Aviat Networks Inc (AVNW) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Aviat Networks fiscal second quarter 2013 earnings conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for your questions.

(Operator Instructions)

Today's conference is being recorded, January 30, 2013. I would now like to turn the conference over to our host, Peter Salkowski, Investor Relations, Aviat Networks. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to our second quarter fiscal 2013 earnings call. I'm joined by Mike Pangia, President and Chief Executive Officer, and Ned Hayes, Senior Vice President and Chief Financial Officer.

During this conference call, we'll make forward-looking statements regarding our business, including statements relating to projections of earnings and revenues, business drivers, the timing and capabilities of new products, network expansion 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. For more information, please see the press release and filings made by the Company with the SEC. These can be found in our Investor Relations section of our website, which is www.Aviatnetworks.com. Now I would like to turn the call over to Mike.

Thanks, Peter, and thank you all for joining us today. I am pleased to report one of the strongest quarters for Aviat Networks in some time. We had excellent top line momentum and another quarter where orders were greater than revenues. As stated in the press release we published this afternoon, we outperformed compared to both our original revenue guidance and the revised guidance we issued on January 14th, completing our fiscal second quarter with revenue at $129 million. In fact, on an absolute basis, this was our highest revenue quarter since the fourth quarter of fiscal year 2009.

The fiscal second quarter revenue performance was driven by both strength in Africa and seasonality. We also had another solid quarter in North America. Non-GAAP gross margin was within guidance at 30.2% of sales. Relative to our results in the past two quarters, I am pleased with the Q2 margin improvement as we begin to see the initial positive impact of the transition to new products. With new product volumes growing, our gross margin will improve further in the coming quarters. Our non-GAAP OpEx in Q2 was within our guidance range at $31.8 million.

As mentioned in the past, we are striving to be more efficient in our back office processes, while we evaluate and make selective investments in product and go-to-market activities. The combination of improving margins and careful management of expenses will continue to have a favorable impact on our EPS. As projected in our last report, we were able to build cash during the quarter. The ending cash and cash equivalents balance was $94.8 million, which was $9.7 million above our Q1 fiscal year '13 balance. It was primarily strong collections throughout the quarter that contributed to the overall favorable result.

With such a great quarter now behind us, our challenge will be to replicate this level of performance on a more consistent basis going forward. We understand that in a flat to single-digit growth market, with distressed macro backdrop, this will require taking share from others in what is and will continue to be a very competitive environment. We need to secure additional Tier 1 anchor accounts and begin the process of expanding our addressable market by entering new geographic and vertical markets. This will require upfront pricing to be aggressive, in addition to the TCO and value differentiation we can provide, while at the same time converting our actions to an improving business model. Notwithstanding the degree of difficulty of overcoming the challenges before us, I remain confident that we are doing the right things towards meeting our objectives.

With that, I would like to provide an update on the microwave transmission market. On a global basis, mobile back haul continues to be our primary addressable market segment. Revenue from this segment continued the upward trend we have seen over the last few quarters, from a combination of network expansion, lease line replacement, and capacity upgrades, all driven by subscriber growth and rapidly increasing mobile data demand. We expect the demand for back haul capacity to continue growing, as the competition in smartphones and tablet technologies makes these devices more affordable, thereby driving further demand for data-based applications and the need for greater back haul network capacity.

LTE deployments, which have been the primary driver in the North American and mobile market, are now picking up pace in other parts of the world, with more and more operators announcing plans to deploy this technology. The pipeline of opportunities from other market segments, such as public safety and national security networks, both in North America and other parts of the world, is encouraging. While the interest in creating alternative long distance, low latency microwave routes also continues to grow.

Now, let's take a closer look at our fiscal second quarter business by geographic sector. In North America, the Company received a large order from a major city government for a public safety network and saw an increase in orders from our mobile operator customers as they continue their 4G/LTE network build. We also secured another significant low latency project with a global financial institution. We continue to excel in winning service business in this sector as customers realize that our project management skill and reliability are tops in the market. This strength is both with mobile operators, as well as with private network utilities and governments.

