Ladies and gentlemen, thank you for standing by and welcome to the Aviat Networks Fiscal 2020 Second 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 call is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today Mr. Glenn Wiener, Investor Relations. Thank you, Sir. Please go ahead.

Thank you and welcome to Aviat Networks fiscal 2020 second quarter results conference call. Our Form 10-Q, press release and our updated investor presentation can all been found on the Investor Relations section of our website. As can a replay of today's call, approximately one hour after the call ends. Today's call will begin with the opening remarks by Aviat's President and Chief Executive Officer, Pete Smith, who will be followed by Stan Gallagher, Chief Operating Officer and Principal Financial Officer; and then Eric Chang, Senior Vice President and Principal Accounting Officer. After their prepared remarks we'll open up the call for questions. Shaun McFall, Senior Vice President of Corporate Development is also with us and will available during the Q&A portion of the call. 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 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 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. Additionally, during today's call and webcast, management will reference both GAAP and non-GAAP financial measures. Please refer to our press release and financial tables therein which include a GAAP to non-GAAP reconciliation and other supplemental financial information. Lastly, we encourage investors and analysts to ask questions. And as always you can reach out to me following the call. We greatly appreciate your continued interest in Aviat and your ongoing support. And I will now turn the call to Pete.

Thank you, Glenn. Its been about five weeks since I took the role of CEO. I've spend majority of my time traveling to our sites, getting to know our people, some of our customers and reviewing our strategy to drive growth, improve profitability and create value for all stakeholders. I did a lot of research before taking this role. And my initial assessment of Aviat is very much aligned with what I've learned thus far. We have industry-leading technology, a diverse global customer base and strong relationships with both our customers and our partners. Our position in North America is solid and should continue to be a catalyst for us in the future, specifically with private networks, public safety and several vertical markets such as utilities, oil and gas, among others. Additionally, demand for solutions in North America should only intensify, given the increased need for mission-critical networks and the upcoming build-out of networks in support of 5G. While we've done well over the past years building our foundation, expanding our customer footprint and developing new solutions for these customer segments, I believe there is significantly more we can do to drive growth and increase our share of demand. Internationally, we have strengths and weaknesses. On the positive side, our technology and customer footprint. However, while we have added accounts and grown in some regions, it's been inconsistent. And I believe we can do a better job of commercializing products for specific customers and regions, while providing more value-added services that differentiate Aviat from the competition. With that said, we will look at each market we're in, others we can expand into and potentially aligned with other companies to lower cost-of-entry while providing customers with the one-stop shop solution to make the buying cycle easier. Throughout my career, I've been…

Thank you, Pete. And good afternoon, everyone. When Aviat first initiated its turnaround strategy in fiscal year 2016, our annual OpEx stood at approximately $85 million on $268 million of revenue and non-GAAP gross margins were little less than 25%. Over the course of three years, even on revenue that is lower by approximately 10% compared to the end of fiscal year 2019, we have improved margins by over 760 points and reduced OpEx by approximately 12%. Over a three-year period, we have demonstrated substantial enhancement to bottom line profitability, while strengthening our balance sheet, yet there is still a lot more that can and will be done to improve. In fiscal year 2020, we believe our financial results will continue to demonstrate our ability to deliver and the following year should be stronger, with more compelling market dynamics working in our favor, and a much stronger product and service offering than in past years. Our objective is to grow our market leading position in North America, and we will accomplish this by continuing to invest in R&D to differentiate our offering versus the competition. We believe we can increase our share in MPLS for public safety networks, grow share with ISPs domestically and internationally with operators focused on developing new networks and help them lower their cost of ownership. As 5G is fast approaching, we have products that have been commercialized over the past year, which puts us in a great position to support both our installed base and capture new accounts. For example, our WTM 4800 EBAND and Multi-band platform is a perfect example and interest in this solution is building. 5G should be a growth driver for us over the next two to three years, and potentially sooner is operators are starting to invest now. We also…

Thank you, Stan. And good afternoon, everyone. All comparisons related to our fiscal 2020 and fiscal 2019 second quarter and six-month financial results are for the periods ended December 27, 2019 and December 28, 2018, respectively, unless otherwise noted. Fiscal 2020 second quarter revenue declined by $9.1 million, with North America revenue down approximately $800,000. International revenue was down $8.2 million and within this Africa and the Middle East declined by $5 million and Latin America and Asia Pacific region down by $2.5 million. As noted in our January 22nd release, and in today's announcement, the cyber security attack at one of our manufacturing vendors led to lower than anticipated revenue for the quarter. For the fiscal 2020 six-month period, total revenue was down $11 million, with North America revenue up approximately $11 million, while international revenue was down approximately $22 million. With respect to North America, strong bookings in the second half of last fiscal year, contributed to our strong fiscal 2020 first half performance. Additionally, our North America bookings performance in the first half of fiscal 2020 was exceptionally strong, which bodes well for our future. While international revenue was down in the first half, and is expected to be down for the full fiscal year, it is important to note that our book-to-bill ratio for international was above one in the first half, and is also expected to be above one in the second half of the fiscal year. GAAP gross margin came in as 32.7% and non-GAAP gross margin at 32.8% for the fiscal 2020 second quarter, a decline of 190 and 180 basis points, respectively. The decline in gross margin was primarily due to lower mix of product revenue and increased supply chain cost. For the six-month period, GAAP and non-GAAP gross margin was 35.7%…

[Operator Instructions] Your first question comes from the line of Theodore O'Neill with Litchfield Hills.

