Ladies and gentlemen, thank you for standing by and welcome to the Aviat Networks fiscal 2020 fourth quarter conference 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 conference is being recorded.

[Operator Instructions]. I would now like to hand the conference over to Keith Fanneron. Please go ahead..

Thank you and welcome to Aviat Networks fiscal 2020 fourth quarter and full year results conference call and webcast. You can find our Form 10-K, press release and updated investor presentations in the IR section of our website at www. aviatnetworks.com, along with a replay of today's call in roughly one hour.

As for today, Pete Smith, Aviat's President and CEO, will begin with opening remarks on the company's fourth quarter and fiscal year 2020, followed by Eric Chang, our CFO, who will review the finance results. Pete would then provide closing remarks on Aviat's strategy and outlook, followed by Q&A.

As per Safe Harbor, during today's call and webcast, the management may make forward looking statements regarding Aviat's business, including, but not limited to, statements relating to financial projections, business drivers, new products and expansion, the impact of COVID-19 and economic activity in different regions.

These and other forward-looking statements reflect the company's opinions only as of the date of this call and involves assumptions, risks and uncertainties that could cause actual results to differ materially from those statements.

The company undertakes no obligation to revise or make public any revision of these forward-looking statements in light of new information or future events. Additionally, during today's call and webcast, management will reference both GAAP and non-GAAP financial measures.

Please refer to our press release available in the IR section of our website at www.aviatnetworks.com and financial tables therein which include a GAAP to non-GAAP reconciliation and other supplemental financial information. At this time, I would like to turn the call over to Pete.

Pete?.

Good afternoon everyone. Aviat Networks continues to navigate the global pandemic. We wish our employees, customers, partners, shareholders and their family health and safety. Before we get into the results, I would like to remind our investors, we are focused and focused on executing our key areas. One, increasing revenue.

From our press releases since the last earnings call, we have announced partnership expansion and new customer wins. We have an excellent that will materialize as we navigate through the COVID-19 challenge. Two, capturing Aviat's differentiation.

We have announced multiband wins, demonstrated the viability of our frequency assurance software and received our first purchase order. Three, driving out costs. We are on track with the previously announced restructuring plan with annualized savings of $3.5 million, of which approximately $2 million will benefit fiscal year 2021.

Now let's focus on our results. Adjusted EBITDA was up $1.6 million versus Q4 of fiscal year 2019. Our balance sheet remains strong. Our cash position is up over $9.7 million since the year began and $2.4 million sequentially, compared to last quarter.

Fiscal year 2020 adjusted EBITDA was $13.5 million which improved $4.8 million from fiscal year 2019 and exceeded the top end of our prior guidance of $11 million to $12 million. This is quite impressive considering what we faced, issues with a contract manufacturer in Q2, volatility in Africa and now COVID-19.

Revenue was slightly down this year as expected but profitability was up and we are better positioned going into next fiscal year to drive both the topline and the bottomline.

We will be seeing growth as there are several actions that we are now taking that are different from the past, initiatives that should lead to new customers and better performance. There are four areas I would like to highlight before turning the call to Eric. First, my observations on growth in North America.

Our North America business continues to perform well. We expanded into new states, cities and applications. The North America team has worked diligently on expanding sales. In addition, the North America team has seized upon our differentiation.

We have won initial business with our frequency assurance software or FAS in public safety, utility and service provider accounts. FAS is the industry's only software expert system for the detection and reporting on interference on microwave links and is patent pending.

Not only can FAS prevent outages by identifying interference events before they become real problems but it also arms customers with data analysis to deal with regulators on interferences.

FAS is critical for the reliability of mission critical microwave links, especially with the emergence of Wi-Fi 6e, which allows unlicensed devices to operate and exceed microwave bands in the USA. In addition, the North America team continues to drive are core products in to 5G application.

In Q4, we received new 5G-related orders in USA mobile operator accounts where we delivered 5G ready capacity capabilities to our customers. Also, the North America team leveraged our e-commerce platform, the AviatStore, to provide differentiation and value to our rural Internet customers. Second, international markets.

