Aviat Networks Inc (AVNW) 2017 Q2 法說會逐字稿

Welcome to the Aviat Network's fiscal 2017 second-quarter results conference call.

I would now like to turn the call over to Mr. Glenn Wiener. Please go ahead, sir.

Thank you, Operator, and welcome to Aviat Networks' fiscal 2017 second-quarter results conference call. We issued our press release after the market closed and posted an updated investor presentation on our website in the Investor Relations section. Additionally, the Company intends to file its Form 10-Q with the Securities and Exchange Commission on or before February 13th.

Joining us on today's call will be Michael Pangia, President and CEO; and Kevin Holwell, our Vice President of Finance; and Eric Chang, our Principal Accounting Officer. Ralph Marimon, our Chief Financial Officer, unfortunately is not able to join us today due to a personal family matter.

During today's call, Management may make forward-looking statements regarding Aviat's business, including statements related to projections of earnings and revenue, business drivers, the timing and capabilities of new products, network expansion by mobile and private network operators, and economic activity in different regions. These and other forward-looking statements involve assumptions, risks, and uncertainties that could cause actual results to differ materially from those statements. Please note, these forward-looking statements reflect the Company's opinions only as of the date of this call, and the Company undertakes no obligation to revise or publicly release the results of any revision of these forward-looking statements in light of new information or future events.

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 in the Investor Relations section.

Our call today is being broadcasted live over the internet, and the webcast will be archived on the Investor Relations page of our website for those who are unable to join us.

At this time I'd like to thank you all for your interest and support of Aviat. And with that, I will turn the call over to Mike Pangia. Mike?

Thank you, Glenn. I'd also like to thank everyone joining today's call.

I'm very happy to report that in our second fiscal quarter we were profitable on a net income basis both GAAP and non-GAAP. We reported non-GAAP earnings per share of $0.57 and adjusted EBITDA of just under $5 million, which represents close to an $8 million year-over-year improvement. We also increased our cash by over $3 million sequentially.

The strategy we implemented to improve our business has proven to be effective and we're increasingly confident that we can sustain profitability moving forward. Our focus on process improvements and driving efficiencies in our business will continue and we are now in a position to increase our actions towards profitable top-line growth.

Overall, I'm very proud of our accomplishments as a company and as a team. Although there is more to do, I'd like to thank all of our employees for seeing our turnaround through and enabling us to achieve these much improved results.

Now let's talk about the quarter. We reported revenue of $68.5 million, which was $10.3 million or 17.7% higher than the prior quarter and came within 2.7% on a year-over-year basis. While our book to bill was under 1.0, it was within our expected range. And as I mentioned on our last investor call, bookings will vary from quarter to quarter.

This quarter we reported non-GAAP gross margins of 31.3%, an improvement of 140 basis points sequentially. When comparing to last year's second quarter, gross margins increased by approximately 800 basis points. Higher volumes in North America led to a favorable mix and positively impacted margins. Stronger operational execution in our supply chain and services areas also contributed to better performance.

And we believe these improvements are sustainable moving forward. Looking ahead, we expect 30% is the new norm for gross margins, though quarters may fluctuate based on mix by approximately 100 basis points on either side.

Non-GAAP operating expenses this quarter came in at $18.1 million, an improvement of $1.6 million over Q1 and $2.9 million over last year's second quarter. Of note, our OpEx for the quarter included a bad debt recovery of approximately $750,000, which impacted expenses favorably in Q2. There were also other timing-related benefits of approximately $250,000.

Notwithstanding these factors, our OpEx was still substantially better sequentially and year over year. Our current quarterly run rate, excluding one-time events or any upticks in spending to support growth, is approximately $19 million to $19.5 million.

In terms of profitability, our goal for Q2 was to achieve positive adjusted EBITDA, which we did comfortably at $4.8 million. We generated non-GAAP net income of $3.1 million, which is Aviat's single best quarter since the second quarter of fiscal year 2013, four years prior. On a GAAP basis we reported net income of $1.7 million.

Our balance sheet continues to strengthen and our working capital metrics are the best we've seen in years. Our cash position of $35 million grew just over $3 million compared to the fiscal 2017 first quarter. DSOs were down and inventory turns were up. Our team has done a remarkable job and we're positioned to generate cash in the second half of the fiscal year.

Moving on to our business and outlook, looking first at North America, we had a strong quarter in North America. The sector represented 57% of our total mix in Q2 compared to 45% in the same quarter a year ago, the result of our consistent success in winning new business, especially in private networks.

In North America, revenue was up approximately $10 million sequentially. We had seven customers from a variety of utility, state and local government projects that represented more than $1 million each in Q2 revenue as well.

Also since we last reported, we announced two new awards with US federal government agencies and a new agreement with NASPO ValuePoint, the nationwide purchasing arm of NASPO, which provides us with greater reach into US state and local government agencies, while accelerating the sales process.

Q2 revenue from our North American service provider customers remained steady and we expect volume in the near term to remain in the same zone. Our strategy has not changed. We will continue to explore opportunities to participate with other operators that we currently do not do business with, while also investing to support our installed base and ensuring we are well positioned longer term as plans for 5G deployments evolve.

Moving on to the international arena, international revenue for the first half of the fiscal year was down approximately $24 million compared to the same period last year. I would say, however, that the overall market appears to be stabilizing. That is, it hasn't gotten any worse than we expected and there are pockets where we are seeing increased activity and new opportunities.

Relative to Q1 we saw sequential revenue gains in Africa and Latin America which offset some of the lower volumes throughout Europe and Asia. Business with MTN has picked up and during the second quarter it remained a 10%-plus customer for us. We also announced new business with Airtel Nigeria, becoming their countrywide managed service provider for enterprise access.