Hi. First question I have is about the contract manufacturer with the issue. Did they wait three weeks before they told you? Or did it take them three weeks before they get things back online? Could you give us more color on that?

Hey, Theodore, it's Stan. I'll be more than happy too. So I was actually called over the weekend when they actually identified the attack. It took them three weeks to actually do the recovery process. We offered all of our assistance for our entire IT team because of their experience. But that was primarily the remediation period to get back online and resume the production and shipments for us.

Now, what's going on in China right now. If people don't get back to work on Monday and it doesn't look like they're going to from what I've seen. Does that interrupt any of your supply chain if this goes on for another through February or into March?

So we've -- we have six of our supply chain people in China and our Head of Operations is in the region working on that, right? So, our guidance reflects our best knowledge today. If you go out and look at a variety of other companies guidance, some things, they'll be hurt badly, some things they won't be hurt very much. And what we have is our guidance reflects our knowledge right now. Some of that guidance does anticipate a delay in folks getting back to work if it's worse, or there's more cases and they're less available workers than we won't do as well. And if it's not as bad as we modeled, we can do better. So the big problem with us and everybody else is giving guidance on the coronavirus is the uncertainty, right? So what we are doing everything that we can to control our operations and our suppliers the best of our ability, but it does come down to the uncertainty of how many and how fast is the China employee base going to come back.

And do you have direct manufacturing there? Or a contract manufacturing and other parts coming from there?

So, components are coming from China. We don't have our contract manufacturer nor are we present in China for manufacturing. So, our risks around the uncertainty of the coronavirus is based on are the component suppliers that we buy from or our contract manufacturer buys from us.

Okay. Thanks very much. Thanks. That clears that up for me. Thank you.

Your next question comes from the line of Tim Savageaux with Northland Capital Markets.

Hi, good afternoon. A couple questions. And then more logistically around the shortfall on fiscal Q2. Do we expect to recover all of that in Q3, which I know, historically, seasonally is kind of a weaker period for you, and maybe expect perhaps to offset that. Or you expect that through the second half? And is there any regional bias that you can discern to the shipments that were unable to be made, whether they were headed North American or internationally or impacted that breakout at all? Thanks.

Yes. Sure Tim. It's Stan. Glad to hear you on the call. So, for what we had identified in the recovery process for the second quarter, we actually ended up having finish goods that got stranded before they could get the proof-of-delivery. So, a lot of that miss and shortfall was just timing. A few days after that, we recovered what we had planned for the second quarter. That was bias towards North America, which is where the margin impact came from. And I believe that we don't have any other remaining items that were associated with that, that carried over to Q3 or to the second half.

Got it? And you'd mentioned, I think, called out some extraordinary booking strength in North America. And I wonder if you could be more -- provide any more color on that on the nature of that, right? I mean, you obviously, also discussed international book-to-bills being above one. So I assume extraordinary means way above one? But if there's any anecdotal color you might be able to provide on North America booking strength and maybe identify what the source of that might be?

So, yes, Tim, I think the best way for me to answer that is to use some of the variable compensation expenses as a proxy. You can see from an OpEx perspective that we did have some upward pressure on that, but that was associated primarily to a lot of the orders performance that we had. What I'd say generally without getting into too many specifics, is it is an order flow that is substantially higher than what we have seen in the past. And it has been consistent over the past three quarters. With regards to specifics on those, when we get our press release that's approved and comes out that you'll see it. Otherwise, there's significant strength in North American and we also have some additional strength that's occurring in the International regions specific to Asia Pac.

Got it. And question for Pete. And I thought your initial commentary, and I know your strategic view is still evolving here. But I thought the commentary around partnerships with others to kind of develop a one-stop shop approaching what I gather would be new international markets, was interesting. I wonder if you might be able to provide any more commentary on that in terms of what states those partnerships might be? Or what sort of players you might be looking to partnership? Are we talking about distributors here or other kind of end-to-end equipment suppliers or any more color on that with would be welcome?