Orders from African mobile operators continue to be strong and were consistent with the high volume observed in our first fiscal quarter. In Nigeria, and in the few other large and more mature countries on the continent, operators are investing in network improvements to increase their service competitiveness, as well as responding to tremendous growth in capacity demand, mostly driven by data transmission. In a midyear investor presentation, MTN reported substantial growth in data traffic and this was reaffirmed in their September reporting, where they stated that their Nigeria traffic measurements doubled within a quarter. We believe that these factors have supported our strong orders and revenue performance in the first half of our fiscal year and are an indicator that makes us optimistic for the coming periods. In addition, we are seeing similar growth from other mobile operators on the continent, and we believe we are very well positioned to compete successfully for this business.

In Europe, orders were flat from the prior quarter, but we have seen some signs of recovery. While business has been less than what we would like to see in this region, we continue to work with our existing customers and are adding resources to address new customers and geographies. Network operator CapEx spending in the region remains relatively high and we believe we can capture a greater share of this business. In Asia-Pacific, our second quarter orders were flat compared to the first quarter, as some of our bigger customers continued to deploy the large orders that we delivered in the past year as they begin to roll out LTE service. Our sales force is engaged with a number of large, larger operators in Southeast Asia, as they develop plans to launch advanced IP-based networks. We expect improving business in this sector in the coming quarters as a result of these efforts.

Now, an update on our products. We continue to make progress against established product development plans. In November, we announced the ODU 600T, which is a derivative of the ODU 600, that provides ultra high capacity split mount trunking solutions for our international market. This product delivers superior performance at a lower cost to competing trunking solutions that rely on more expensive indoor equipment.

The Company also completed development work on additional ODU 600 frequency bands during the quarter and expects the remaining frequency bands to complete by the end of the fiscal year. This product now accounts for over 80% of our outdoor radio shipments compared to 65% in the first quarter, and 31% in the fourth quarter of fiscal year 2012. We continue to work towards the initial introduction of the converged transport router product line, planned for the second half of fiscal year 2013. The Aviat CTR 8000 family of products will start undergoing customer evaluation in the coming months. This family represents the future of highly integrated microwave networking and offers our customers an elegant migration path by reusing much of the network investments that they have already made.

Now, I would like to discuss our fiscal year 2013 key objectives and progress. As mentioned last quarter, our focus remains on the continued acquisition of new customers, accelerating innovation in wireless transmission, investing in our service capabilities by leveraging our network operating center and turn key services, and improving costs and operational efficiencies. I am pleased with the progress we are making. We continue to broaden our customer base in all markets, but we are diligently working daily to maintain our very high customer retention rates. Our technology road map is on track. The introduction of new, more cost efficient and higher performing products are moving forward at a steady pace. We will see further introductions in the coming months. Demand for our entire services portfolio is increasing. We continue to see our project management skills and dependability as areas of distinct competitive advantage over others in the industry.

Several internal projects are underway to improve our operational cost efficiency and they are showing results that will support our plan of optimizing expenses each quarter. That said, we are also investing in our go-to-market resources, particularly in those regions where we can regain market share and expand our coverage. We are also making a major investment in updating our ERP system over the next few quarters that will lead to process and cost efficiency, better controls, and improved use of our maturing and stable supply chain. Now I would like to turn the call over to Ned for an overview of our financial results. Ned?

Thanks, Mike. Our GAAP financial statements, along with the reconciliation of non-GAAP financial measures, are included in our press release issued today, following the market's close. I would like to take a few minutes to summarize our non-GAAP financial performance at a high level. As Mike previously mentioned, we had a very strong quarter. The key highlights were revenue for FQ2 came in at $129 million, which was above the top end of our preannounced revised guidance range. Sales were particularly strong in our reported Middle East and Africa sector, at $63.9 million. And we saw a solid performance in our North America sector, at $41.4 million.

