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Aviat Networks, Inc. (AVNW)

Q2 2015 Earnings Call· Thu, Jan 29, 2015

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Transcript

Operator

Operator

Good day and welcome to the Aviat Networks Quarter Two 2015 Financial Results Conference Call. Please note today’s conference is being recorded. At this time, I would like to turn the conference over to Leslie Phillips, Investor Relations. Please go ahead, ma’am.

Leslie Phillips

Management

Thank you, Joshua. Good afternoon, and welcome to Aviat Networks fiscal second quarter 2015 results conference call. I’m joined today by Mike Pangia, President and Chief Executive Officer; and Michael Shahbazian, Chief Financial Officer. This call is being broadcast live over the internet for all interested parties. And the webcast would be archived on the Investors Relation part of the company’s website. 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 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 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 include a GAAP to non-GAAP reconciliation and other supplemental financial information, is also available on the company’s website. With that, I will now turn the call over to Mike Pangia.

Mike Pangia

Management

Thanks, Leslie, and good afternoon to everyone listening on the phone as well as on the webcast. Fiscal second quarter revenue of $92.5 million came in above the high-end of our guidance range. The top line performance was primarily driven by strength in North America. Leveraging the actions that we have taken over the past four quarters to run the business more efficiently, our non-GAAP gross margin improved 230 basis points year-over-year and 60 basis points quarter-over-quarter to 27.2% for the fiscal second quarter. Non-GAAP operating expenses were $27.2 million, down $3.2 million year-over-year. Our Q2 OpEx included approximately $2 million of mostly one-time financial audit expenses related to 2014 Audit. Further demonstrating the progress we’ve made in reducing expenses, non-GAAP net loss from continued operations was $2.6 million compared to $9.4 million in the year ago period. We reported breakeven adjusted EBITDA versus a negative adjusted EBITDA of $6.8 million in the fiscal second quarter of 2014. Our second quarter performance is a clear illustration of the positive impact or efforts to streamline the business we’ve had on our financial results. While this is a move in the right direction, we remain focused on further improving the effectiveness and efficiencies of our operations and delivering more consistent results. Cash at quarter end was $38.7 million. The ending cash balance was affected by the timing of collections which we’ll elaborate on in a few minutes. And lastly, while our second quarter bookings improved sequentially, our book-to-bill ratio was below 1, as a few larger bookings were deferred until later this fiscal year. We expect sequential improvement in bookings for the remainder of the fiscal year. During the remainder of my prepared remarks, I will review the results of our two largest geographic regions for the quarter and also provide a…

Mike Shahbazian

Management

Thank you, Mike and thanks to all of you for joining us today. If you’ve not already done so, I’d encourage you to download from the Investors Section of our website, financial press release we posted earlier today. It contains Aviat’s un-audited GAAP financial statements along with a reconciliation of non-GAAP financial measures. My prepared remarks will be focused on the non-GAAP financial overview of our fiscal second quarter and the related business trends. I’ll then provide guidance for this fiscal third quarter. Revenue for the second quarter came in at $92.5 million, compared to $82.4 million in the first quarter of fiscal 2015 and to $85.8 million in the second quarter of fiscal 2014. Product revenue accounted for 63% of total revenue compared to 68% in the first quarter of 2015, with services representing 37% compared to 32% in the previous quarter. This increase in services resulted from completion of a number of large projects in North America during the second quarter. MTN was once again a 10% plus customer in the quarter. Non-GAAP gross margin for the fiscal second quarter was 27.2% of sales up from 26.6% of our fiscal first quarter. Second quarter gross margin was positively impacted by higher volume in North America and product and services mix particularly in Europe and Asia. Our non-GAAP product gross margin was 26.9% while non-GAAP service gross margin was 27.8%. As many other U.S. based companies have reported, we too were affected by the dramatic and sudden increase in the dollar. We recorded about $900,000 in FX losses in our current cost of sales, current quarter cost of sales resulting in 100-basis point impact on our gross margin rate. For the fiscal second quarter our non-GAAP operating expenses totaled $27.2 million up from $25.3 million in the first quarter.…