All right. So I'll give a little color, but maybe not as much color as you would like, right? So, if you think about the international business, it's "the rest of the world" and the rest of the world is a big place and difficult for us to cover. And we're in some active discussions for partnerships so we can extend our reach and drive more volume through indirect channels. So, we are -- so that would be one. We're always evaluating technology, I wouldn't say that we're close on any of those type partnerships, but we're close -- close doesn't really matter until you finalize it, but we're close on some distribution deals that hopefully, we can land and announce and use it to drive growth internationally. Is that helpful?

You're right, not quite as I-- no, just kidding.

That's fair enough. I made my first forecast.

Well, that's -- we're one for one. Last question for me. And speaking of forecast, and I'm probably jumping the gun here. But you did make a number of comments about fiscal 2021 or at least extending into that time that seemed to point to an expectation of at least revenue growth and expensive decline, both of which sounds reasonably good. Am I hearing that the right way? Or what are you kind of able to say about fiscal 2021 here now that we're able -- halfway through fiscal 2020?

So, look, we want to do a bottom up plan on 2021. But we see, Stan mentioned the bookings, the book-to-bill ratio improving. And we see that in North America, we have that engine going. We also see an opportunity to lower our costs. So, I think you've got it right for 2021, and directionally and we need to do more work before we can be more specific.

Great. Thanks very much.

Sure.

Your next question comes from the line of Mark Spiegel with Stanphyl Capital.

Yes. Hi. Two questions. First one is just the Huawei ban mean anything for you guys in rural infrastructure? I think I read somewhere that they're being banned there?

That came out in the last two days.

No, no, this was a couple of months ago.

All right. Well, there was actually in the Wall Street Journal article again, I guess, in the last couple days, and there was a lawsuit, yes. Look, I think that that can only be good for us, right?

Yes. Well, part of it is a Pentagon saying, but I thought there was a separate directive for rural Telecom. So I was wondering if that's anything you've had any effect from yet? No, is what you're saying?

Not significant. And part of that is -- so far we didn't really have a huge installed base, so at least in our category to go at them. I wouldn't say is zero. I think we do see some opportunity there. I think we will be a beneficiary to some extent. But I don't think it's a big opportunity.

Okay. Fair enough. And then second one, and it's really a softball question. But Trump did say in his State of the Union address that he wanted to spend $20 billion on rural broadband infrastructure. And that was one of the few things that the democrats actually stood up and applauded, which makes me think that it can get passed. Is that -- are you guys going to be able to get a piece of that?

Yes. That's an area where we've been active in. We've had some new products there, and we've been achieving some success with rural Internet and broadband customers over the last year or so. And it's another area where we are actively looking to expand our reach a little bit with some other activities there as well. So generally, whatever trickle down the fact that is from that into our area, generally we see that as a positive.

Okay, great. My other questions were answered. So thank you very much.

Thank you.

[Operator Instructions] Your next question comes from the line of Steve Busch with Everglades Resources.

Hi, guys. Thanks for taking my call.

Hi, Steve.

Good to see we're progressing on the fronts we can control. Does that make any sense to just jettison some of these African businesses and just focus on North America given our growth rates here? Or is that not really something you want to go towards?

Well, I think, really, the Africa business is a bit volatile and what we've talked about over the last month has been how do we modulate our cost structure to match the demand. And that's when we do have businesses, it's positive contribution margin, and we need to manage it better. And, long term Africa, perhaps has the least amount of infrastructure in the world. So we think having a presence in Africa and simultaneously managing our cost structure with the current period demand is the way to go. We have more work to do in that regard, but that's the perspective that we have currently.

Okay. That's fair enough. I mean, I know MTN is selling or looking to sell off some Nigerian assets, I don't know how that affects you. Are they still a 10% customer or where they stand now?

No, they're not a 10% customer anymore. And as we mentioned before, this is Stan, we had de-risk our plan as far as our annual operating plan and budget for Africa this year, It's actually performing a little bit better than the de-risk right now. And the activities that we have in place are, as Pete said, we're modulating that business and matching the cost structure, so that we have the most favorable outcome. But no, they're not that large and I don't anticipate them to grow into a 10% customer in the foreseeable near future.

Okay. And how many 10% customers do we have this quarter?

So we didn't have any in the second quarter of our fiscal year, Motorola still was a 10% customer for the first time.

All right. Okay. And so how's the Motorola rollout going in Florida?

Well, as you know, Motorola stepped back a little bit towards the end of the year and did not sign. So, we are now waiting for how the state of Florida is going to go and address that. We still believe our prospects are intact and very strong. But we're going to have to let the state play that one out.

All right. Okay. And how many shares did you buy back this quarter by the way? I know you gave $1 number. How many shares was that?

Its almost an 100K dollars [ph]. And 1.4 million [ph] for the year-to-date.

Right. Okay. Thank you. Good luck.

Alright, thanks.

And there are no further questions at this time. I'd like to turn it back over for any closing remarks.

Very good. Well, thanks, everybody for joining the call. We'll see you in 90 days.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.