In terms of product and services revenue mix, we again saw strength in our services business, with the split coming to 73% product and 27% service in the quarter. Our service capabilities are clearly a key differentiator in winning and supporting deals worldwide. Our significant Tier 1 mobile operator in Africa, MPN, was once again a 10% customer in the second fiscal quarter. As mentioned earlier, this customer is investing heavily in network equipment and capacity additions, and we intend to earn as much of that business as possible going forward. Non-GAAP gross margin for the quarter was 30.2% of sales, which was within our guidance range.

As mentioned earlier, some of the cost benefits of moving the outdoor radio business over to the ODU 600 are beginning to be realized in gross margin improvement. Further, non-GAAP gross margins for both product and services were solid, with product margins amounting to 30.5%, and services margin amounting to 29.6%. This allowed us to deliver a second consecutive quarter where non-GAAP gross margin rates made a substantial sequential improvement. 60 basis points above our first fiscal quarter is a non-GAAP gross margin rate. Non-GAAP operating expenses for the quarter totaled $31.8 million and were also within our guidance range. While we are seeing additional selling expense related to strong year end bookings performance, we continue to see cost efficiencies within G&A. That said, we are making selective investments and additional selling resources, consistent with our plan to expand our customer base in areas where we see business opportunities, as we have mentioned in previous reports.

Second fiscal quarter adjusted EBITDA was $8.7 million, which compares favorably with our first quarter results of $4.7 million, and to our year-ago quarter's adjusted EBITDA of $1.5 million. Net -- non-GAAP income from continuing operations earned in the quarter was $6.5 million, or $0.11 per fully diluted share. We often speak to the leverage in our income statement and the various levers we have to manage non-GAAP operating margins. As we have described in earlier reports, our target model operating margin is in the high single-digit percentage range. In FQ2, our non-GAAP operating margin reached 5.6% of sales. We continue to maintain a very strong balance sheet, with $94.8 million in cash and equivalents, and debt of only $10.8 million. Net cash, that is cash less debt, amounted to $1.37 per share.

As mentioned earlier, and as discussed with you in our last earnings call, we are expecting to perform well with receivables collections in the quarter, and we did just that. With this very strong collections performance, we reduced net receivables to $99.1 million, and our DSOs came down to 70 days, the lowest level observed post merger. We saw a small increase in overall inventories to a net value of $73.9 million. This was related to customer schedules that drove us to build finished product and projects that are in the process of being commissioned and accepted by our end customers. Having said that, with the increased volume in this quarter, our inventory turns actually improved to 4.9 turns.

Our payables balance decreased to $42.4 million, or 43 days of DPOs. GAAP cash flow from operations generated $12.7 million, with CapEx in the quarter of $2.3 million, our free cash flow stood at positive $10.4 million. All in all, despite the quarter-to-quarter gyrations, net cash performance for the first half of the fiscal year was largely as we expected. During the quarter, we increased our liabilities for uncertain tax positions, under FIN 48, and recorded a GAAP income tax reserve of $9.9 million. This was primarily attributable to a tax audit related to historical years, in a foreign jurisdiction.

Now, let me conclude the financial section of the call with our guidance for our third quarter of fiscal 2013. Based upon current trends, our revenue outlook range is $115 million to $121 million in our third fiscal quarter. Our strong bookings performance over the past several quarters provide us confidence to maintain the floor on our revenue expectations, but we are not expecting to hit the same revenue as the seasonally strong second fiscal quarter. As mentioned earlier, we believe our FQ2 over performance is attributable to an extraordinary period of buying in Africa and seasonal factors associated with the end of the calendar year. While we expect continued order strength from Africa, our bias is to base guidance on the near-term visibility provided to us by our backlog and the historical context that our second and fourth fiscal quarters have somewhat stronger seasonality in terms of bookings and revenues than that observed in our first and third fiscal quarters.

