Aviat Networks Inc (AVNW) 2015 Q4 法說會逐字稿

Good day and welcome to the Aviat Network's fourth-quarter and FY15 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Leslie Phillips, Investor Relations. Please go ahead

Thank you, Tiffani. Good morning and welcome to Aviat Network's fourth-quarter and FY15 results conference call. I'm joined today by Mike Pangia, President and Chief Executive Officer; and Ralph Marimon, Chief Financial Officer. This call is being broadcast live over the internet for all interested parties, and the webcast will be archived on the Investor Relations page of the Company's website.

During today's call, Management may make forward-looking statements regarding Aviat's business, including 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 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.

Please note that these forward-looking statements reflect the Company's opinions only as of the date of this call. The Company undertakes no obligation to revise or publicly release the results of any revisions to these forward-looking statements, in light of new information or future events. For more information, please see the Press Release and filings made by the Company with the SEC. These can be found on the Investor Relations section Aviat's website at www.aviatnetworks.com.

In addition, during today's call, Management will be referencing both GAAP and non-GAAP financial measures. A copy of the Press Release and financial tables, which include a GAAP to non-GAAP reconciliation and other supplemental financial information, is also available on the Company's website. With that, I will turn the call over to Mike Pangia. Mike?

Thanks, Leslie, and good morning to everyone listening on the phone as well as on the webcast. After the market closed yesterday, we published our fiscal fourth-quarter earnings release and filed our 10-K, within the 15 day extension period provided by the SEC. The delay was primarily related to an issue with our project accrual accounting that was uncovered during the annual audit process. While we will provide more details about this later in the call, this accounting issue resulted in several adjustments to our fiscal fourth-quarter results. Even with these adjustments, our fiscal fourth-quarter results show improvement across many areas of our operations, including non-GAAP operating expenses and cash flow from operations.

Our pace of business remains strong. During the fourth quarter, we announced new CTR wins in the Middle East and Asia Pacific, and began deployments of our CTR product with a new Tier 1 mobile operator in the United States, under the contract announced last week. These, and other contracts, drove another doubling of CTR orders, quarter-over-quarter. In addition, in the fourth quarter, Aviat was recognized as the top microwave specialist in a recent Infonetics survey. We have taken several steps to improve efficiencies and our business operations. As a result, we see an improved path towards sustained profitability and cash generation. We expect our Q1 results to show continued progress.

Before going any further, I would like to introduce Ralph Marimon, Aviat's newly appointed CFO. After conducting an extensive CFO search, Ralph joined Aviat in late May, bringing over 10 years of public company CFO experience in complex industries. We feel very fortunate to have him join the Management team. Welcome, Ralph.

I will now provide an overview of our financial results, followed by the fourth quarter's customer and product activity. Ralph will give a more in-depth review of our financials, and provide guidance for our first quarter of FY16. I will then close the call by discussing some of our objectives and business drivers for the upcoming year.

Now more about our results. Revenue for our fiscal fourth quarter was $87.8 million, with bookings during the quarter at their highest level. In FY15, we achieved a book-to-bill above 1. Momentum in bookings is being fueled by the CTR line of products and demand for our outstanding service capabilities. We are proud of our ability to provide a strong services component to our customers, ranging from network planning to design consulting. These services support the entire end-to-end product in network lifecycle.

Non-GAAP gross margin came in below our expectations, due to adjustments related to inventory and project accruals. Non-GAAP operating expenses for the fourth quarter of 2015 were in line with the $23 million run rate we anticipated. As with the past several quarters, we successfully reduced our OpEx spend significantly, year-over-year. These improvements are part of an ongoing effort to simplify our operations. We see additional opportunities to make improvements, both internally and externally, such as with sales process and tools to support closer collaboration with customers and suppliers.

While we might see some fluctuations, we believe this level of OpEx will be further reduced, while still allowing us to invest in growth opportunities. Adjusted EBITDA and earnings per share for the fourth quarter both showed improvement over the prior quarter, and year over year, even with the impact of higher inventory reserves and certain adjustments. During the fourth quarter, we had positive cash flow from operations. That represents the progress we're making at improving our business model. As we continue to focus on cash as a primary metric, we expect to make further improvements through FY16.

Moving on to some of our fourth quarter highlights and customer activity. In June, research organization Infonetics published the results of its annual Microwave Strategies and Vendor Leadership survey, based on input from mobile operators from around the world. Aviat was the top-rated microwave specialist in 2015. Aviat ranked Number 1 among all microwave specialist in seven of the ten categories, including security, where we were ranked Number 1 when compared to both microwave generalists and specialists.

We believe this recognition reiterates the strength of our brand. It also serves as further evidence as to how and why Aviat can compete and win against the microwave generalists. Also helping us win new business is our strength in support and services. You can see this reflected in nearly all of our FY15 contract wins, and we expect this important point of differentiation to set us apart, moving forward.

