Aviat Networks, Inc. (AVNW) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Aviat Networks' Fiscal Year 2018 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Glenn Wiener, Investor Relations. You may begin.

Thank you, Nicole, and welcome to Aviat Networks' fiscal 2018 second quarter results conference call. We just filed our Form 10-Q, issued our press release and posted an updated investor presentation on our Web site. All documents can be found in the Investor Relations section. Today, we will have prepared remarks from Michael Pangia, President and Chief Executive Officer; and Ralph Marimon, our Chief Financial Officer. Shaun McFall, Senior Vice President and Chief Marketing and Strategy Officer is also with us and will be available during the Q&A portion of the call. 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 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. During today's call, management will also be referencing both GAAP and non-GAAP financial measures. Please refer to our press release and the financial tables therein, which include a GAAP to non-GAAP reconciliation and other supplemental financial information. Our call is being broadcast live over the Internet and the webcast will be archived on the Investor Relations page of our Web site for those who are unable to join. I’d like to thank you all for your interest and support. We will look to updating you on our progress. And at this time, I will now turn the call over to our CEO, Michael Pangia. Mike?

Thank you, Glenn, and good afternoon to all those joining us today. Let me start with a recap of our financial results and then I’ll provide some commentary around our business outlook. We had solid revenue this quarter and bottom line results that comfortably exceeded our forecast. Our cash position increased another 2.5 million sequentially and almost 6 million since the beginning of the fiscal year. There’s a lot of positive activity going on at Aviat and with the momentum we have, we remain on track to meet our previously stated fiscal year guidance. Second quarter revenue of 61.7 million was in line with our expectations and up almost 10% sequentially. Both mobile and private networks revenue were up evenly on a percentage basis. We also had a tremendous bookings quarter, led by the strength of our private networks business in North America. On a year-over-year basis, looking at Q1 and Q2 combined, overall orders were up over 5% and our book to bill was well above 1. Our non-GAAP gross margins of 35.3% came in very strong due to a mix shift towards North America which comprised approximately 60% of our total revenue in the quarter. Second quarter gross margins were up 400 basis points year-over-year and up 440 basis points sequentially. Now, while we don’t expect to be at the 35% plus gross margin levels in the near term, we have consistently been improving margins over the past two years given efficiency programs, cost reductions, new products and our increased focus on North America and our private networks business. Gross margins for fiscal year 2018 should improve from FY '17 levels and we see opportunities to enhance margins further in the years ahead. Non-GAAP operating expenses of 18.2 million were about 650,000 higher sequentially but right in line with the guidance we gave last quarter. There were really no surprises. We continue to focus on reducing our G&A spend while reinvesting some of the savings towards R&D. This is a critical part of our strategy as newer products are certainly contributing to our performance and our development roadmap is driving optimism both with our installed base and new accounts. As for our bottom line results for the quarter, non-GAAP operating income of 3.5 million was an improvement of 3.8 million sequentially. Non-GAAP income from continuing operations of 3 million was an improvement of 3.6 million sequentially and on a diluted per share basis, we went from a loss of $0.12 in Q1 to income per share of $0.53 in Q2. Further, adjusted EBITDA of 4.6 million increased by 3.7 million compared to the fiscal 2018 first quarter. In comparing our results for the first half of the fiscal year, non-GAAP operating income was up 2.2 million, net income from continuing operations was up 1.8 million and adjusted EBITDA increased by 1.3 million. Now on to our business, looking at our success in Q2 and what we’re seeing in the markets we serve. Our private networks business is firing on all cylinders. We’re continuing to add new accounts, we’re winning new awards from our installed base and we’re building a stronger and better qualified pipeline. Q2 bookings were boosted by the recently announced State of Colorado order which took us well above the original $28 million contract we announced in September 2016. We also had strong bookings from a number of smaller deals from several customers spread across the U.S., primarily in public safety and utility networks. And what I said last quarter still holds true. Opportunities with state, local, and city governments are building. There is a growing trend by cities and counties to align with state-wide standards which plays to our advantage, and this is further reinforced by the activity we’re seeing in Colorado. Nationwide, the public concerns over safety and security should continue to prioritize the needs for investments in mission-critical first responder networks. The investments in our products and our expanded services capabilities have been key differentiators in helping us secure much of our new business and our competitive position is only strengthening. Further, we’re continuing to lay the groundwork to expand into other verticals such as transportation and education. As for our service provider business, it’s been a pretty consistent story over the past year. Our current customers are between major upgrade cycles globally but we continue to get steady orders. Moreover, this past quarter, we added several smaller orders that were generated by our news insight sales team. On a cumulative basis, these orders also aided our strong performance and the opportunity for future business is also growing. In Q2, service provider revenue grew sequentially by approximately 10%. With our new WTM 4000 platform, we are actively pursuing targeted service providers who are not current customers. Strong interest in higher capacity solutions makes WTM 4000 and some new versions of the product that we are introducing soon very compelling in these discussions. Overall, service provider orders are picking up and we saw a 7% year-over-year improvement. MTN remains a 10% plus revenue customer during the quarter. During the first half of the fiscal year, MTN orders were up 23% and we’re seeing increased demand in support of their LTE rollout. Overall, in Africa, customer relationships and business prospects remains strong. Domestically, our service provider business has been steady. We’ve begun to position solutions that address 5G with our leading U.S. service provider customers and while high volume 5G deployment are still about the future, probably starting in 2019 or 2020, we are seeing near-term use cases emerge. While our stronger performance has been weighted more towards private networks, over the past 12 to 18 months we are equally excited about the domestic and international opportunities we see with both current and new service providers in the years ahead. We are also exploring opportunities to enhance and broaden our partnerships in adjacent technologies such as optical transport and integrating our solutions into larger ecosystems as SGN initiatives progress. This is in the early stages but it is becoming a bigger part of discussions with our customers. I’ll now turn the call over to Ralph. Ralph?

