities. The adoption of this accounting standard has no material impact to our income statement. This concludes my prepared remarks.

And operator, at this time, we're ready to open up the call for questions..

[Operator Instructions]. Your first question comes from the line of Theodore O'Neill. Your line is now open..

So I have a couple of questions about the WTM 4800. And I also see that you've got a nice shout out on the product in Ovum, which was very nice to see.

So the question is, when customers are looking at this product, they can see, obviously, you've got a single chassis multi-band solution for 5G backhaul, but you've also got the cloud-based design software.

Are those both sort of equally valued by customers or is there one that's more important than the other?.

So I'm going to let Shaun answer that. Go ahead Shaun..

Hi, Theodore, it’s Shaun.

I would say that for some customers they’re actually of significant importance, both of them because of the capabilities they may have and for some other customers it may be that we do not work for them, or they have other ways of doing the planning work, for example that they may or may not put quite as much value on the planning tool themselves.

The product itself, I think the value proposition and our product, I think it’s pretty clear to most of the customers I've seen so far and the footprint alone is one of the most attractive elements of it..

Because it takes up less space on the tower?.

Less space, less power. And it's a much smaller proposition and lower in weight. All are just pluses from that aspect..

And the other question I had about the product is, is that useful for the -- for your private networks as well?.

It's not what we’re predominantly focused on there. But most of those networks use lower frequency band microwave, long distance, more rugged terrain type of applications. It's most of what we do there, but there's no reason why we couldn't use it there.

It’s just that typically the distances we're trying achieve are quite a lot longer than we would achieve with that product..

Your next question comes from the line of Steve Busch. Your line is now open.

Could you discuss what percent of international drop was Africa versus APAC?.

We’ve got that in the press release, no that we have -- it's very back. So if you look at the supplemental schedule of revenue by geographical area, you have to take a look on a comparative basis. You do have for the quarter ending now the African, Middle East is 10.6 or 10.593 and then Latin American and Asia Pacific 4.47.

And note that Latin America is a smaller portion of that is the way we group that by geo..

I'll take a closer look at that.

What drove North American growth, that was pretty high growth rate, like what sector or?.

So, yes, let's talk about North America and how we actually exited the year last year. We had an amazing order flow at the back end of last year. A lot of that translated quickly into revenue in the first half, and we're anticipating it to continue.

But if you look at back last year, our revenue increased in North America approximately 40% or more, and that was just based -- that was based on order flow but it's also based on a number of big projects that we’re actually winning, and a number of those in the private network space, public tenders, et cetera.

And it's building a strong foundation in our portfolio and it’s built into our forecast..

You answered my start, but any 10% customers?.

Not this quarter..

You’re kind of holding back your forward guidance.

Is there any particular reason or are you going to re-up that after this current quarter?.

Yes, so for the back half of the year, one of the two areas that we talked about, especially in the international space was Africa. And we don't have the full visibility that we would like. We have already derisked them from our forecast. But we have activities -- strong activities right now as we speak going on in Africa to try and stabilize that.

Our forecasting process will refresh 16 times a year. And as we get more comfortable and closer to the second half, I think you're going to see some guidance on that.

But right now, we're going to make sure that we do a great job executing the first half, creating a profitable growth and making sure that we have a great line of sight into some of the lack of visibility that we have with Africa right now..

And I guess my kind of final question is, what was the restructuring recovery you got for the quarter?.

This quarter we actually have a charge of about $1.3 million. So we announced the restructuring plan about back in late June. So that was the charge related to that plan. .

Sorry, Steve that was Eric in. .

I see it was a charge, not a recovery. I see, okay. .

Your next question comes from the line of [Lewis Moser]. Your line is now open. .

Hi, I am new to the company. I noticed your report today and I’m reading some things, the journal it says network earned a penny and it may not be comparable to the $0.33 estimate of the analysts, then there is sales beat. So how do you determine the penny earnings versus the $0.33 estimate? And as this may not be comparable so ….

