Aviat Networks, Inc. (AVNW) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aviat Networks Fiscal 2017 Third Quarter Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Glenn Wiener. Please go ahead, sir.

Thank you, Stephanie. And welcome to all. I'd like to welcome you all to Aviat Networks' Fiscal 2017 Third Quarter Results Conference Call. We filed our Form 10-Q, issued our press release and posted an updated investor presentation on our website. And all documents can be found in the investor relations section. Joining us, today's call will be Michael Pangia, President and Chief Executive Officer; and Ralph Marimon, our Chief Financial Officer. Both will have prepared remarks, and we will then open up the call for questions. 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 the 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. In addition, during today's call, management will be referencing both GAAP and non-GAAP financial measures. Please refer to our press release and financial tables, which include a GAAP to non-GAAP reconciliation and other supplemental financial information. Our call today is being broadcast live over the Internet, and the webcast will be archived on the investor relations page of our website for those who are unable to join us. I'd like to thank you all for your interest and support of Aviat. And with that, I will now turn the call over to Michael.

Thank you, Glenn. For those who have followed us over the past year or so, you know that our focus has been on strengthening our foundation and getting our company on track to generate consistent and sustainable profitability while building our cash position. The model we employed was based on achieving breakeven when revenue is light. And in periods when revenue is stronger, we would be positioned to add significant profits to the bottom line with minimal impact to our cost structure. We have successfully realigned our organization, invested in process excellence. And after the past 18 months of action, we now have the right model. This is reflected in our fiscal 2017 year-to-date results, as we've generated a $13.7 million improvement in non-GAAP operating income versus the prior year. Also on year-to-date basis, adjusted EBITDA of $6.2 million marks a $13.3 million improvement, and our net cash position has increased by $9.4 million. As for the third quarter, we were again profitable on both a non-GAAP operating and net income basis. And we posted adjusted EBITDA of $2 million. We accomplished this on revenue of $58.7 million, which is just below the guidance we provided last quarter. Our Q3 revenue was impacted by some projects which were pushed out of the quarter to future periods, most of which we anticipate will materialize in the first half of fiscal 2018. Our Q3 book-to-bill was slightly under 1. Similar to my comments regarding revenue, some anticipated bookings were pushed out as well. We expect Q4 bookings to be stronger and for the momentum to carry through into fiscal 2018. As I've mentioned previously, given the longer-term sales cycle of private network deals and the binary rate nature of our Private Networks business, it's better to look at bookings over a longer horizon. For example, our book-to-bill on a trailing 12-month basis is over 1, and this was the case for both North America and international. And comparing our fiscal 2016 and 2017 third quarters, we generated a $7 million improvement in non-GAAP operating income and $6.8 million improvement in adjusted EBITDA. Further, our non-GAAP gross margin rate of 30.2% increased 630 basis points and was in line with what we had guided. On the expense side, non-GAAP operating expenses were $17 million, which represents a reduction of over 18% compared to Q3 of the last fiscal year. There were some nonrecurring items, but overall we lowered our fixed expenses further and now expect our normalized run rate to be more like $18 million to $18.5 million per quarter, an improvement of approximately $4 million on an annualized basis from our previous guidance. Our balance sheet also continues to improve across the board. Our cash position of approximately $40 million marks a $4.9 million increase over Q2 and we generated cash from operations of $5.1 million. We have now generated cash from operations in 7 of the past 8 quarters. Additionally, our cash conversion cycle continues to be near the best levels in our history. Ralph will provide more details around our balance sheet shortly. I'm very pleased with our performance thus far in fiscal 2017, as we exceeded our profitability and cash targets with a much stronger foundation in place to take the business forward. Our culture continues to pursue process excellence. And we now are increasing our focus, investments and energy towards top line growth. Our optimism is supported by our strong backlog in a growing funnel of opportunities. Maintaining and servicing our large installed base will remain a critical part of our growth strategy, and we have a highly targeted sales approach for securing new customers. Another key driver of our positive view is the strength of our offering. We have invested and innovated in areas that give us the best possible competitive position, and recently, we've had some major breakthroughs. We just introduced the WTM 4000, the highest-capacity radio ever built. The WTM 4000 expands the capabilities of our microwave radio portfolio and opens up growth opportunities both near and longer term. After a strong debut at Mobile World Congress in early March, we held an interactive launch event; and had over 600 attendees, with more than 1/3 of them new potential customers. We are now actively building our funnel across both the service provider and private network segments; and gearing up for the anticipated general release early in our next fiscal year, 2018. Additionally, we recently unveiled new low-latency products targeting the financial services segment, products that are used in long-distance networks for trading applications. And in our third quarter, we received multiple customer orders for the new versions. Per our announcement earlier this week, we also invested in expanding the data-carrying capacity of our IRU 600 product line. We have a large installed base utilizing the IRU 600. And our North American service provider customers can benefit significantly by seamlessly upgrading their networks with our new offering. This is also the core product for our private network applications in North America. And adding this capability assures future support as high-definition video, security and surveillance and other high-bandwidth mission-critical applications evolve. Our continued investment in networking software for our CTR microwave router platform has created incremental license revenue opportunities, along with the potential of further improving our gross margins. The value proposition of a CTR platform is instrumental in defending our incumbency in key customer accounts while putting us in a position to win multiple large private network contracts. We're investing in solutions that will help us drive growth and expand our reach. Innovation will continue to be a critical component. Based on our offerings; our incumbent positions and customer relationships; and the many opportunities ahead of us within public safety, government agencies, utilities, financial services and with service providers globally, we feel we are well positioned to win market share and further improve our financial performance. Turning to our near-term outlook. In my remarks last quarter, I provided guidance for the second half of the year. Now with our results in for Q3, I'd like to provide some updates. As I referenced earlier, primarily as a result of the pushout of projects, our fourth quarter revenue should come in between $57 million to $62 million, though our bookings are anticipated to increase significantly. In addition, some of the orders we received in Q3 have a longer conversion to revenue than we originally had anticipated. For example, the low-latency orders we received in Q3 are currently not expected to start shipping for revenue until the first quarter of fiscal 2018. Gross margins are expected to remain strong, and our prior guidance is intact. We expect our fourth quarter gross margins to be approximately 30%. As mentioned earlier, with the improvements in our operating structure and reduction in fixed expenses, we now believe our normalized run rate will be $18 million to $18.5 million, with Q4 expected to come in towards the higher end of this range due to some variable expenses targeted to generate growth. This should result in Q4 non-GAAP operating income tracking around breakeven with positive adjusted EBITDA. Additionally, we do expect a slight cash usage of cash in the quarter, although we expect to finish the fiscal year with a significant increase in our cash balance versus the prior year. I'll now turn the call over to Ralph. Ralph?