Now, regarding guidance, over the past couple of years during our recovery, we have been providing various measures of guidance, starting only with revenue and then, as our confidence grew, we progressively added other elements, like cash, gross margin rate, and OpEx. We believe the time is right now, for the Company to begin providing guidance at the non-GAAP income from continuing operations per diluted share, or EPS level, and move away from any more detailed income statement element outlooks. We have demonstrated consistent execution in the recent past and we will continue to focus very intently going forward on improving non-GAAP gross margin rates and optimizing our non-GAAP operating expenses. Going forward, we'll only be providing qualitative color on these two metrics, with a guided non-GAAP EPS range, reflecting the levers we have at our disposal, from top line through expense, to deliver on the bottom line.

We expect FQ3 non-GAAP gross margin rate to be consistent with our previous guidance, that gross margin rates will be above 30% in the second half of our fiscal year. We continue to caution that as we've experienced in our last couple of quarters, mix can have a significant impact on gross margin rates in one direction or another. Given the variability in product mix, geographic mix, services volumes, carrier choppiness, timing of customer deliveries, especially for larger projects, and pricing, the gradual improvement in margin that we expect to achieve over time may not be linear. We will maintain our focus on modulating operating expense to deliver on the bottom line. We expect non-GAAP operating expense to experience a slight sequential increase over last quarter, largely due to our decisions to make certain selling resource investments in markets where we believe there are attractive business returns.

On a go-forward basis, opportunities remain to further optimize and better align our spending, especially G&A, and ensure that we are investing in those key areas, supporting our target objectives and non-GAAP profitability. The Company expects to earn non-GAAP income from continuing operations in the range of $0.02 to $0.06 per diluted share in the third fiscal quarter. We are anticipating solid cash collections in the third fiscal quarter.

However, in view of the very strong collections performance in fiscal Q2 and some one-time disbursements in the first quarter of the calendar year, such as an additional payroll run, higher than normalized payroll taxes with FICA, corporate insurance premiums due, and property taxes to be paid, we anticipate that we may use several million dollars of the current cash balance in fiscal Q3. Over the longer term, our goal and expectation is to accumulate additional cash, but it may not be necessarily in a linear pattern, so you can expect to see the Company use some cash in some quarters and generate it in others, as we respond to the working capital needs of the business.

As we previously stated, we expect our 2013 fiscal year end net cash position to be about the same as the levels observed at the end of fiscal 2012. As we mentioned in our last call, we are including an estimated cash tax expense in our non-GAAP results this fiscal year. During fiscal Q2, we estimated $650,000 in cash tax expenses and business models should include a similar amount for fiscal Q3. So with that update, I'll turn the call back over to Mike for his executive summary. Mike?

Thanks, Ned. We have come a long way with respect to our financial performance. To illustrate, I would like to share some calendar year financial data, which said in another way, is represented by our trailing 12-month performance ending on December 28, 2012. Despite a challenging calendar 2012 macro environment, we were able to grow calendar year 2012 revenues 4.2% year-over-year to $471.6 million. This above-industry revenue growth was achieved while reducing non-GAAP operating expenses by 5.1% and still maintaining the same level of R&D investment on a year-over-year basis. This performance resulted in 2012 calendar year non-GAAP EPS of $0.22 in 2012 versus only $0.04 in 2011.

I am very pleased with our ability to reestablish Aviat Networks as the leading independent microwave back haul provider, while remaining focused on returning value to our shareholders. We remain committed to investing in the top and bottom line growth of the Company and my confidence in our business and the approach we are taking continues to grow. In closing, our order backlog is strong and our visibility is improving. We are deploying new products and solutions to the market and we have more new products in the pipeline. Our competitive position, as measured by total cost of ownership, is as strong as it's ever been and we are focused on continuing to improve it.