That’s GAAP and non-GAAP, right? Yes, so, hi, Lewis. What I would expect here is that the number that you're referring to is the GAAP income per share versus the non-GAAP earnings per share. And it's probably not a apples-to-apples comparison.

So I expect the analyst coverage for $0.33 per share is probably on a non-GAAP basis and so we would want to make sure that the comparisons are correct. .

Assuming that, then the adjusted EPS GAAP would $0.50, am I correct?.

It’s $0.52, yes. .

Is that true?.

Yes, it is true..

So then you beat both sales and earnings considerably?.

Well, I would say on the earnings site, we are very profitable given that particular data point that you shared with us. And I think on a year-over-year basis we're very pleased with our performance. .

And the back quarter comparison is what I haven't read the whole press release?.

In terms of the year-over-year comparisons?.

Yes, year versus last year at this time?.

Yes, I mean last year the adjusted EBITDA was at $918,000 versus $4.1 million this year, if you want to use that as a data point. .

Your next question comes from the line of Mark Spiegel. Your line is now open. .

A couple of questions. First, Stan, are you going to have the permanent job there, is a search going on.

Is this a trial period for you, what's happening with that?.

Yes, I'll be brief on that one. There is a search going on. The Board would not have appointed me if they didn't have a strong conviction in the ability to continue leading the company. And I can tell you, we have a great team here. We had a seamless transition and we have our eyes set on the future and everything is moving forward very well..

What does that mean? So there is a search going on, but you are one of the candidates.

Is that -- would that be fair?.

Yes, that would be a fair statement..

Okay. This is a much bigger picture question. I've been a holder there for a few years, not as long as a lot of other people. You guys are selling on an enterprise value basis of only around 0.2 times revenue using this quarter as a run rate and that's without even putting any valuation on the NOLs.

Obviously, you're making some IR efforts now I think which is great. But the real question is why hasn't some strategic buyer come along and pick you guys up even at 0.5 times revenue which would be a huge pop in the stock.

I mean I realize you're not there to answer stock market questions, but I am asking -- I mean why isn't somebody buying this company.

It's like, it's the cheapest way to add revenue in a growth starved universe, right?.

Absolutely, Mark. I'll tell you what, I'm not going to be flipping on this, you're going to have to ask the big strategic guys why. I can tell you, we do have some conversations with folks on a frequent basis.

But we know exactly what you're saying especially from a valuation perspective and absolutely we are trying to get our performance data and vision out there. But I can tell you the best way for us to continue to be an amazingly attractive candidate is to continue to perform.

And I would say if you look back in quarters, we do have our ups and downs for the first quarter and third quarters kind of saw toothing between second and fourth. And this quarter I think we've broken that trend, although one data point is not a trend maker.

So we're going to be focused on continued profitability growth and continued reinvestment for the technology and when those opportunities come, we will absolutely be looking at them..

[Operator Instructions]. We have follow-up question coming from the line [Lewis Moser]. Your line is now open..

I spoke to you before. The price of the stock aftermarket and it's been [$627]. This report is good.

Why do you suppose as nothing going on there with the stock, it just doesn't seem right?.

Obviously, I can't talk to the different investors who follow our stock. What I would say is due to our share count and some illiquidity, there's not usually ever much action on the aftermarket for Aviat. And I don't expect that -- I expect that to continue.

I think the news will digest over the overnight period and we'll see whatever activity tomorrow morning..

Yes, I know, I follow specifically stocks of this nature, which don't have much activity and a lot of people miss the earnings reports, there’s like 500 of them coming out in the last couple of days. But the stock should be much higher. Anyway we'll see what happens tomorrow, Tuesday..

There are no questions over the phone. I will turn the conference back to Stan now..

Perfect. Thanks, Lance. So thank you everyone. In closing, we are making great strides in driving bottom-line performance this year with our eyes clearly set on the future. And I say this due to our reinvestments in technology, tools and talent. Of course, we are focused on delivering results every year.

But our true goal is to develop transformative solutions for our customers and significant returns for our shareholders. I think that sums it up for the day, and I hope you enjoy the rest of your day. Thank you very much..

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