Thanks, Mike. And good afternoon. I'd like to add a few comments regarding our income statement and balance sheet, and then Mike will provide brief closing remarks. With respect to revenue, the delays Mike referenced earlier were predominantly with private network customers in North America. Even with this, our North America revenue grew by $2 million or 7.5% when comparing the third quarters on a year-over-year basis and represented approximately 50% of our total. Additionally, year-to-date revenue in North America was up close to $3 million over the same period in fiscal 2016, and our international was down as anticipated. Product revenue comprised 67% of our mix, and services was 33%. We had one 10%-plus customer in the third quarter. Our gross margins continue to track in line with our guidance at just over 30%. As we continue to grow the Private Networks segment, which is anticipated given our bookings, backlog and funnel, there is some further strengthening in the gross margins as we move through fiscal 2018. We continue to manage our costs diligently. And our OpEx was lower in almost all functions of our business, which is reflected in our results during Q3 and in our outlook moving forward. Non-GAAP operating expenses of $17 million represent a reduction of more than 18% compared to the fiscal third quarter last year and a reduction of 6% sequentially. Some R&D costs initially planned for Q3 will now be in Q4, so you will see a sequential increase, but overall we have taken out additional fixed costs and our run rate is substantially lower than at this time last year. Mike has already highlighted the positive story around profitability, so now I'll move on to our balance sheet. Our cash balance at the end of Q3 stood at approximately $40 million, representing an improvement of $4.9 million sequentially and $9.4 million since our fiscal 2016 year-end. Our excellent cash performance is primarily due to strong collections, along with improved controls and processes and our ability to consistently generate cash from operations. In fact, cash from operations in our fiscal 2017 second and third quarters was $5 million and $5.1 million, respectively. And through the first 9 months of fiscal 2017, we have generated $14 million. I'll add that we've lowered our debt position by $1 million since year-end, and our balance sheet overall remains in great shape. Working capital metrics continue to improve as well. DSOs of 70 days represent an approximately 7% improvement over Q2; over a 10% improvement compared to Q1; and a significant decrease from where we are -- where we were at the end of fiscal 2016, when DSOs stood at 99 days. While there are still some international collections challenges, we have managed this well and our DSOs in North America given the quality of our customer base continues to drive performance. Our overall inventory balance continues to decline due to our focus on operational efficiencies. Overall, I'm pleased with the progress we have made with respect to our financial controls and ability to manage our business efficiently. We still see some areas where we can improve and additional costs that over time we can remove while we continue to invest in our foundation. I'm going to turn the call back over to Mike now for his closing remarks, then we can address any questions you might have thereafter.