Our international team started to implement and extend our commercial strategy, defend Tier 1 telecom business, win new Tier 2 accounts, expand reach through partnerships and capture value where we are differentiated. Expanding our reach through partnership. We signed a new partner agreement with Netronics to grow our presence in the Middle East.

And we have another significant agreement in place that we have not named which addresses other regions where we lack sales coverage. We have seen successes with our multiband solution which is a highly differentiated offer significantly reducing spectrum costs for our customers.

We have secured an important 5G win in Africa with Safaricom, due to our multiband value proposition and have expanded our presence in existing accounts as well. We are excited about the possibilities with this offer. Third, cost. We are executing on our announced restructuring.

We observed additional cost savings in Q4 due to an aggressive response to the COVID-19 environment. Fourth, generating shareholder value. To improve the shareholder value, we need to drive sales and lower cost. I am focused on growth, commercialization and new customer acquisition while concurrently reducing expenses.

We are in the early stages of building our sales funnel for Tier 2 customers internationally, our sales funnel for multiband and our funnel for FAS, frequency assurance software. As we execute on these initiatives over the coming quarters, we expect this to translate into topline growth.

As I have said in the last call, we will focus on opportunities in markets and geographies where competitors cannot match us. Execution will lead to higher revenue, continued margin expansion and ultimately higher profitability to drive shareholder value.

I am going to turn the call over to Eric now to review our financials, but I do have a few additional comments after his remarks.

Eric?.

Thank you Pete and good afternoon everyone. During my remarks today, I would review some of our Q4 and full year financial highlights rather than reading through all line items that I think can be found in both our Form 10-K and press release.

All comparisons are between the fourth quarter of fiscal 2020 and the fourth quarter of fiscal 2019 and between full year fiscal 2020 and full year fiscal 2019, unless noted otherwise. Although our Q4 and full year fiscal 2020 revenue both declined from the prior year, but we have seen significant growth in North America revenue for the full year.

North America revenue has increased to $151.7 million for the fiscal 2020 from $132.9 million for the fiscal 2019, an improvement of $18.8 million, which is driven primarily by our private networks business.

International revenue declined as expected but the decline in second half of the fiscal year was smaller than what we have experienced in the first half of the fiscal year. Our book-to-bill ratio was well above one for both the fourth quarter and full fiscal 2020 and we exited fiscal 2020 with a strong backlog. A few other points.

In Q4 of fiscal 2020, North America comprised almost 61% of total revenue and continues to represent a higher percentage of mix. Q4 gross margins remained strong, both 34.9% on a GAAP and non-GAAP basis, compared to 35.2% and 35.1% for Q4 of fiscal 2019. Q4 GAAP operating expenses were $19.7 million, compared to $20.1 million.

And non-GAAP operating expenses, excluding the impact of restructuring charges and share-based compensation, were $17.5 million, compared to $19.8 million.

Both our GAAP and non-GAAP operating expenses improved due to cost cutting initiatives we implemented during the second half of fiscal 2020 such as restructuring plans, a slowdown in hiring and reduced travel.

As we noted in our Q3 earnings call, we have announced restructuring plans in March and April and we recorded a restructuring charge of $1.9 million in the fourth quarter. We have realized some result of savings during Q4 and the remaining savings will be realized in fiscal 2021 and beyond.

Q4 non-GAAP net income was $4.1 million, compared to $2.6 million for the same period last year. Q4 non-GAAP EPS was $0.75 per share compared to $0.47 per share for the same period last year. Adjusted EBITDA of $5.5 million was up approximately $1.6 million from $3.9 million for the same period last year.

For the full year comparisons, our non-GAAP net income improved to $8.2 million from $3.2 million. Fiscal 2020 non-GAAP EPS was $1.51 per share compared to $0.58 per share for fiscal 2019. Adjusted EBITDA improved to $13.5 million from $8.8 million for fiscal 2019.

Our full year adjusted EBITDA, as Pete mentioned earlier, exceeded the top end of our prior guidance of $11 million to $12 million. We can address any questions relating to our result during Q&A. Moving on to the balance sheet.