In a challenging environment we've focused on providing outstanding support to our existing customers and, as a result, we are maintaining our position. We are investing in our technology portfolio to strengthen our competitive position. We will soon unveil some exciting new products that will serve as the catalyst for addressing new customers and markets and support our future growth ambitions.

A few comments now on our balance sheet. Our Q2 cash and cash equivalents balance of $35 million was up $3.0 million sequentially. And since fiscal 2016 year end, we've increased our net cash position by $5.5 million.

Our cash flow from operations was $5 million in the second quarter and year to date was $8.8 million.

DSOs continued to improve. DSOs during Q2 were 75 days compared to 78 days in Q1 and 99 days in Q4 of fiscal 2016. DSOs were positively impacted by our higher concentration of North America business, along with improved collections internationally.

Our inventory position of $23 million is down from $26.9 million reported in Q1 and down $7.3 million compared to our fiscal 2016 year end. We continue to focus on process enhancements related to inventory management and our turns of 8.2 times is a significant improvement over prior quarters.

We're very pleased with the progress we are making in working capital management. With the improvement in receivables and inventories, our cash conversion cycle has substantially fallen over the past six months.

Let me now shift to our outlook. In the second half of the fiscal year, we're expecting revenues to be approximately $130 million to $140 million with Q3 in the range of the low to mid 60s and Q4 higher, most likely in excess of $70 million. Relative to last year's second half, our estimate will yield between 9% and 17% revenue growth.

We expect to report positive non-GAAP operating income for the second half of the fiscal year, with Q3 coming in near breakeven. We also expect to report positive adjusted EBITDA in both the fiscal 2017 third and fourth quarters.

Lastly, we anticipate a slight cash usage in Q3 due to new programs kicking off internationally, but our cash position is expected to increase in the second half of the fiscal year.

In closing, the strategy we put in place was intended to drive us to profitability this fiscal year. This was achieved in the fiscal second quarter, and we believe we're positioned for growth in the second half of the year, while sustaining profitability. We've exceeded our near-term gross margin target and improved our processes and cost structure significantly. We now have a stronger foundation in place, with a clearer line of sight to drive performance.

With profitability achieved and continued balance sheet improvements, we are now shifting towards a growth mindset. We will continue to pursue all strategic avenues that will enhance our offering, market position, and valuation. That has not changed.

Lastly, I want to sincerely thank our shareholders. Achieving profitability in a macro challenged environment has been a difficult task. But we have emerged a stronger company. Many of our shareholders have been very supportive throughout this turnaround process. We're excited with our prospects and looking forward to building on this momentum. Thank you for your continued support.

This concludes our prepared remarks and we will now open the call for questions. Operator?

(Operator Instructions) Orin Hirschman; AIGH Investment Partners.

Congratulations on the terrific results.

Thank you. Appreciate that.

I know it's been long in coming and you're working very hard. And thank God it's nice, it's very gratifying, to see. A quick question just on the actual numbers themselves. The non-GAAP EPS number, that included the -- I want to make sure I know the exact number -- that included roughly $750,000 benefit plus another minor benefit?

That's correct, yes.

Okay. Do you happen to have the adjusted EPS number without those one-time benefits?

I think it's about a $0.15 per share impact, roughly.

Okay. So it would have been $0.42.

That's correct. Yes.

Okay. In terms of -- you know, carriers are steady. Any reason to believe that there's any big change in the spending or that's really going to depend on a year or two from now 5G and we're just going to -- more of a steady-state mode? And it's nice to win the Nigerian in -- but is that actually for the carrier or is that for their trying to get corporate customers for private networks? I wasn't clear on that.

Yes, it's more -- so the enterprise play in Nigeria is more associated with working with the operator to drive business with corporate business, utilizing our solutions.

As far as the mobile operator front, we feel very confident that we actually have an opportunity to enter some other operators that we're currently not doing business with. Having said that, the business will continue to be steady. And I wouldn't rule out opportunities for growth within some existing accounts, again based on probably more in the position of taking some share from others that are with those customers. Not expecting any major uptick in CapEx in the near term, but we definitely anticipate that to be the case in the meaningful longer term.

Okay. In terms of the market [that's] really been working so well for you, which is North America, private corporate networks, obviously that's really been great and it gets you in where you do a $60 million or a $70 million fourth quarter. What gets you to the $75 million to $80 million mark, assuming that the carrier world just kind of stays in the doldrums, but steady like you outlined? What's needed to get you even further on the private network side? Or it's just a matter of time?

So first I can say that I have a very, very strong funnel of opportunities which puts us into I guess a more optimistic position on our ability to generate growth moving forward. So it first starts with a line of sight to opportunities that I see that would represent further growth within the private networks vertical.

I do want to, again, go back to what I said earlier. Whether it's private networks or mobile -- and when I talk about mobile, there's different tiers to mobile, everything from the top tier all the way down to the lower tier regional providers. We have a lot of opportunity to actually start addressing customers that we haven't really focused on that much in the past that are in some of these tiers and in some geographies that we haven't really focused on, even within private networks. And we see a lot of opportunity, as I said earlier, to actually position ourselves and take share from others to drive growth.

If the overall market picks up, to me that would even provide further fuel for us to drive growth even further than we anticipate.

Is there anything critical on the new product side?

So our current portfolio that we have is very strong. We have a number of dimensions to our offerings that differentiate us from others. So when you look at total cost of ownership and include the services layer, we feel very good about our position.

We will be introducing some new products in the coming weeks. Stay tuned for that. And we believe that that will be a further catalyst to position us even more favorably and open up additional opportunities and some of the new customers that I highlighted earlier.

Okay, great. Thanks very much

You're welcome. Thank you.

(Operator Instructions) And there are no further questions.

Thank you, Operator.

Thank you. That does conclude today's conference call. You may now disconnect your lines.