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Aviat Networks, Inc. (AVNW)

Q3 2014 Earnings Call· Tue, May 6, 2014

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Transcript

Operator

Operator

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Aviat Networks’ Third Quarter of Fiscal 2014 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) I would now like to turn the conference over to Leslie Phillips of Investor Relations. Please go ahead, ma’am.

Leslie Phillips - Investor Relations

Management

Thank you, operator. Good afternoon everybody and welcome to Aviat Networks fiscal third quarter 2014 earnings call. I am joined today by Mike Pangia, President and Chief Executive Officer and Ned Hayes, Senior Vice President and Chief Financial Officer. During today’s call management may make forward-looking statements regarding Aviat’s business, including statements relating to projections of earnings and revenues, business drivers, the timing and capabilities of new products, network expansions by mobile and private network operators and variations of economic recovery 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 that these forward-looking statements reflect the company’s opinion only as of the date of this call and the company undertakes no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. For more information, please see the press release and filings made by the company with the SEC. These can be found on the Investor Relations section of Aviat Networks’ website at www.aviatnetworks.com. In addition, during today’s call, management will be referencing both GAAP and non-GAAP financial measures. A copy of the press release and financial tables which included GAAP to non-GAAP reconciliation and other supplemental financial information is available on the Investor Relations section of the company’s website. Now I’ll turn the call over to Mike

Mike Pangia - President and Chief Executive Officer

Management

Thanks. Leslie. Today we announced our third quarter of fiscal year 2014 results. Total revenue for the quarter was $81.4 million resulting in a non-GAAP loss of $0.16 per share. Non-GAAP gross margin came in at 25.8%. We implemented important components of our restructuring plan, the response, this cyclical slowdown that the entire microwave backhaul industries experienced over the past few quarters. We believe our plan better aligns the company’s cost structure with our near term outlook. We’re on track to exit the fiscal fourth quarter with non-GAAP operating expenses of approximately $27 million. We’re also on track to lower the company’s quarterly breakeven level to approximately $90 million and expect to see gross margin improvements in fiscal year 2015. Moving forward we’re taking steps beyond our restructuring plan to position the company for profitable growth. While our cash balance is sufficient to run the company, we see room to improve our liquidity position through further improvements in our cost structure and a particular working capital management. Ned will speak to these changes in a few minutes. As I mentioned our fiscal third quarter results reflect the cyclical nature of the microwave business, where demand differs greatly by region, customer, and vertical market. This cyclicality is currently on display in Africa where revenue declined 42% versus the same quarter of the previous fiscal year and was down 44% during the first nine months of fiscal 2014 versus the same period in 2013. These declines occurred despite the fact that we maintained a very strong position in this market. While operator spending remain weak in Africa we did start to experience an improving pace of business in our other markets. Our third quarter book-to-bill ratio was substantially above one making a third consecutive quarter in which this ratio was above 1,…

Ned Hayes - Senior Vice President and Chief Financial Officer

Management

Thanks, Mike. Aviat’s GAAP financial statements along with a reconciliation of non-GAAP financial measures are included in the company’s press release issued today following the markets close. I’d like to take a few minutes to summarize our non-GAAP financial performance at a high level. The key figures were company’s book-to-bill ratio in the first third quarter was substantially above 1, for the consequent improvement in our backlog for the coming quarters. Revenue for fiscal Q3 came in at $81.4 million down sequentially from $85.8 million in fiscal Q2 of this fiscal year, as we continue to absorb weakness in both bookings and revenue in our Africa region. Africa and the Middle East region revenues declined sequentially from $26 million in fiscal Q2 to $21.7 million in this fiscal quarter. This region’s revenues have declined from $150.6 million in the first nine months of the last fiscal year to $84.7 million in the first nine months of this fiscal year demonstrating a cyclicality we’re facing in the region. Still MTN our key account in Africa was once again a 10% plus customer in the quarter. It should be noted that reported revenue in the quarter was not impacted by any changes in revenue recognition timing arising out of our recently announced managed services agreement with MTN Nigeria. Having said that North America was relatively strong in both orders and revenue with new wins in the non-mobile space and continued expansion of our mobile operator customers LTE networks. Non-GAAP gross margin for the fiscal third quarter was 25.8% of sales. Gross margin in the quarter was negatively impacted by an increase in our customer services inventory excess and obsolete reserve of approximately $1.5 million compared with last quarter reflecting lower returns of legacy products as our customers are transitioning faster than we…

Mike Pangia - President and Chief Executive Officer

Management

Thanks, Ned. Our results demonstrate that we are in a tough market, with Africa continuing to be the most challenging. In this region CapEx spending has been contracting and competition remains fierce. Given with these challenges the global backhaul space remains attractive. To ,maximize our opportunities we’re actively taking steps to position the company to be more agile and efficient and while we’re encouraged by the improving visibility and the traction our new products are receiving we’re very focused on improving our liquidity position to ensure that we can continue with a strong balance sheet and cash position. As we position the company for profitable growth we remain cautiously optimistic about our medium to long-term prospects.

Leslie Phillips - Investor Relations

Management

And now we’ll open the call to questions.

Operator

Operator

Ladies and gentlemen we will now begin our question-and-answer session (Operator Instructions) And our first question comes from the line of Richard Valera with Needham & Company. Please go ahead. Richard Valera - Needham & Company: Thank you. Good afternoon gentlemen.

Mike Pangia

Analyst

Hi, Rich.

Ned Hayes

Analyst

Hi, Rich. Richard Valera - Needham & Company: Hi, couple of questions on the cash situation. One, Ned, could you say how much domestic cash you have and how comfortable that position is? Secondarily would you mind sharing the size of the credit line that you discussed and sort of what terms there might be on that, those are my first two things?