Our cash and cash equivalents stood at $41.6 million at the end of the fourth quarter, which was up $2.4 million sequentially from Q3 and $9.7 million since the end of fiscal 2019. Our cash flow from operations was $17.5 million for the full year 2020, compared to $2.9 million for fiscal 2019, an improvement of almost $15 million.

Our net cash was $32.6 million at the end of fiscal year 2020 and is the highest level exiting a fiscal year since fiscal 2014. We have a credit facility with Silicon Valley Bank which is based on eligible AR borrowing base.

At the end of the fourth quarter, our loan balance was $9 million, which we repaid in full in July 2020, subsequent to our year-end. Given our strong net cash position and as we expect our cash to continue to increase in fiscal year 2021, we may choose not to draw against the credit facility starting the first quarter of fiscal 2021.

Although we did not repurchase our common stock in the fourth quarter, but for the full year, we have spent about $1.8 million in stock repurchases and $3.4 million remain available under the program. This concludes my remarks. I will turn it back to Pete.

Pete?.

Thanks Eric. Just a few additional comments before Q&A. North America has been strong this year and barring any unforeseen events should be strong in fiscal year 2021. The principal concern is the impact of COVID-19 on our customers' budgets and timelines and the ability to execute field services. Our international business has been contracting.

We aim to stop the contraction and return to growth by execution of our sales and marketing processes, defending our Tier 1 accounts, winning new Tier 2 accounts, expanding our reach with partners and capturing our differentiation in products such as multiband.

Both our North America business and our international business have strong demand drive, 5G rollout, mission-critical network, rural broadband. We are well-positioned for all of these opportunities. Expect announcements as we make progress in capturing the demand that results from these highly favorable market trends.

Further, the COVID-19 challenge amplifies these demand drivers in the medium to long term. In the short term, we will navigate the COVID-19 situation. To close the call, I would like to sum up fiscal year 2020, our overall direction and provides some perspective for fiscal year 2021.

In fiscal year 2020, we improved our cost structure and executed through uncertainty encountered with COVID-19. We delivered the higher annual profitability, 5.7% adjusted EBITDA, in the last 10 years of Aviat's history. We have maintained our revenue. We need to get into a growth mode. We have outlined a plan to achieve this.

In addition, we had key wins including our first microwave upgrade agreement, MUA, subscription operating with a large County government, network rollout for the Virginia State Police, multiband wins at Safaricom and Globe for 5G deployment and a channel partner agreement with Netronics.

From a product standpoint, we launched our new multiband radio platform and frequency assurance software, upgraded our North American mission-critical platform and three, enhanced our all outdoor solution for 5G. We have repositioned the leadership team to accomplish our fiscal year 2021 and beyond goal.

One example, we have insourced our investor relations. Keith Fanneron will be our investor relations point of contact. We thank Glenn Wiener for all his support and know that we can still call on him for his expertise. Through these changes, challenges and successes, cash increased $9.7 million during fiscal year 2020.

I am very proud of the team's accomplishment and I am increasingly excited about our future opportunities. Our key takeaway messages for investor, focus and execution. Aviat's goal remain the same. Growth, margin expansion, expense reduction and meaningful bottomline results. Like everyone, we are still navigating the COVID-19 environment.

Based on our sales focus, capturing value and execution on the cost front, we expect our fiscal year 2021 adjusted EBITDA and revenue to grow compared to fiscal 2020. We expect to see benefits from our strategic focus including new products such as FAS and our focus on improved reach and adding new customers.

We will provide a more specific guidance when we have more certainty around COVID-19. Operator, we are now ready for questions..

[Operator Instructions]. And our first question is from Tim Savageaux with Northland Capital. Please go ahead..

Hi. Good afternoon. Pardon me. And congrats on the results. And Pete, I guess I want to pickup on where you left off there with regard to the 2021 outlook which is pretty broad in terms of growth expectations. But maybe I try and marry that up. I see you filed your Q as well.

And obviously, you had a very significant increase in backlog for the year, I think on the order of 30%. Now, to be fair, backlog also increased last year and revenues were down.