Mike Pangia

Management

Thanks, Mike. To close our prepared remarks, our strong fiscal second quarter results demonstrate our ability to leverage both the mobile and non-mobile businesses and the impact of our past restructuring efforts. However, as illustrated by our Q3 outlook, there are several factors which are negatively impacting our business, some temporary which has made it difficult for us to be consistent in our financial performance. To this end, we are evaluating structural changes to improve the overall business while continuing to consider strategic alternatives. I want to reiterate that management is fully committed to running Aviat as a profitable cash generating business on a more consistent basis. We are focused and aligning our product roadmap and investments with key accounts in the geographic regions where we see the highest potential for profitable growth. We have a tremendous base of customers and vertical markets to build from. This is also a critical step in simplifying our business. In the near term, these actions could have an impact on our top-line. However, we are confident that our profitability will improve. The board is fully aligned and in agreement with our plans to tackle operational expenses improve profitability and generate cash on a more consistent basis. We expect to provide more clarity around these plans in the near future. Our ongoing efforts along with our innovative product roadmap and great customer base, make us optimistic for the future. I’d now like to turn the call over to the operator to begin the question-and-answer period. Operator?

Operator

Operator

Thank you, sir. [Operator Instructions]. We’ll take our first question from Rich Valera with Needham & Company.

Rich Valera

Analyst

Thank you. I just want to get a sense of your visibility beyond the current quarter on the top line. It sounds like you’re expecting some bookings improvement particularly I guess in Africa towards the latter part of the quarter. And I think you said you expect the top line to improve maybe as early as the fourth quarter. Any more color you can give on a rebound in the top line to something meaningfully higher than what you’re guiding to in the current quarter and just visibility in general?

Mike Pangia

Management

Yes, so, as our bookings have been lower than we expected, obviously our visibility has been impacted in the near term. So, as I said earlier, we do expect to continue, we expect to continue to see sequential improvements in our bookings which will help us with our visibility going into the fourth. And it’s not just our expectations around Africa, what we do see some improvements and recovery go into the fourth. But we also see that in some of our other markets as I referred earlier, we have had some deferrals on decisions, on some booking activity. And we do expect some of that also to be in place with bookings improvement as early as the third quarter which will help us in the fourth as well.

Rich Valera

Analyst

Okay. And then with respect to the cash usage, I guess the first half of the fiscal year, your views looks like comfortably over $10 million I think, I confuse something close to $13 million of cash. Understanding the target of being cash positive for the year, this is a stretch. I mean, how can we think about cash in the second half of the year or going forward, yes, I just want to get your sense of putting the first half behind us, how do we look at cash, cash usage going forward?

Mike Shahbazian

Management

This is Mike. I can certainly give you my response on that. Certainly we did utilize some cash during the first half of the year. As we look forward, as I mentioned we had a very strong collection period early in the quarter. And we expect that to continue, we’re expecting fairly high collections this quarter. And we do expect to run slightly positive for the quarter. As we look out over the fourth quarter, we would expect to see continuing positive trends but it’s not clear that we’re going to be positive cash flow for the full year given the results we experienced during the first quarter.

Rich Valera

Analyst

Do you think it would be positive in the fourth quarter itself though?

Mike Shahbazian

Management

Might be a little bit early to say but certainly we’re hoping that we’re going to have continuing momentum as we go into the fourth quarter.

Rich Valera

Analyst

Right. I mean, I would think that positive for the whole year would be a very distinct goal at this point given the first half. I mean, is that something that’s even in the picture?

Mike Pangia

Management

I believe we don’t expect to be in a cash generation positive for the fiscal year.