We are making the right moves in trimming expenses, while investing in areas that will enhance the top and bottom lines. We are well positioned to continue year-over-year growth by regaining share lost in mobile back haul and entering into new vertical markets. We believe our business is at an inflection point for enhanced profitable growth, which should result in increased shareholder value.

Before turning the call over to the operator to take questions, I would like to take this opportunity to congratulate all of our employees on a worldwide basis for achieving outstanding results across all of our key operating metrics during the Company's fiscal second quarter, and I would like to thank everyone for their diligent efforts. Now, I would like to turn the call over for questions. Operator, you may now proceed with the Q&A.

(Operator Instructions)

Rich Valera, Needham & Company.

Thank you, and congratulations on the strong results, gentlemen.

Thanks, Rich.

Sure. Quick question on the gross margin. Just wanted to understand the trajectory here and some of the leverage you have to play with. I missed the number, but it sounds like something like 80% of your products shipped now use the ODU 600, which is a pretty high percentage. Wondering, one, how much you have left there to help the gross margin with just the conversion to the ODU 600?

And following that up, what other levers do you have to pull on the product side to maybe help the gross margin? And obviously you're trading that off against, you said in your prepared remarks, Mike, trying to crack into some of these Tier 1s, having to offer some fairly aggressive upfront pricing. Just wanted to get your thoughts on how those different dynamics play out in gross margin and how much more juice you have on that ODU 600 transition.

Yes, that's a great question. And let me start off by saying that, as we said in our release today, or at least in what we have just spoken about, is that we are starting to see the initial impact of the ODU 600 on our margins.

We talked before about any time you move into a new product transition, the initial cost of those new products, albeit they start out lower than the product they are replacing, you're not really getting to that optimal cost point until you've reached certain volumes. We're now starting to approach those volumes as we enter into our second fiscal year. There's still more room on the cost side of the equation relative to where we are today, as well as that mix will continue to grow towards that, ultimately towards 100% over the course of the next few quarters.

We also have, in addition to the ODU 600, we still have other product introductions which will enhance our margins in the near to medium term. We have a next rev of our IRU 600 product, which is a flagship product in North America. That will happen over the course of the next couple quarters. We also have some other additions. I talked about the ODU 600T, as an example, where that will start growing in volume.

So, there's a number of things on the cost side of the equation over the next few quarters that give us increased confidence in our margin's improvement. With respect to actually having an effect at the product side, Ned, you might want to give Rich some data on the split between product and service margins.

So we were quite delighted, Rich, especially quarter over sequential quarter to see the improvement of product margins. You'll remember last quarter they were in the mid-27% range.

Sure.

And now we're calling them out at 30.5% range. And again, the line of sight that we have in terms of shipments and our continued progress in cost reductions, especially on the ODU 600, and the very strong pricing strength that we have with the IRU 600 in North America, we see plenty of room to grow.

That's helpful. And similar question on the OpEx line. You talked about a little incremental investment for targeted sales opportunities in the fourth quarter. Should we look at that as perhaps being sustained as we look out into the next fiscal year? Or look at March, March-June, or is that something where you would hope to offset that in subsequent quarters with expense reductions in other areas?

I think if you take a look at how we have been performing on the OpEx side, we've been hovering between that $31 million to $32 million zone, and coming off $31.8 million, let's just say that we're hovering around the $32 million. The components within that have moved. We are increasing our investment in our sales and marketing expense and at the same time, we're reducing it in areas like G&A.

And as we -- just to clarify something, the investment that we're making on the sales side, and we'll continue to make those, the impact of those investments will probably be more felt in the coming fiscal year than your reference to the fourth quarter. It does take some time when we're making the investments in terms of the sales cycle to get the benefit of those.

So I look at it as, that $32 million range, plus or minus on a given quarter, relative to where the top line might be, that's probably an area that we see ourselves in the zone. And we'll continue to optimize the spending in that bucket.