But given your commentary on bookings in Q4, which are, I think, much stronger than you Q3 commentary, sort of slightly above one, I wonder if you can maybe relate what you saw in terms of backlog growth, understanding some of that might be farther out with regard to what we should expect? It seems like we should expect double digit revenue this year, based on that backlog.

But feel free to provide more perspective on that..

Yes. I don't think we are going to sign up to double digit revenue growth but we are pretty confident in the revenue growth. When we think about the year, we are really excited that book-to-bill was 1.3 and on a dollar value, Eric, correct me if I am wrong, we are coming into the year with $50 million more of backlog.

So we think that that will translate into growth. And a lot of that's driven by 5G wins in the mission critical space and as well as our AviatStore e-commerce platform to solve rural broadband opportunities. So we feel good.

And Tim, I don't want to guide, so we are not going to be specific because we want to see how COVID plays out and the timing of certain deals. But we feel really good that we are going to be able to grow the international and the North America business.

I wouldn't go so far as to 10% on the topline and then on the bottomline we are on track with our restructuring plan. What we have learned in COVID is that we can squeeze our costs a little more. So overall, I feel really good about the year. But I want to get a little bit more mileage under our belts before put specific guidance out.

And I think, if we were to put out guidance right now, maybe we wouldn't full credit for everything we have in the pipeline. Give me a little more time and we will be more specific..

And if I can add. So we exited fiscal 2020 with a very strong backlog, right. If you see in the 10-K, it's about $210 million. If you compare that to the end of last fiscal year, it was $160 million. So it's actually a $50 million increase in backlog exiting the full fiscal year, right, the increase.

And then the $210 million, bulk of it is coming from North America private network business..

Okay. I guess I will write that down later. No, that's interesting and that was kind of following into my next question, which is, so it sounds like while you expect international to return to a growth profile, given that comment there about the nature of the backlog in U.S.

private network strength, it sounds like you might continue to expect North America to grow faster, right? And I guess that's where I am headed with that is with regard to gross margin profile, right. Obviously, there is a kind of a mix factor.

So it sounds like you could still see, given that mix and strength in North America, some upward pressure on gross margin..

So what we were prepared to talk to and I think, Eric, you should give this is, I think in the past we have been asked what our long term model should be. And Eric, why don't you comment on our long term model..

Yes. When it comes to the long term model, so this year, our gross margin is about 35% for the year. And overall, I think we do want to see continuous increase in that percentage. But from a bottomline standpoint, we do see, we exited on an adjusted EBITDA basis, I think this year was 5.5% and we do see that continued growth.

Maybe our long term model is between 7% to 10% on a bottomline basis..

Got it. Well, maybe covering the last piece of that. I mean we have seen OpEx lower than expected, pretty much across the board this quarter on reductions in travel and some promotional type expenses. But it sounds like the decline that you saw goes beyond that and is sort of more sustainable.

So I want to put, I guess a previous comment about $2 million of restructuring benefit accruing into fiscal 2021. How do we look at that relative to the full year for 2020? Or I imagine that Q4 OpEx is kind of a low point. You expect it to come back up a bit as some things start to normalize from an expense standpoint..

So quite simply, you know, I think what we said in the script was that we are on track for adding $2 million of profit, adjusted EBITDA, in fiscal year 2021 due to our restructuring. And you know, we did have some COVID-related cost benefits in Q4 and we see them all repeating in Q1. And you know, if we go back to travel, that will go up.

But then by the time that comes through, we think we will further along in our restructuring which I think our restructuring we have announced that in fiscal year 2022, we would be at our run rate savings of $3.5 million of unadjusted EBITDA.

So for modeling purposes, you can count on, we are on track for the $2 million in fiscal year 2021 and if we are on track for 2021, the $3.5 million that we declared that we would save in 2022, we are confident that that's going to materialize..

Got it. Sorry..

Well, I was going to ask if it was helpful. Go to the next question. Sorry..

Okay. Just one more for me. Sorry. And that is really about kind of go forward demand drivers. You mentioned several new product platforms.