Throughout FY15, we worked diligently to diversify our global revenue base, adding new customers in North America, Africa and Asia. We are working to bring in new business from Latin America and Europe, where we continue to see compelling opportunities.

In the mobile operator vertical, and per our announcement last week, we are currently working with a Tier 1 mobile operator in the United States, on it's LTE expansion. This is the first CTR deployment with a leading mobile operator in North America. Beyond the technology and product, it was our strong services and network management capabilities that helped Aviat secure this new business. We've made great progress with this customer and have already made significant shipments against a multi-year contract.

In addition to this contract win, we strengthened our position in Asia Pacific, announcing multi-year agreements with Globe, a Tier 1 telecom provider in the Philippines. As part of the operator's LTE expansion, Aviat will provide our CTR, as well as microwave network planning and engineering. In Africa, mobile operators have faced macroeconomic challenges for the past few quarters, ranging from currency devaluations to political instability in some countries. We will continue to work closely with our customers in supporting their improved TCO objectives, by leveraging our strong experience in the region.

The MTN group remains our largest customer in the region, and we strive to exceed their expectations on a daily basis. MTN continues to invest in network performance improvements and in the enterprise segments. We believe our products, technology and services are extremely we'll suited to support these initiatives. From a long-term perspective, we believe Africa has all of the drivers for continued growth and it is a region we will continue to focus on.

Moving to our public safety vertical. Our operations remain strong in the fourth quarter, and we received significant orders from a leading, global-systems integrator. We announced an agreement with United Arab Emirates security agency to implement CTR microwave routers and a new public safety LTE network. The customer will, initially, deploy the CTR. When the customer then deploys commercial LTE, player-free services that the network adds will be introduced via IP MPLS technology.

We also had some key wins and other private network verticals, securing multi-million dollar awards with one of the world's largest investor owned energy companies, a new customer. And, a leading oil and gas company in Latin America. In Asia Pacific, we are working with a specialized carrier to support broadcasters with connectivity for mission-critical services. As highlighted in the Infonetics survey, Aviat ranked Number 1 in security, across both microwave specialist and generalists. Our focus on security greatly supports our strength in public safety, and other private networks, as Aviat can be relied upon for providing important, differentiated functionality and support services to match.

Moving to an update on our products. Over the past year, we executed well against our long-term road map, making further enhancements to our product portfolio with new microwave and IP routing solutions. We introduced variants of our CTR platform to specifically address lower-density networks. And, in September, we introduced an all outdoor version of the product. The CTR is a transformational microwave product line, since it efficiently integrates microwave transport and IP routing in a single solution.

The software defined functionality of the CTR platform allows us to expand it's capability over time, and create further revenue generating software releases in the future. We are pleased with the pace of adoption of our CTR product, and we now have over 50 customers using the CTR to address their networking needs. The product is well-positioned with new customer opportunities and is helping Aviat expand our position with existing key customers.

In addition to offering innovative products, and as mentioned earlier, we are also focused on services that enhance our customer's total cost of ownership. During the year, we expanded the number of customer networks managed from our North America network operations center, and extended our NOC operations into Mexico. The NOC increasingly enables us to monitor and optimize our customer networks. Our strong maintenance business represents a significant recurring revenue stream. And, we continue to develop our professional services portfolio as a key to our long-term strategy and differentiation.

Now, I will turn the call over to Ralph Marimon to discuss our financial results in more detail. Ralph?

Thank you, Mike. And thanks to all of you for joining us. If you've not already done so, I'd encourage you to download the financial Press Release from the Investor section of our website, that we posted yesterday. The release contains Aviat's audited GAAP financial statements, along with a reconciliation of non-GAAP financial measures.

Before reviewing the financial results, I would like to address the delay we had in releasing our earnings and filing our 10-K. During the course of the year-end financial close and audit, we found an issue with our accounting process, primarily related to project accrual accounting, which took extra time to resolve. As a result of this process, we made an immaterial revision to a prior-year financial statement, which has been reflected in our most recent filings. This revision had no impact and our cash flows.

Also during the close process, we identified material weaknesses in our financial controls, which are detailed in our 10-K filing. Management and the Board are committed to a strong, internal control environment. And, we expect to fully remediate these control issues in this coming fiscal year.

My prepared remarks will be focused on a non-GAAP financial overview of our fiscal fourth quarter, and the related business trends. Unless otherwise stated, and other than revenue, all dollar figures I provide will be on a non-GAAP basis. I will then provide guidance for the first quarter FY16.