Thanks, Ralph. Fiscal 2017 certainly is a significant improvement from fiscal 2016 from a profitability perspective. Our story moving into fiscal 2018 is about growth, as our foundation is stronger. We can scale up quickly without adding a lot of costs, and we have the potential to generate more meaningful profits. Based on our current backlog, funnel and expected bookings, our financial model for fiscal 2018 will be targeting revenue in the range of $250 million to $280 million, which will represent an approximately year-over-year increase of 2% to 8%. We expect to see continued strength in North America and Private Networks globally, and our ability to achieve the higher end of our range will be contingent on winning some larger projects currently visible in our pipeline. We expect stabilization in our international service provider business, with some possible upside based on a recovery in the underinvested emerging markets. Gross margins should continue to trend upwards. And operating expenses should be relatively flat, with some variability based on the top line. We are well positioned to generate an increase in both operating income and adjusted EBITDA for the next fiscal year. As it relates to strategic alternatives. We've had a number of discussions since our last quarterly call. And we continue to pursue all avenues that will enhance our offering, market position and valuation. That has not changed. We have and may from time to time in the future provide information to interested parties. At this time, however, there is nothing further to report. In closing. We've made significant progress. We're profitable. Our balance sheet is stronger, and we're positioned for growth in the coming fiscal year. Operator, we're now ready to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Orin Hirschman with AIGH Investment.

Orin Hirschman from AIGH. So normally you would not -- I don't think it would be typical for you to give out guidance for the next fiscal year if you're not in backlog that lets you feel so confident in the lower end or mid-range of the next guidance.

Yes, definitely. So my confidence in my growth statements related to fiscal year '18 start with the fact that there's been some pushouts, as we articulated earlier, followed by much higher bookings anticipated in our fourth quarter. We have a very strong backlog with multiple projects that are already slated to go to revenue in fiscal year '18. My funnel is growing and large. And last but not least, I have a number of new products which will have an impact on our next fiscal year.

Okay. In terms of the gross margin range, if you take it to a range of a couple of percentage points, what would you give high, low type of guidance?

So I mean that's I would prefer to say that we do expect further improvements from our current level of 30%. We believe that we should be able to track in excess of that. Again, the improvement that we see is going to be based on product mix, volumes and continued efficiencies that we already see visible in our supply chain. And as I mentioned earlier, we also have some new product introductions, which also can enhance our gross margins further.

Okay. If I look at the spending for the next fiscal year, we talked about Q4 was the tail, it's like take the $18 million to $18.5 million non-GAAP per quarter and just annualize it. Will it vary based on the revenue level, meaning if you hit the high end, then expect to spend $18.5 million on average [ before ], versus if you're somewhere between the $250 million and $280 million that you would spend in the lower end? Does that...

Again, I think that we'll be relatively flat year-over-year somewhere in that range. To the extent that we're at the higher end of the range, you're probably going to see spending being higher than flattish. And to the extent that we're at the lower end of the range, then we'll be managing our spending like we always do to be flat; if not, further opportunities to the extent that we see the top line trending downwards. We're very focused on continuing to generate profitability and increase our performance year-over-year on the bottom line.

At this time, we have no further questions. I would like to turn it back over to management.

Thank you so much. I look forward to speaking to everybody soon. Thanks again for your time.

Thank you. This concludes today's conference. You may now disconnect. Speakers, please hold the line.