Thanks, Mike. As Mike provided a thorough recap of our quarterly results, I’ll focus my remarks solely on our balance sheet. We ended the second quarter with 42.1 million in cash, cash equivalents and restricted cash which marks a $5.9 million improvement since the beginning of FY '17 and a $2.5 million improvement over Q1. At the end of Q2, our restricted cash included 1 million that was being held by a bank under forward contracts specifically for the repayment of a dividend declared by our Nigeria entity. The forward contracts were settled in January of 2018 and are no longer restricted. Strong cash collections, improved profitability and our continued focus on effective capital allocation has significantly improved our cash position. In fact, since the beginning of fiscal 2017, we have increased our cash position by approximately 11 million and expect further improvements moving forward. Cash provided by operating activities in Q2 was 4.3 million and through the first six months of fiscal 2018 was 9.2 million. This compares to 8.3 million in the first half of fiscal 2017. Our overall cash conversion cycle continues to be a historical best for the company. DSOs of 64 days marked a seven-day improvement over Q1 and 11-day improvement over Q2 of fiscal 2017. DSOs continued to improve as more of our business is being generated in North America and we’re seeing better collections internationally. Our inventory position of 26.2 million came in a bit higher than planned, but that was due primarily to our strong bookings this quarter and products on hand related to upcoming shipments. Our inventory remains in good shape with inventory turns of 6.1. Our capital expenditures through the first half of fiscal 2018 were 3.3 million and we anticipate capital expenditures will be approximately 2.3 million for the remainder of the fiscal year. We have a relatively high CapEx ramp this fiscal year related to new product introduction. We expect cash to be relatively flat in Q3 and anticipate further improvements in Q4 finishing the year with an increase in our cash position. With over 40 million in cash on hand, approximately 12 million available under our credit facility and sustainable profitability, we have good liquidity to drive our business and results forward and we expect our balance sheet to continue to improve. Now, I’ll turn the call back over to Mike for his closing remarks.

Thanks, Ralph. Before going into our outlook, I’d like to first address the strategic process. On our past two conference calls I noted that we were in the later stages of discussions. As of today, there is nothing formal to report and the process is continuing. Since we started looking at strategic alternatives, our business has strengthened. The quality of our customer base has improved and we have upgraded our solutions significantly. We’re in a much stronger financial position now which has enabled us to better assess all alternatives. We’re not standing still and we continue to evaluate options to enhance stockholder value. We remain focused on growing our business and improving profitability. As for our outlook, our top line guidance for the full fiscal year has not changed. We’re still anticipating a top line of 245 million to 255 million and we expect Q3 revenue to be in the range of 62 million to 65 million. Our non-GAAP gross margin performance for the year-to-date has been exceptional, primarily due to the higher concentration of business in North America. In the second half of the year, we expect gross margins to normalize more in the 30% to 33% range based on higher international revenue. We still anticipate fiscal year '18 non-GAAP gross margins to be in the range of 31.5% to 32.5%. Our outlook for non-GAAP operating expenses remains at the 72 million to 75 million level. We expect Q3 non-GAAP operating expenses to be somewhere between 18.3 million and 18.7 million and modestly higher in Q4 as a result of our increased sales outlook. We’re seeing traction with the products we previously introduced and we have more new products coming to market in the quarters ahead, which builds on my earlier statements about R&D expense allocation. In closing, we’re expecting to be profitable in both the third and fourth fiscal quarters on an operating and net basis and we are confident that we will achieve our fiscal year EBITDA guidance of 11 million to 13 million. From an adjusted EBITDA loss of 12 million in fiscal year '16 to positive adjusted EBITDA of approximately 7 million in fiscal year '17 to more than a 50% increase anticipated in fiscal year '18. We are trending upwards and we are on the right path. This concludes our remarks. We are ready to open the call for questions. Operator?