The only thing I would add, Rich, would be the following. We as a management team take a long, hard look at expense-to-revenue ratios. If you take a look at the year-ago quarter, our expense-to-revenue ratios were close to 31%. We're closing out the quarter here under 25%.

Secondarily, I think some of the investments that you're seeing right now, away from R&D and away from marketing and sales in G&A, in the introduction of a new ERP system, is going to be able to help us drive significant further efficiencies in G&A well into the next fiscal year. So I think, again, we'll have plenty of room here to continue to optimize and make the go-to-market investments that we need to, to attack the addressable markets and geographic markets that we don't do today.

Great. That's very helpful. Thanks, gentlemen.

Thanks, Rich.

Barry McCarver, Stephens and Company.

Good afternoon, guys. And great quarter. Congratulations.

Thank you.

Thanks, Barry.

Just thinking about the revenue guidance for the coming quarter. Obviously you are expecting a pullback from this quarter. Can you break it down, is there some seasonality in that? Or was there a particular market in 2Q that may have pulled in more revenue into Q2 than you were originally expecting? I just want to make sure we understand the outlook for a base of revenue in the next couple of quarters.

Yes, so this is, as I talked earlier, our -- I guess our challenge, as well as our opportunity, is to start generating more quarters like the one that we just came off of, more consistently in the near to medium term. And if we take a look at our second quarter, first thing is very much a natural quarter with respect to meeting customers' needs. So sometimes the word pull-in is used in a negative manner. In this particular case, the customer needs is what drove the $129 million.

And what we talked about when we provided our revised guidance, we did go $3 million above that top end. And we had a number of projects related to North America that took us a while longer through the close process to assess. We had those originally scheduled for the third quarter, but we met, the acceptance by the customer was met before that. So that's what caused the upside.

And I look at it and to still be in that $115 million to $121 million zone we gave, if you take a look at the midpoint of that quarter on its own and you compare that to the third quarter the prior year, we're still showing a nice uptick year over year. So I think it's very positive to come off a quarter that we came off and still maintain the level that we're at for the third quarter.

Also, if we all step back a year ago, and you take a look at, I don't think anyone would have thought that we would have been able to reach -- achieve a level like that this early on based on where we're headed. And even ourselves, if you take a look at where we've come from, we started out talking in the $100 million to $110 million zone. Then we moved it up.

We looked at $115 million at a point in time as being at a level that we would like to get at as a run rate and here we are in the third quarter, quite nicely, as that being the floor. We feel very good about where we are and we still see prospects moving forward to get us into an even higher level of consistent run rate.

Great. That's good insight. And then just secondly, in your prepared remarks, you mentioned a large municipal contract that you were setting up. I was wondering, is that in the numbers, or is it something that you would be building in the future? And additionally, is that in any way related to some of the natural disasters or weather we've seen in the northeast? Are you seeing those type of events strengthen the demand for the microwave solution?

The latter part of it, no, it's not related to any of that weather in the northeast. And then as far as the impact, I believe that we took a portion of that order, of revenue in the second quarter.

About half.

About half. So therefore, the balance to come was spread over the next couple of quarters.

Okay, great. Thanks a lot, guys.

Okay.

Aalok Shah, DA Davidson.

Congratulations. Good quarter. Mike, in terms of how we should think about the year itself, you're coming off a great quarter. I know you've talked about it a couple times already, but the lumpiness of the quarter is something that I think, I just want to understand a little bit better. I understand that you had a much better Q4 because of seasonality and some trends in Africa. But the overall pattern in terms of how we should view each quarter in terms of the lumpiness, Q2, Q4 is better, do you expect that to be the path again this year?

And then also, in terms of the new products, how should we think about how far along you are in terms of new product cycles and is it another 12-month or 24-month cycle to get to a point where you think you'll see the full benefits of those margins? Maybe you can outline a couple of those and I have a couple other follow-ups.