Ned Hayes

Analyst

Sure. So in general Rich the disposition of our cash is about the third of it in the U.S. a third of it in Africa and a third of it in the rest of the world. So given our current working capital and operational cash requirements we feel that we’ve got sufficient balances right now for us to continue to conduct our business. The new terms on our Silicon Valley Bank facility are allowing us the liquidity amount of about $40 million on that line. I think the interesting and important things to focus on are the covenants that we’re looking at certainly the adjusted quick ratio needs to be greater than 1.1 and we report on that monthly. That calculation is unrestricted cash plus AR, the current liabilities, less deferred revenue advances, whatever debt we have outstanding and outstanding letters of credit so we’ll make sure that we abide by that. We also have created a huge amount of flexibility going forward on our EBITDA covenants. If you take a look at what they are we’re looking at the quarter ending 328 is a negative $17 million, two quarters ending 627 at negative $27 million and two quarters ending 9/26/14 at $12 million certainly those are not our forecasts but we believe we have certainly built up an extraordinary amount of headroom for us to make sure that we’re in compliance with those covenants. Richard Valera - Needham & Company: Great. That’s helpful. And can you say what your rough expectations are for cash usage if that’s the case in the upcoming quarters?

Ned Hayes

Analyst

Yes, I think in general we will be – as we described in the past we’ll be using cash once again to pay our restructuring liabilities. I think that number could at be anywhere between $4 million and $5 million and probably another couple of million being used in terms of operating losses and working capital shifts. Richard Valera - Needham & Company: Okay. Fair enough. I wanted to ask a few questions about some of the new products. So congratulations on the launch of the CTR and WTM products during the quarter. I wanted to see if there is any color you could give on your expectations for a bookings ramp associated maybe with these products combined. And when you think they’d be contributing let’s say materially to revenue and I don’t know how we want to define that, 5% or 10% of revenue – just any color on how you think you re going to ramp. And also you made reference to the fact that the lower cost near existing products it was a sense of where you would expect the initial gross margins for the new products to be ad it sounds like you would expect them to go up over time with volume. So if you can give any color on the gross margin trajectory of them that would be helpful? Thank you.

Mike Pangia

Analyst

Yes, first off on the new products in terms of the impact on our business. So we’re positioning CTR very actively now on all new opportunities. It’s intended to be primarily for the international markets. So I would see that over the course of the next fiscal year you will see us transitioning towards the CTR. So I would expect that a fair amount of our business by the end of the next fiscal year will be CTR-driven when it comes to the indoor networking unit for the international markets. On the 3300 and it’s – before I go into 3300 CTR given us our indoor networking unit that has a significant amount of volume in the business. The 3300 which is the millimeter wave product. That market size is not significant at this point but it’s an important enabler and entry into many customers that are starting to deploy that technology and that will be something that I think over time will be very well-suited to the small cell segment. So the 3300 will be a door opener and I see that being growing over time but numerous significant assets at CTR. As far as margin impact is concerned I would say that as we discussed in the script the impact of CTR with respect to a land and expand strategy, I think that it’s got a lot of capability from a software upgrade potential not withstanding that, I would expect the CTR to be at least to pull into the current margins we’re getting with some significant upside driven by both the licensing capability as well as the impact on the cost side of the equation as we ramp the volume. Richard Valera - Needham & Company: I just want to make sure I understand, what you’re saying there, Mike. So initially would we put them a sort of 30% gross margin where your products have been running prior to the dip in revenue here amend with upside potentially to low to mid, I don’t want to put words on that?

Mike Pangia

Analyst

We don’t – improvement only comparing it to the current margins, we don’t breakdown our margins down to that level, Rich. Richard Valera - Needham & Company: Sure.

Mike Pangia

Analyst

We sell obviously the indoor unit gets sold with outdoor radios and it’s much more of a bundled sale. Their services included in several of our offerings. Again relative to our current products that we’re selling I expect it to be neutral to positive from the outset with a improvement of margins clearly over time as a result of the licensing capabilities as well as improvement on product cost. Richard Valera - Needham & Company: Okay. That’s helpful. And one final one from me. Just on the Africa outlook, obviously you’ve gone through sort of a long slide here following the period of a very high activity. And one could conclude maybe that there was some sort of burn off of inventory if you will taking place here. Do you have any sense of where we are in that process and any view towards when the African business might start recovering?

Mike Pangia

Analyst

Yes. Clearly the impact of inventory has had in the past and that has comeback down significantly. Having said that our largest customer MTN as they recently provided color on their capital requirements for the next fiscal year they actually identified that their largest market which was Nigeria which you see about 23% CapEx reduction in 2014 calendar year and clearly there is a focus by MTN to better manage their cash, I think they’re optimizing that to be extreme. The rest of Africa and recent reports that we’ve seen., Africa in general most reports has been down calendar year 2013 versus 2012 down into the – around 14% based on what we’ve seen 12% to 14% in that range. So those are all factors that clearly are working against us. We’re seeing signs of more visibility on projects coming through with MTN that’s a positive sign. We’re seeing budgets being allocated. So I would expect that recovery will happen but we’re not – the timing of it is the most difficult thing at this point to estimate, Rich, we’re taking actions outside of MTN in Africa and I think our – the activities that we got going on is South Africa will help us in terms of diversifying our concentration MTN until such time that they start spending again at a more normal rate. Richard Valera - Needham & Company: Okay. Good luck with the turnaround, gentlemen. Thank you.

Mike Pangia

Analyst

Thank you.

Ned Hayes

Analyst

Thanks, Rich.

Operator

Operator

Thank you. (Operator Instructions). And I’m showing we have no further questions in the queue at this time. I would now like to turn it back to Ms. Leslie Phillips for any closing remarks.