Revenue for the fourth quarter came in at $87.8 million, up 17% sequentially, and up 3% year over year. Product revenue was 63% of sales and services were 37% of sales, compared to product revenue of 63% and service revenue of 37% of sales in the third quarter. Cash generated by operating activities was $500,000 in the fiscal fourth quarter, marking our strongest quarter of cash generation this year. As Mike mentioned, we believe this metric best represents the progress we're making to improve the business model. The Company ended the fiscal fourth quarter with a cash balance of $34.7 million, compared to $35 million at the close of the fiscal third quarter.

Gross margin for the fiscal fourth quarter was 21.4% of sales. Gross margin was below our expectations, primarily due to higher than forecasted expenses related to inventory and projects, which we do not expect to recur. Without these higher charges, gross margin would have been approximately 25%.

For the fiscal fourth quarter, our operating expenses totaled $23.2 million, down from $23.8 million in the fiscal third quarter. This sequential decline was driven by implementation of our expense reduction measures. Fourth quarter operating expenses were down $5.6 million, or 19% year over year.

Our loss from continuing operations for the fiscal fourth quarter was $5 million, or $0.08 per share, compared to a loss from continuing operations of $8.7 million, or $0.14 per share, in the year ago quarter. Fiscal fourth quarter adjusted EBITDA was a loss of $2.5 million, compared to a loss of $6.3 million in the year ago quarter. CapEx in the quarter amounted to $700,000. Free cash flow, which includes cash used in operating activities plus CapEx, was a use of $200,000 for the quarter.

Now, moving to working capital. Inventory turns improved to 7.1, from 5. DSOs were 91 days, compared to 84 days last fiscal quarter. And DPO were 61 days, compared to 60 last quarter. Strong inventory management improved the cash conversion cycle in the quarter. And AR collections and payments continue to pay similar to the past several quarters. For the FY15 results please reference the Press Release published yesterday. I would now like to turn your attention to guidance for the first quarter of FY16.

We expect revenue in the range of $78 million to $83 million. We expect breakeven to positive adjusted EBITDA, and breakeven to cash generation in the quarter. Regarding liquidity. We believe our existing cash balance, line of credit and expected future cash collections, will provide us with adequate liquidity.

Now, I would like to turn the call over to Mike for additional remarks, before we turn the call over to the operator for questions.

Thanks, Ralph. From FY15, demand for innovative products, including the CTR and strong service portfolio, helped stabilize the top line. In FY16, we will use these key differentiators to preserve our market share and expand our addressable market. In FY15, we also made great progress at optimizing our business model and sizing the Company to generate positive cash flow. Overall, we're entering FY16 with a significantly better financial and operational position than when we started the last fiscal year. While we are encouraged by this progress, we see additional opportunities to build out this momentum, increase our cash flows and create value for our customers and shareholders. I would like to thank all of Aviat's employees for their hard work and efforts.

Now, back to the operator for questions.

(Operator Instructions)

Kevin Dede, Rodman.

I've got a couple of questions for you. Book-to-bill seems strong. 50 customers on the CTR. I was wondering if you could give us a little more insight on how that customer base breaks down, between carrier and private network, or government?

That is primarily carrier mobile operators.

Could you review how you think they are looking at the TCO argument that you bring them? And, what sort of network reengineering you think is implied in pushing that routing capability to the edge?

Let me just, to simplify the answer, it is really driven off of the product as a layer [two] traditional transmission product. It has a lot more capability than the product it's replacing. In terms of its evolution, as we've discussed before, the ability to integrate routing functionality is a significant OpEx savings, from a hardware perspective as well as from an OpEx perspective. Obviously, if you're only dealing with one product, you've got one service, you've got less power consumption. And, all of those factors lead to the opportunities we have in front of us.

The one thing I will say about the product and it's innovative capabilities, it does take a longer sales cycle, because you are integrating both networking as well as the transmission area. In some cases, with customers, those organizations are still independent. And, there is quite a bit of interoperability requirements as well, because of the innovative capability of the product. We are very encouraged by working with several customers and demonstrating the product, and working through the long sales cycle. And more opportunities are opening up for us around the world. And again, this is primarily focused in on the mobile operator area here, internationally, despite the success in North America. And, obviously, we are also leading to some business wins in the public safety area, as well, as we announced our win the Middle East.

Okay. So, when you referenced interoperability, you're really referring to that platform's capability to support other vendors specific microwave lengths.

It's got to connect to other vendor products, given where it's positioned in the network. And, we are moving along very nicely in that area, in terms of some of that testing that we are doing with existing customers.

Okay, so, just another line of questioning. I know that you have been forced to resize the Company, and that includes IT support, and it probably includes other machinations in product manufacturing and customer support. I was wondering if you would not mind giving us a synopsis of where your infrastructure stands at this point. Where you're manufacturing, where you're distribution focus is, and whether or not you think you are in a position now to support your growth, going forward.