Yes. So the first thing, so the color we provided is that we are using the past here as an example as a baseline around seasonality was difficult because we had the Thailand situation in our last fiscal year, which limited our ability to be able to address some of that calendar year end budget flush is another way of saying it, with respect to the North American market.

And then just the way the cycle works in Africa is that they are on a calendar year and usually what we see is in the month of January, we go through with one of our larger customers. We go through a regular process where we're discussing pricing and other terms for the following year. So from linearity perspective, we usually start out our third quarter lighter and then we build it out through the rest of the quarter.

Having said that, as Ned mentioned, we do see the fourth quarter and the second being the better quarters of the year. That would suggest to be building a model off of that would say that the fourth quarter should represent an improvement from the third based on seasonality. Although we're only providing guidance at this time for the third quarter.

Then the second part. On the product rollout side, the refresh of our outdoor radio unit portfolio completed by the end of the year, we will have an improved IRU 600 product before the end of the year and the combination of those two will be what will drive the bulk of cost improvement on our business model for this particular fiscal year.

As we -- we will continue to introduce new products, we've talked about our converged transport router, the impact that will have on our business will probably take some time, given the fact that we've got an existing product out there, with the Eclipse packet node, which does a phenomenal job with respect to our existing base.

As we start positioning our new platform, initially it would be very applicable to new business. That will allow us the ability to be, to have a better chance of penetrating those new accounts, utilizing more aggressive pricing. Because the one substantial difference, as we move to our next-generation technology was the architecture of the product line allows us to be able to go in and meet the needs of an RFP and deal with the preserved at value as we continue to upgrade in a much better way than our current portfolio allows us to do that.

So I think you'll probably see some benefits entering new accounts, but it will take more of a gradual time line relative to the indoor new product with the effect on margins. Hopefully that helps.

The only other thing, Aalok, I would add would be that you should not ignore the very strong margin performance that we're seeing in the services business. When I showed up at the Company a little more than a year ago, services margins were actually highly dilutive to gross margins.

You're seeing them being very supportive right now in terms of the high value add of the kinds of services that we're providing, in terms of network design and commissioning, knock and manage services, MLA service agreements, installation services and logistics, project management. All of those are being treated as very high value contributions from our customers and we're seeing relatively strong service margins at the -- as a result.

And if I could follow up on that real quick, in terms of how we should view the services revenue in general, is it a recurring revenue stream for the most part?

I wouldn't call it an annuity stream per se. I wouldn't go that far. Certainly, our MLA contracts, to the extent we've got very good attach rates, would be along those lines. To the extent that we are providing knock services and managed services for private enterprise networks, those are probably annuity streams as those customers likely will not be building microwave technology expertise in their staffs. But the other stuff in terms of network design, on a project-by-project basis, that's probably not as an annuity-like revenue stream as the others I've described.

And last question, if I could, you have mentioned a couple times about the low latency financial services market being a pretty good market for you guys. I'm trying to get a sense of how big an opportunity that really is and how much you think there's still left to penetrate in that market.

It's still early stages in that market in terms of we're actually part of defining the market, working with customers in this particular space. And to the -- the impact thus far from a revenue perspective has been less than from an order perspective. Some of these projects have a longer tail associated with the revenue, conversion to revenues as a result of building them out. But much more of an impact on orders than revenue and it's starting to be a decent amount. But still not in the same zone as what we would see from a typical mobile operator as an example in North America.

Great. Thank you so much, guys.

All right, Aalok. Thank you.

(Operator Instructions)

At this time, I would like to turn the conference back to management for any final remarks.

Want to thank everyone for participating in today's earnings call and thank you for your interest in Aviat Networks. I would like to turn the call back over to the operator to provide the conference call replay information and close the call. Thank you, and have a good day.

Ladies and gentlemen, if you would like to listen to a replay of today's conference, you may do so by dialing 1-800-406-7325, or 303-590-3030, and entering the access code of 4590206 followed by the pound sign. We would like to thank you for your participation. You may now disconnect.