And it sounds like, well, I guess my question is, to what extent, it sounds like given the private network strength in North America, you expect those to be more meaningful or material contributors going forward than to the extent -- I guess to what extent did some of those new products drive some of the strong order results that you talked about in Q4 in particular? And then if you look forward in terms of your growth drivers for 2021, I guess 5G, mission critical networks or rural broadband, maybe you can kind of weigh those in terms of or rank order in terms of what growth drivers you are most excited about?.

Well, that's like trying to say, which one of my children I love most. Look, they are really fantastic for all of us. So I think you know we are performing well historically and growing with the private network, the mission critical private network.

Where we think we can have seen some topline growth, margin expansion, we see the frequency assurance software playing there where we can get margin expansion with that software. The 5G rollout, we talked about, we do have a good position and we did have good demand in Q4 with the U.S.

network providers, but we also see that starting to ramp up internationally. And we saw that at Globe and Safaricom. What I would also add, we see internationally that the multiband where there is high spectrum costs, that the multiband significantly lowers the total cost of ownership for the international operators.

And that that we see the multiband, as we do have some North America demand for that, but the demand drivers are high spectrum costs outside of the U.S. And a small part of our business is rural broadband but we deliver that through the only e-commerce platform in the microwave space. So we can deliver kind of our standard products in 14 days.

So like in COVID, where work from home took off kind of overnight, the WISPs needed more capacity and we were able to deliver that. And we are starting to see that's going well in North America. We are starting to see that kind of demand profile internationally and we are getting set up to push the store out internationally.

So I would say, I am confident in the mission critical space we are doing well there. Growth driver should be this e-commerce platform for the rural Internet. And as 5G goes, we think we have the right products to grow with them.

So I would say, at our core, our biggest part of business is mission critical, we are confident in that and we are really excited about the growth that the store and 5G is going to bring..

Got it. Thanks very much..

Good. Thanks Tim..

Thank you. Our next question is from Theodore O'Neill with Litchfield Hills Research..

Thank you. Congratulations on exceeding your EBITDA guidance for the year.

The growth that you are seeing in 5G, can you attribute that to just the overall 5G growth, the pie getting larger? Or are you taking a larger piece of it?.

So share in a growing market can sometimes be difficult to estimate, right. There is some recent research over the last two quarters that indicated the microwave market was down and we were up compared to the market. So I think we are gaining a little bit of incremental share. Yes, I would say that we are incrementally growing share.

But that's really hard to estimate. It's a qualitative statement. Where we think that is perhaps occurring is in the rural broadband and with some of our recent 5G wins. And then the part that's really hard to estimate is how the large mobile network operators, how they are doing with respect to 5G, that would be hard for us to estimate.

So qualitatively, I would agree with that, your suggestion, but it would be hard to pin us down to a number..

Okay. I asked this question in the last call and I will ask it again.

How's your supply chain doing? How is holding up relative to COVID?.

So our supply chain and our team executed nearly perfectly in Q4. So it's holding up well. It's performing. And we would think that it's outperforming some of our peers. So we are really pleased. And then look, I will say, we did have issues that were short term issues that we overcame within the quarter.

But the good thing about that is, we are learning from it and becoming more resilient. So you know, a year from now we will expect near perfection week-after-week from our supply chain. So we are really, really pleased with our supply chain.

And we also think our dependability gives us a platform to win new share and that will play out over the next six to 12 months..

That makes sense.

My last question is, are you seeing any uptick in activity looking at sort of M&A opportunities?.

So we have a pipeline of bolt-ons that we are looking at. Q4 with COVID, a lot of that got put on hold. We are going to continue to look for opportunistic deals that will be in line with our core competency and be accretive to growth.

So we are looking but we are not going to pull the trigger on something unless it fits and we are going to be able to drive growth and realize those synergies..

Okay. Thanks very much..

Thank you..

Thank you. Our next question is from Mark Spiegel with Stanphyl Capital. Please go ahead..

Hi Pete. I love your enthusiasm. Two quick questions. How is this potential 6 GHz interference affecting you guys? Obviously, I have seen the thing about your software, but that only tells you that you are being interfered with.