Thank you. [Operator Instructions]. Our first question comes from Mr. Mel Coffey from individual investors. Your line is now open.

Thank you. This goes out to Mike Pangia. Mike, I’ve sat in the last couple of your conference calls specifically starting May 10 when you came out with your earnings and you started talking about the strategic alternative. Since then even with this pullback in the market, markets are up about 22%, you’re stock is down about 35%. You mentioned the same thing last conference call and again today. It’s getting very long in the tooth just to be able to tell the shareholders about a strategic alternative when the company isn’t buying back any stock, they are not coming out with any positive press releases or looking to do anything to get this company in front of other broker dealers to increase the volume on the stock. We need more from you and not just the strategic alternative sentence, okay? You need to elaborate more, because I’ve been in the stock since May. I have some very wealthy clients in the stock and they’re getting hurt right now. And coming on conference calls like this and just talking about a strategic alternative and not expanding on that and just being very plain Jane while your stock is getting beat down compared to what the market is doing, it’s unacceptable now. What are you guys plan on doing to get the stock turned around and start moving at least with the markets?

So is that the complete question or is there more, Mel?

Yes, it’s very long in the tooth right now about your strategic alternative, okay? Since you started talking about that May 10 of last year, again even with this pullback markets are up about 22%, 23%. Your stock’s down about 35%, 40%. Shareholders deserve more right now, okay, than just the sentence about a strategic alternative?

Okay, so I appreciate your input. First off, one of the things that we’re doing to improve our spot price, our shareholder value is performing and making sure that we’re on track if not exceeding our financial results and we had an excellent quarter. And year-to-date, we’ve done an excellent job of improving the company in terms of its financial model and generating cash and we’ll continue to do --

You definitely had – you had a very good second quarter. Your earnings per share blew out the water and I’ll give you that. But if no one knows about it, if you’re not getting the story out there, what does it matter? Your PR team needs to be getting out there and telling the story to get some volume going talking about a strategic alternative. You can have the best quarter in the world but nobody knows about you. Who gives a shit?

Okay. We’ll take your insight and your input and we’ll work to build a plan in terms of providing more exposure to the company. Again, it starts and it ends with first having strong financial performance. That’s where our focus has been. As far as the strategic process is concerned, given our strong financial position and given the options we have available to us, I’m not concerned about whether that’s done immediately or not. We’re making sure that we take the right time to do the right thing. And in the meantime we’ll continue to improve our business and our financial results. So again, I’ll take your input into consideration with respect to how we get more exposure and we’ll continue to perform.

What about buying some stock back from the inside and putting your money where your mouth is?

That will have to be considered at the Board level. Again, we’re considering all strategic options to increase value. That will be something that we’ll continue to look at as well.

All right. Thank you.

Thank you.

Thank you. Our next question comes from Mark Spiegel from Stanphyl Capital. Your line is now open.

Hi. Just a question about – well, it’s really a two part question. Number one would be with so much cash sitting there, why keep that 9 million in debt? But on the other side of the coin, according to the 10-Q you guys would be paying an average rate of like high 4% a year, so in theory an interest expense should be close to $400,000 a year and I’m wondering why the interest expense is so low on the P&L?

This is Ralph. We used the bank debt primarily at the end of each quarter. We don’t borrow for a long period of time, it’s fairly clear. We use it to help the balance sheet but also any kind of payments, supplier issues, everything else to maintain the liquidity level we want. So we also use it quite frankly to maintain good relationship with the bank so that we have available credit when we need it. So we are looking at alternatives with that, whether we continue it or whether we take it down a bit. So we have started those discussions now that the company is in much better financial shape.

Okay, that’s fine. Clearly the way you’re using it, which I didn’t realize, it’s such a nominal expense, it’s almost irrelevant. So that does make sense. Okay. That was my question. Thank you very much.

Thank you.

Thank you. I’m showing no further questions. I would now like to turn the call over to Mr. Glenn Wiener, Investor Relations, for any further remarks.

Thank you, Nicole. This concludes today’s portion of the call. And as always, please feel free to reach out to my office if you have any questions, more than happy to address it as is management. We have a strong quarter. We’re on the right track. And with that, we will now conclude today’s call. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.