Yes. So, the actions that we've taken on our cost structure have been in many different areas, primarily focused in on operating much more efficiently, simplifying some processes. Also, as we've discussed in the past, taking a hard look at our markets to determine which ones we think represents the best opportunity for us going forward. I feel very, very comfortable that the actions that we have taken have positioned us to be a much stronger Company, in many ways and how we operate. And, we still have a number of opportunities in the area of simplification, and improvement from a spending perspective, that are actually -- there's a lot of areas that are actually not headcount related.

These are areas that include things like the impact of not having forecasting that is perfect, given the environment we are in. We are working on those types of initiatives, that will make us even stronger from a supply-chain perspective, in other areas. As far as how we operate and our focus going forward, we are very much intending to have a focus in on cash generation as our number one proxy, not necessarily the top line. Because of where we are going to focus, and we are looking for quality business rather than just chasing the top line, in the near term. We believe that we have all the right investments. And, in fact, we will invest more in the areas that we believe there is increasing opportunities for profitable growth.

Okay. So, it is comforting to hear, Mike, that your priorities have not changed. I was wondering if you might be able to peel the onion back another layer, and give us some insight on where your distribution centers are? I remember, it was not too long ago -- well, maybe, it depends on how you measure time, where you decided it was important to open a DC in Western Europe. I'm just kind of -- and I know you have had to consolidate manufacturing. I am just kind of wondering, where your assets reside at this point. And, whether or not those physical assets are sufficient.

So, I think if you are talking about our -- so from an operational perspective, in terms of our manufacturing supply chain, I think we're operating that as efficiently as we can. And, we are leveraging the best infrastructure to do that. I don't think that necessarily has any direct correlation to where we will be focusing our attention from a market perspective. From a market perspective, we have a global base of customers. And, I think we will continue to leverage that global base.

Where we see opportunities? We continue to see opportunities in our strongest markets. In both Africa and North America. And, we will continue to focus on those. Maybe I have not answered your question, perfectly. But, we feel very good about the infrastructure we have, and the locations we have it, to support our opportunities for growth.

Okay. You alluded to opportunities in Latin and South America. And, I guess I'm curious to know that your infrastructure, as is, will support opportunities as they emerge there.

I think relative to -- I think Latin America is a good example of, when I talked about Latin America, we are not going after business in all of Latin America. We know we have a couple of areas of strength there, and we are focusing our attention on the opportunities in those areas of strength. I don't think it is appropriate for me to spell out what those are, specifically, at this point in time. As we have business opportunities that are significant, that we will make public, then we will do that at the appropriate time.

I think when it comes to Europe, we all know Europe is a large area. We do have some strong bases within Europe. I think we've discussed before Eastern Europe as an example, where you have strong base. And, we see a number of opportunities with customers there.

Again, I think in the European side, what I would say is that there's obviously some challenges there, from a macro perspective as well. I think the currency devaluation of the euro versus US dollar has had some effect. But, again, we feel very good. And, again, fueled by CTR, about our opportunities there in Europe as well, in the areas that we are focused on within that large part of the world.

Okay. Last question for me. I am wondering if you would not mind giving us the top down view of the competitive environment? And, how flattish telecom CapEx spending has shaken things out a little bit, in light of the Alcatel/Nokia combination?

So, I think there has been a lot of reports that have come out, related to the microwave area. And, I think they all reflect somewhat of a flat market. We talked before regarding, it's hard to look at the market from an overall perspective, without peeling the onion back and looking at where there is growth, versus where there is, perhaps, contraction. I think if you take a look in the last several quarters, and again, based on the competitive landscape, I think India has been an area of significant growth in this space. We obviously do not operate in India. That is an area that has had a lot of attention.

I think Europe is in a market which has had challenges, we've discussed. I think Africa has had some challenges, as I also mentioned earlier, regarding currency valuations, fluctuations. North America continues to be, I think, a very strong market.

We believe, again because of our position as both in mobile operator as well as public safety private networks, there continues to be opportunities. The challenge in North America is always timing, because a lot of the opportunities outside of mobile are large and binary. And, when they're won, it has a huge impact on the booking side. And, it takes a few quarters for that to convert to revenue. We feel very good about that as well.

Our competitive landscape, primarily, is when we compete primarily against the large generalists. And, our focus and our attention as a specialized provider in this area is what sets us apart. Our service capabilities, our ability to design networks to deliver our products on time, within a very, very strong lead times. And, all of our post-sale support activities are the things that set us apart from the generalists. We feel very good about our competitive position around the world, both against generalists and specialists.

Okay, Mike. Thank you so much for addressing my questions. Appreciate it.

You are welcome, Kevin. Thank you.

There are no other questions in the queue at this time. I would like to turn the call back to Leslie Phillips.

Thank you. I want to thank everyone for your participation today. And, thank you for your interest in Aviat Networks. This concludes Aviat Networks fourth-quarter and FY15 earnings call. Good bye and have a great rest of your day.

That concludes today's conference call. Thank you for your participation.