Rich Valera

Analyst

Fair enough. Did you wanted to address the gross margin a bit, nice gross margin for the quarter but it sounds like you had a lot of things go your way between the revenue upside and the favorable North American mix. So, I’m trying to get a sense one of - what kind of sequential decline you’re looking for in the gross margin in the current quarter? And how we should think about gross margin as we look beyond the current quarter, it wasn’t that long ago we were talking about 30% as a kind of medium term target. And frankly that’s looking like a pretty challenging target given what I expect will be probably a meaningful drop in the current quarter. So, color around gross margin dynamics would be appreciated? Thanks.

Mike Pangia

Management

So, in terms of the positive direction on our gross margins in the past quarter, obviously the higher business in North America which is our most profitable sector does have a positive impact. But we did also mention Rich that we also had something going against us which was the FX impact. So our gross margins actually could have been even 100 basis points better in the last quarter. We’re not, as far as the third quarter, we do expect to see a reduction. Again, you can take a look at the volume impact as a primary driver for that relative to the fixed cost we have. As we go out to the balance of the year, as we’re looking at focusing our attention on those markets where we see the highest potential for profitability. Well, we have an opportunity to leverage our roadmap as new volume and new products, as higher volume and new products come into play, we expect to see ourselves improving. And then, as we continue to focus on the structural changes as well as aligning our costs, we’ll continue to be moving towards the upper 20s and into that 30% margin range. That’s where our focus and attention is.

Rich Valera

Analyst

Great. And how do you think about the FX headwind, I appreciate you had about 100-bps headwind in the just reported quarter. How are you thinking about that as an impact in the current quarter?

Mike Pangia

Management

Yes. So, I think the current quarter obviously is a - will be, we expect to have the similar impact because when we talked about our reduction, we’re talking about it from the reported gross margin in the quarter. I think the, as big an impact is in several markets where we do have prices and local currencies, that’s where we will have to try to renegotiate or not continue with some of those opportunities depending on the timing and how long that impact exists. So I do think that it is going to be more of a top line impact and we’ve already seen that in the guidance and the bookings that we’ve had to date.

Rich Valera

Analyst

Fair enough. Just one more on OpEx. It sounds like you had about $2 million of - you suggested largely non-recurring audit expenses. And sequentially OpEx go down by I guess about half that. Why is that, why wouldn’t they go down more if those - order expenses not completely go away or is it some other stuff that sort of increase that quarter-over-quarter?

Mike Shahbazian

Management

Right, no that’s a good point. We do expect the expenses associated with audit fees to go down sequentially. However, we do expect to incur higher sales expense primarily associated with sales incentive programs because we do expect higher bookings during the third quarter. And so, certainly that would flow through there, with that, some other events, trade shows and things like that. So, we will have, a little bit higher spend in marketing as well. And we’ve got some additional engineering costs we’re going to incur during the third quarter. So, these will offset some of the benefits we’re going to get from lower spend in the G&A regarding the audit fees.

Rich Valera

Analyst

Got it, okay. That’s it from me. Thank you very much.

Mike Pangia

Management

Thanks Rich.

Operator

Operator

Thank you. [Operator Instructions]. And we’ll take our next question from Aaron Yu with Singular.

Aaron Yu

Analyst · Singular.

Hi, good afternoon guys.

Mike Pangia

Management

Hi Aaron.

Aaron Yu

Analyst · Singular.

Hi, I wanted to I guess just ask, if you guys have been in conversation with the new directors from Steel Partners and Lone Star, and kind of get a sense of what nature those conversations have been? And they’ve sort of maybe outlined any strategic plans that they sort of have in store for Aviat over the next several months or a year?

Mike Pangia

Management

So, we have, we’ve reached a settlement agreement with those parties which we announced I believe a few weeks back. And we now have a new board in place. And we’re working, we’re 100% aligned and working with the new board towards our goals.

Aaron Yu

Analyst · Singular.

Got it. Great. Thanks guys.

Mike Pangia

Management

Thank you.

Operator

Operator

And there are no further questions at this time.