Are avoiding that spectrum? And if so, can you offer them an alternative?.

So we have not seen any change in the demand pattern for the 6 GHz spectrum. So I would say, we haven't seen that play out. If someone was really concerned and wanted to go away from the 6 GHz spectrum, we do have a full range of products that we could put them in.

Is that helpful?.

Yes. Very helpful. And I forgot my second question. So I thank you for that one. If I think of it, I will get back in the line. Thank you..

Well, great. Thank you Mark..

Thank you. Our next question is from Steve Busch with Everglades Resources, Please go ahead..

Hi. Good afternoon guys. Great job, great quarter..

Thank you..

So most of my questions have been answered.

But how does your Safaricom customer, compare to MTN's prior revenue growth, revenue side? Is it much smaller?.

Yes. So they are a smaller operator. Let me give you the color that I think maybe you are looking for. That Safaricom win is important because it proves out our multiband and the economics that we advertise when we got that design win. And a lot of what MTN operates in is the microwave, high spectrum costs microwave.

And I wouldn't say this specifically about MTN, but all of our customers where they have high spectrum costs are taking notice of what's going on with Safaricom and asking for presentations or asking for the economic analysis as well as we have a variety of proof of concept tests that are ongoing.

So what the Safaricom did do for us was it created a big funnel that as we convert the funnel on the opportunities, we think that's going to translate into revenue growth and particularly in the Africa region..

That's really good color. Thank you for that. So with MTN, they switched their supplier to Huawei or someone.

Was that what happened? And maybe we can get some of that back, is what you are saying?.

I think that's a reasonable hypothesis. I don't want to what I comment on one specific customer. But Huawei did take that share. And we think that we have a highly differentiated offering that would make us more competitive versus Huawei and others, right..

Great. That's perfect. Thank you. So you mentioned that you have a patent pending. I don't know if you can add any more color to that versus you also had that press release with MTI Wireless and there was a bunch of patents mentioned in there.

Is it the same line? Or who owns the patent with the MTI Wireless? And how is the other you are talking about that's pending?.

So the MTI Wireless, that's the antenna supplier that goes along, that provides an antenna solution for multiband. So separate that patent out. So on our frequency assurance software, we do have a patent pending. And that patent is around the algorithm, right. So the algorithm for detecting interference which ultimately leads to resolution.

So we have some really smart guys that were able to sort out how we could basically solve a difficult signal noise problem and we filed with the patent office and we are hopeful that we get granted the patent in the time that the patent office needs to review it.

And I would say that we think it's unique and it really doesn't matter what we think, thinking about our customers. What we did say in the script was that we have received our first orders for that. And that's the ultimate proof if the customer is going to buy it. So I hope that's enough color on the patents that have been in the press around Aviat..

Right. That's fine. I appreciate that color. And I have to say, I would just leave it with a comment. I like the fact that you said you are focused on execution and that you need to get into growth mode because I think that's what's the next driver for the stock is getting our topline and bottomline moving together. And I wish you well in that endeavor..

Thank you..

Thank you. And our next question is from Mark Spiegel with Stanphyl Capital. Please go ahead..

Yes. Hi Pete. Just one quick follow-up. I remembered what I wanted to say. I do hope that you guys will be super, super cautious on acquisitions. And the reason I say that is, you are selling at around on an EV, enterprise value, basis, you are selling at only around 0.3 times revenue.

And I think in this market, it would be really hard to find a decent business selling anywhere near that cheaply. So although it may be somewhat growth or earnings accretive, it won't be accretive on that multiple which is maybe the most attractive thing about the company. So obviously, you know what you are doing.

I just wanted to throw my two cents in there on that. Thank you..

Thank you for that input, Mark..

Thank you. And sir, you can go ahead your final remarks. There is no more in the queue..

Well, to close the call, I would like to thank everybody, wish everyone health. We are really, really excited about the business. Our restructuring is on track. We have a great funnel and we are excited to talk to you about the progress in a couple months as we wrap up Q1. Thank you everyone..

And thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect..