Good afternoon, and welcome to Aviat Networks' Second Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I'd now turn the conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. You may begin.

Thank you, and welcome to Aviat Networks' second quarter fiscal 2024 results conference call and webcast. You can find our press release and updated investor presentation in the IR section of our website at www.aviatnetworks.com along with a replay of today's call. With me today are Pete Smith, Aviat's President and CEO, who will begin with opening remarks on the company's fiscal second quarter; followed by David Gray, our CFO, who will review the financial results for the quarter. Pete will then provide closing remarks on Aviat's strategy and outlook, followed by Q&A. As a reminder, during today's call and webcast, management may make forward-looking statements regarding Aviat's business including but not limited to statements relating to financial projections, business drivers, new products and expansions, and economic activity in different regions. These and other forward-looking statements reflect the company's opinions only as of the date of this call and webcast and involve assumptions, risks, and uncertainties that could cause actual results to differ materially from those statements. Additional information on factors that could cause actual results to differ materially from these statements made on this call, can be found in our most recent annual report on Form 10-K, filed with the SEC. The company undertakes no obligation to revise or make public any revisions 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, which is available in the IR section of our website at www.aviatnetworks.com and financial tables therein, which include a GAAP to non-GAAP reconciliation and other supplemental financial information. At this time, I would like to turn the call over to Aviat's President and CEO, Pete Smith. Pete?

Thanks, Andrew, and good afternoon, everyone. Thank you for joining us to review Aviat Networks' results for the second quarter of fiscal year 2024. We are pleased to report that Aviat's continued its solid execution and achieved revenue and margin growth in the quarter. Highlights from the second quarter include: revenue of $95.0 million, which represents growth of 4.8% versus Q2 of last year. Gross margin of 38.8% versus 35.7% in the same quarter a year ago. Adjusted EBITDA of $13.7 million a record high 14.5% of revenue. Record non-GAAP EPS of $0.97. Strong balance sheet with $45.9 million of cash and marketable securities and a net debt balance of $3.6 million. Please note this quarter's revenue and profit growth is against the year ago period that benefited from the large initial order from our Bharti Airtel win. These financial and operational results are driven by the continued implementation of Aviat's operating model and made possible. Thanks to the effort and execution of the Aviat team and our partners throughout the quarter. We will review key highlights of the second quarter, but first let's discuss our completed acquisition of the NEC Wireless Transport business. Aviat closed the acquisition of the NEC Wireless business on November 30th. We now refer to this as the Pasolink business. At this point, we can provide an update that will emphasize the components of the Aviat operating model framework. See slide 17 in the investor presentation for an overview of the framework. First, the transaction consisted of taking over 18 plus entities, which were ranged to serve customers across the globe. We have maintained and integrated these entities and their team members in alignment with our Asia Pac, Latin America, and EMEA leadership teams. This approach has been agreeable with the customer base and aligned…

Thank you, Pete, and good afternoon, everyone. During my remarks today, I'll review some of the key fiscal 2024 second quarter financial highlights noting our detailed financials can be found in our press release and 10-Q filed this afternoon. As a reminder, all comparisons discussed today are between the second quarter and fiscal 2024 and the second quarter of fiscal 2023, unless noted otherwise. For the second quarter, we reported total revenues of $95.0 million as compared to $90.7 million for the same period last year, an increase of $4.4 million or 4.8%. On a constant currency basis, our revenue would have been $95.5 million. North America, which comprised 54% of our total revenue for the quarter was $51.3 million, a decrease of 1.4% from the same period last year due to timing of public safety projects. For the first six months of fiscal '24, North America is up 6% versus the prior year and bookings remain strong. International revenue was $43.7 million for the quarter, an increase of $5.1 million or 13.1% in the same period last year. Growth in Latin America and Asia-Pacific regions more than offset currency headwinds for local services in Africa and the large initial Bharti Airtel shipment in the second quarter of last year. Our trailing 12 month book-to-bill ratio remained above 1 as it has since fiscal 2018. Gross margins for the quarter were 38.8% on both a GAAP and non-GAAP basis, as compared to 35.5% GAAP and 35.7% non-GAAP in the prior year. The improvement was driven by higher software revenue, favorable project mix and moderating material costs. Second quarter GAAP operating expenses were $31.8 million, an increase of $8.3 million from the prior year, driven by M&A related deal and restructuring costs and higher R&D investments. Second quarter non-GAAP operating expenses,…

Thanks, David. Before opening for Q&A, I will provide updates on our guidance inclusive of the Pasolink business. We are raising our fiscal year 2024 guidance as follows. Revenue to be in the range of $425 million to $432 million, and adjusted EBITDA to be in the range of $51 million to $56 million. This updated guidance reflects contribution from the acquired Pasolink business in the remainder of the fiscal year. We anticipate that the revenue from the Pasolink business will continue to ramp up over the next four quarters to reach annual contribution levels of $140 million. We are leaving our adjusted EBITDA guidance unchanged, even though we anticipate slight dilution from the Pasolink business in the remainder of the fiscal year 2024. This is a result of the confidence we have in the core Aviat business profitability and the benefits of the Aviat operating model. You can reference Slide 19 in our investor presentation for an outline of how we see the Pasolink business impacting the pro forma cost structure through the end of fiscal year 2024. We would also like to improve our accretion guidance. We previously said we expect Pasolink to be accretive by the fourth quarter of ownership. We would now like to update our outlook for the deal to be accretive by the third quarter after close, specifically the July to September 2024 quarter. This is a sign of our confidence in the work that we have done thus far and our line of sight to improve profitability in the Pasolink business. We also want to state that we are committed to the combined businesses reaching our long-term EBITDA goal of 15%. With that, operator, let's open up for questions.

Thank you. [Operator Instructions]. And our first question comes from the line of Theodore O'Neill with Litchfield Hills Research.

Thank you very much and congratulations on the good quarter.

Thanks, Theo.

Thanks, Theo.

So Pete, I was wondering if you could give us all -- so your viewpoint on the first 30 days of ownership with the NEC business and how that's going?

Theo, I think David will take that question, because he'll give a little bit of financial color. So David go.

Okay. Thanks, Dale. Yes, so we're really encouraged by the progress we've made so far on the integration. Our planning in the interim phase allowed us to quickly take cost out of the combined business on day one, as well as introduced Aviat operating model to our new team members. We also met with the significant number of customers and the feedback has been positive. From a revenue perspective, we only had real operational ownership of the business for about a week during the quarter. And the reason for that, obviously, when we first closed, we had to do physical counts of inventory and transfers as well as IT systems and data migration. And then once we got things up and running, we had the holiday season at the end of the month. So fairly limited amount of time that we actually ran the business for the quarter. So with that very limited sample of activity in the quarter, we think we'd likely redo extrapolation errors inconsistent with our true expectations of this business if we were to break it out separately. We'll start to do so in the third quarter once we have a full quarter of operations. One other item of note, we typically only break out our backlog once a year at year-end, and we'll do so again this year, but because our next report will include the Pasolink backlog, we'll go ahead and disclose our Aviat backlog performance without Pasolink one last time. So at the end of Q2, our core backlog was up 24% versus the same time last year. And for further context, we reported at the end of fiscal 2023 that our backlog was up 18% versus the prior year. So in that six month interim period, we've increased the -- increased from 18% to 24%. I think that's all very indicative of a very healthy core business.

Okay. And I'm just a little interested here in the adjusted EBITDA guidance. Since Slide 6 shows that Pasolink has a zero contributions for EBITDA, if I'm reading this right. Keeping it to the guidance the same implies that there's some really good stuff going on with the core Aviat business. Can you comment on that?

Yes. We agree.

Yes. We would agree. If we -- in the absence of the Pasolink transaction, we would be raising the core profitability guidance range. So what I would say is stay tuned on that as we execute. Perhaps there'll be an update on that later in the year.

Okay. And one more question. Here on Slide 5, you talk about expecting a $140 million contribution from Pasolink. And I'm assuming that since you have sales people on both sides that have to learn new products that that's going to ramp more or less linearly throughout the next four quarters. Have I got that? Is that about right?

I would say progressively. So we expect our low revenue quarter to be the quarter we're in and we'll move progressively up over the next four quarters. And -- we see $140 million of revenue and we want to be conservative in saying that we will stepwise go up on the $140 million as we progress. But we are actively working to shorten lead times and our end-to-end cycle time with the Pasolink business. So what we'd like to do is we're committed to $140 million, we'd like to say that we will progressively increment move up as we go through the four quarters. But as we bring the Pasolink business into the Aviat operating system, we may modify the way that $140 million will play out, but for current the way we have it modeled and the way we would ask the investor base to model -- is model it as a progressive step up for now.

Okay. Thanks very much.

Thank you. One moment please for our next question. And our next question comes from the line of Scott Searle with Roth MKM.

Hey, good afternoon. Thanks for taking the questions and congratulations on the record numbers.

Thanks, Scott.

Maybe just to quickly follow-up on the prior question related to Pasolink. I just want to clarify here. We're going to ramp up to $140 million for the year. So we're exiting four quarters from now, at a number that's above that $35 million, but you're also -- that's reflecting actively managing down lead times within the channel. So, it seems like we're off to a better start overall, in terms of what you guys are seeing from customers, initial engagements on the NEC front? And then just to follow-up on the cash flow front on that front. It sounds like I think you said $35 million of incremental inventory that came aboard with NEC. It sounds like you're going actively working that down as well then. So I'm kind of wondering how you're thinking about incremental cash flow coming out of the deal?

So David will take the cash flow.

Okay. Hey, Scott. So yes, from a cash flow perspective, we expect NEC will be possibly impact cash in the near term and by the near term, I mean the next couple of quarters, right. So we acquired over $50 million in AR with only $12 million in accounts payable. So as that is collected and paid out that should generate cash. Now we do expect a large working capital adjustment, which is disclosed in the 10-Q, but that'll be a fourth quarter item. So net-net will still be positive there. And then in the medium term, which I take the first 18 months of ownership will be able to generate the core business of the Pasolink business will generate modest cash or generate modestly positive cash flow, but then we have the inventory reduction that provides substantial upside to it as we were to reduce those inventory levels to our target is about a third of what we currently got.

Yes. Got you.

Go ahead, Scott.

And just that $140 million run rate, I just want to clarify that. That is what you expect contribution from NEC over the next four quarters, $140 million ramping from a smaller number to a larger number as we exit that fourth quarter. Is that correct?

That's correct.

Okay. And if I could follow-up, Dave, on the gross margins, it was a great quarter. It sounds like there was some software benefits in there. I think there's also some new product mix that you called out as well, 11 gigahertz. I know you've been working, you've got some routers and switches that have been factored into the mix. How should we think about gross margins going into the current March quarter? I know it tends to be volatile from quarter-to-quarter, but I assume the trajectory still continues to be on an upward basis, even though I guess we're going to have the first quarter of a full NEC contribution in March. How should we be thinking about gross margins?

Yes, okay, so this quarter was a record quarter for gross margins for the core Aviat business and again that was largely attributable to software and favorable project mix. I wouldn't expect that level of margins to persist in the near-term. On the core, it does tend to be a little bit lumpy, but we remain confident in our previous guidance of 100 basis points improvement for the full fiscal year versus the fiscal '23 on the core business. So now with Pasolink, that we do expect that to be somewhat dilutive to our margins in the near-term. Hence I think if you model gross margins in total to be in the 34% to 37% range for the remainder of fiscal '24, that would be good. And then we expect to drive synergies thereafter, which will drive the Pasolink gross margins further north and mitigate any dilutionary effect that they have.

Got you. Okay, very helpful. Lastly, if I could, Pete, just to follow-up on your comments on North America, just want to clarify not to read into the softness year-over-year. You continue to have a big backlog, it sounds like on public safety and other fronts related to ARPA. And if I could follow-up on the BEAD commentary as well. We've seen some commentary from Calix and others talking about a little bit of a pause, not just related to ACAM, but just kind of digestion and application for those BEAD funds, I know that traditionally has not been a big customer base of yours in terms of wireless sized BEADS. But I'm wondering if you're seeing any impact or any slowdown whatsoever ahead of those BEAD awards starting to happen in mid to late 2024? Thanks.

Yes. So first, we never thought BEAD was going to impact calendar year 2024. So in our script, we basically said, we think BEAD is still on track. We really believed it was going to have an impact say a year from now. So that's part one, and then part two, I think rational economics are starting to prevail, right? The whole idea of BEAD is to connect unconnected or underconnected Americans and for certain deployments in less dense areas suburbs and rural developments wireless makes more sense. And so we think that the oversubscription to fiber is starting to rationalize and we think that the opportunity for wireless will be improved. And what I would also talk a little bit more about is the six gigahertz frequency, it that's been delayed from the summer of 2023. Now the FCC is saying that that should happen on March 8. And we think that when that comes, that unlicensed broadband service comes in, it will pave the way for more lightweight backhaul and we think that's going to have a positive effect on both RDOF and BEAD appropriations. That was maybe more than you bargained for in your question, Scott.

That was perfect. Thanks, Pete. I'll get back in queue.

Okay.

Thank you. One moment please for our next question. And our next question comes from the line of Erik Suppiger with JMP Securities.

Yes. Thanks for taking the question. Congrats. First off, can you explain why the Pasolink revenue ramps up. What are the dynamics that are at play that start off small and then pick up? And can you give us some context in terms of how we should anticipate the contribution in the March quarter?

Okay. So the reason we are focused on a ramp-up is because we want to where the business is new to us and we want to make sure we set expectations and build into it. So it's not any seasonality or any customer dynamics. It's just the way we think it's going to take us a little time to ramp-up the factory, our order management system, our deliveries, so that's the way we want to deal with that. And then David, do you want to answer the range for the next quarter's revenue?

Yes, I think the range for next quarter's revenue should be thought of in the mid-20s kind of a range like Pete said, there will be a ramp up here, and we're pretty good with that number and we are going to do what we can to get some upside, but I think that's where you should be.

And Erik, just while we're on this, Scott asked about the ramp. You asked about the ramp. So let's get out the FY '25 revenue range for modeling purposes ought to be 5.15 to 5.20 for FY '25, so right and just for everybody who's on the call, we're on July 1 through June 30 cycle.

Okay. That's great. Then last question. You did talk about combining the products as your longer term roadmap. What is the timeframe in terms of getting the products combined?

I would say that's after year two, in the third year of ownership, we can start to see the convergence of hardware. And in the prepared remarks, we talked a lot about the software and the Pasolink customers are eager to migrate to the Aviat's network management software. So that's our first priority and we would hope that year one, year one and half, we will start to be able to deliver that software to the historical NEC customer base. And then in post year 24 months, we can start to see the convergence of hardware.

Great. Okay, thank you.

Thank you. One moment please for our next question. Our next question comes from the line of Jaeson Schmidt with Lake Street.

Hey guys, thanks for taking my questions. I just want to circle back to the gross margin. I know you laid out 34% to 37%, which seems like a little bit better than that kind of 33% initial number. Just curious what are the dynamics driving that? Is it just feeling better about the mix, whether it's product or geography in the core Aviat business or the Pasolink business getting margins lifted quicker than expected? Any color there would be helpful.

Yes. So the 34% to 37% was a combined number, right. So it's going to be -- we're assuming that the Pasolink business is going to be around 30% for this fiscal year, and just doing the math, that would indicate that the core Aviat margins are going to be in the 37% range or so. So we feel pretty good about that. And then we've got pretty solid synergy roadmap to improve our cost structure there and get the Pasolink margins moving north here in the not too distant future.

Got you. And then, Pete, I know in your prepared remarks, you talked about some potential revenue synergies, cross selling opportunities. Those aren't baked into your targets. But can you just discuss some of the areas or geographies you're most excited about?

So we're most excited about software and that would be every place other than in the U.S. It's particularly with the Tier 1 customers that came over in from NEC to Aviat and needed, so that would be part one. And then part two is we are very excited about Indonesia. And the reason we're excited about Indonesia and that was really Smartfren was a representative. So we think that Indonesia is right for private networks, there's an industrialized nation that has lots of microwave, but there's the Indonesia Telecom operators typically deliver the private network services, and this is what the Smartfren press release is about where we can go into Tier 1s in emerging economies and bring the Aviat private network offering and deliver to say mining oil and gas, public safety customers where they had principally been riding on the carrier's backbone and the number one geography for that kind of application is Indonesia. So to sum up, put it simply, we're most excited about software synergy sales and the region or the country we're most excited about is Indonesia.

Okay. That's really helpful. And then just the last one for me, and I'll jump back into queue. The India rollout, do you still expect that to happen here in the March quarter, and then to ramp again in June?

So I -- we're pretty confident that it will happen sometime between March 1 and June 30. So there's the quarterly timing on that. So that's what I would say, Jaeson. And I don't -- that can drive a little bit of lumpiness between the March and the June quarter. The good news is we're confident, we're engaged in the India customer base, and we're conservative with respect to our timing. So for modeling purposes, put it in the June quarter, but it could happen in the March quarter.

Okay. That makes sense. Thanks a lot, guys.

Thank you. One moment please for our next question. And our next question comes from the line of Dave Kang with B. Riley.

Thank you. Good afternoon. Going back to Indonesia, so once it gets going, I mean, how big can it get? Can it become like maybe 10%, maybe high single digit?

High single digits definitely 10%. We'll see, but we don't -- we're not anticipating that at this point.

High single digits is the right answer, I think, for now.

Got it. And then, equally on India, how big can they get?

We would say a little bit lower. Yes, a little bit lower than Indonesia.

Okay. Got it. And then what about margins from Indonesia and India as well? I mean, are they going below I assume they can be below corporate average?

So look, India, we've said before, is below corporate average. But as we get volume, we think that we can do -- we can take cost out. On the look, the Indonesia business is being driven by The Pasolink product, which is below corporate average. And so I would say for now that's the way to think about it. But we've said that we would get the Pasolink gross margins from 30% to 33%. And we've also said that when we get to that 33% level, we'll have another vantage point, and then we'll start talking about how far we can go beyond the 33% gross margin level. And that is -- the Indonesia business is principally, Pasolink and I think that's the best color we can give from our vantage point today. And ask the same question in a couple of quarters, and hopefully, I'll be able to give you a more favorable answer, Dave.

Got it. And my last question is, can you just talk about pricing environment, any changes up or down?

Stable.

Stable.

Stable. Got it. All right. Thank you.

Thank you. One moment please for our next question. And our next question comes from the line of Tim Savageaux with Northland Capital Markets.

Good afternoon.

Hi, Tim.

Congrats on closing the deal. Let's see, where to begin here. The backlog commentary, and while I appreciate the growth metric. Got a few more questions on that, which is I think you gave us at last fiscal year-end, associated with that 18% gross for the backlog of $289 million given your book-to-bill commentary in the interim, or I assume that's higher. Well, I would love to get as much specifics as I can. I assume we're reasonably at the $300 million but do you have any color or commentary on that?

I think your math there, back of the envelope is reasonable as far as north of $300 million.

Actually, Tim, we don't have the math broken out in front of us, but it's pretty simple math.

Yes. And my simple math points to a pretty darn good book-to-bill coming out of all that as well, I'd say comfortably over 1. But in that context, you seem to be and you typically see seasonal declines in revenues in Q1, given your kind of implicit Pasolink guide, you seem to be guiding to that again. So just sort of typical carrier spending behavior in certain quarters or what are you seeing in terms of typical seasonality, March down, June up, sounds like India could help that, but…

Yes, just to clarify, you're talking about calendar Q1 or Q3, right?

That is correct. Sorry, yes.

Yes, I think we would agree with your statement, Tim, with that. So we hope to do better, but we need to own the Pasolink business a little bit longer to understand the seasonality. And we're hopeful that shortening the cycle time, working the inventory down will lead to faster delivery of product, faster revenue ramps. So I think with where we're at right now, we would agree with your statement and we hope to improve the business where we could say, well that pattern will no longer hold. And I think that, that would be we'd have a vantage point for the fiscal year '25 to make that statement for -- make a different statement, but your statement for where we are now is most likely correct.

I'll take that, given today. Okay. Well, I think we might be mixing up Aviat standalone seasonality in March and in Pasolink in June. But assuming maybe some degree of uptick in Pasolink revenues, as you move into June, I mean you look to be guiding the standalone business. It's a pretty solid growth this year, right, 7%, 8% something like that. And you look to be guiding it flat next year, which is a little – wait a minute please Pete, which is a little bit dissonant with some of the bookings and backlog and commentary that we've seen, that assumes that Pasolink gets to a full 140 and maybe that's not a good assumption, but there still seems to be a lot and not flat, up 1% to 2%, I guess. And I'm not reading that kind of change in your business. So maybe we can delve into that a little bit deeper.

Yes, so look for we typically guide the next fiscal year in August. And for where we're at now, we want to be conservative and I wouldn't read you're right. We came out with the backlog statements, we think the core is healthy. What the analysts have said to me, if we don't give a number, you'll put the number together on our behalf. So you're right to give us a bit of a hard time on the FY '25 number. This is where we're comfortable, but as time goes on, I would expect us to do better, but that's the number we're comfortable with right now.

Yes. Don't know if that was a hard time, just doing a little math here. But I hear you. A couple more quick ones. So obviously, the gross margins were surprisingly strong, especially given the international mix. You cited a couple of factors and you're also very strong. You appeared to be in APAC, it might have been LATAM as well. Can you talk a little bit more about kind of what happened there in that region and how you're able to have high end of the range gross margins with that degree of international mix?

Yes, like I said, I think if you look at the regions where the region, where the software was most beneficial, it was in APAC. And then also in the Americas, Pete mentioned the record store revenues in the first half that also is margin accretive as well as we had some favorable easing material input costs. So that provides a bit of a tailwind to us as well. So all those factors combined really kind of a confluence of events, but again it could be a little bit lumpy, but so I think our full-year guidance is solid.

Okay. And last one for me. You noted R&D up pretty sharply here in the quarter. I assume that's still standalone or does that include anything from NEC given when you closed it on the one hand? And on the other, when you talk about incremental spend in R&D, is it from that elevated baseline or some other baseline?

So the R&D does include a month worth of NEC additional costs that are contractually spelled out with them. And then we were up on just an organic basis as well. That's a planned increase as we work to develop the product roadmap. So it was a little bit lower than we had anticipated in Q1, if you will. But I think we're on track for kind of our full-year guidance there and not overspending in any way. It's rationally thought out and this is what we had planned.

Okay, fair enough. But it sounds like maybe something a little over the Q1 '24 expense baseline? Would it be relevant for your incremental guide than Q2 per se since it's a stub. Is that [indiscernible]?

Very fair.

All right. Great. Thanks very much.

Thank you.

Thank you. I would now like to hand the call back over to CEO, Pete Smith for any closing remarks.

Thanks everyone for joining. We look forward to updating you on our continued progress in about 90 days. Be safe. Talk soon.

Thank you for participating. This does conclude today's program, and you may now disconnect.