Aviat Networks Inc (AVNW) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Aviat Networks Fiscal 2020 Fourth Quarter Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now hand the conference over to Keith Fanneron. Keith, go ahead.

Thank you, and welcome to Aviat Networks Fiscal 2020 Fourth Quarter and Full Year Results Conference Call and webcast. You can find our Form 10-K, 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 in roughly 1 hour.

As for today, Pete Smith, Aviat's President and CEO will begin with opening remarks on the company's fourth quarter and fiscal year 2020; followed by Eric Chang, our CFO, who will review the financial results. Pete will then provide closing remarks on Aviat's strategy and outlook, followed by Q&A.

As for safe harbor, 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, the impact of COVID-19 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 involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. The company undertakes no obligation to revise or make public any revision of these forward-looking statements in light of new information or future events. Additionally, during today's call and webcast, management will reference both GAAP and non-GAAP financial measures. Please refer to our press release 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'd like to turn the call over to Pete. Pete?

Good afternoon, everyone. Aviat Networks continues to navigate the global pandemic. We wish our employees, customers, partners, shareholders and their families' health and safety.

Before we get into the results, I would like to remind our investors, we are focused and focused on execution on key areas: one, increasing revenue. From our press releases since the last earnings call, we have announced partnership expansion and new customer wins. We have an excellent plan that will materialize as we navigate through the COVID-19 challenge. Two, capturing Aviat's differentiation. We have announced multi-bandwidth, demonstrated the viability of our Frequency Assurance Software and received our first purchase order. Three, driving out costs. We are on track with the previously announced restructuring plan with annualized savings of $3.5 million, of which approximately $2 million will benefit fiscal year '21.

Now let's focus on our results. Adjusted EBITDA was up $1.6 million versus Q4 of fiscal year '19. Our balance sheet remains strong. Our cash position is up over $9.7 million since the year began and $2.4 million sequentially compared to last quarter. Fiscal year '20 adjusted EBITDA was $13.5 million, which improved $4.8 million from fiscal year '19 and exceeded the top end of our prior guidance of $11 million to $12 million. This is quite impressive considering what we face, the issues with a contract manufacturer in Q2, volatility in Africa and now COVID-19.

Revenue was slightly down this year as expected, but profitability was up, and we are better positioned going into next fiscal year to drive both the top line and the bottom line. We will be seeing growth as there are several actions that we are now taking that are different from the past, initiatives that should lead to new customers and better performance.

There are 4 areas I would like to highlight before turning the call to Eric. First, my observation is on growth in North America. Our North America business continued to perform well. We expanded into new states, cities and applications. The North American team has worked diligently on expanding sales.

In addition, the North America team has seized upon our differentiation. We have won initial business with our Frequency Assurance Software, or FAS, in public safety, utility and service provider accounts. FAS is the industry's only software expert system for the detection and reporting of the interference on microwave links and is patent pending. Not only can FAS prevent outages by identifying interference events before they become real problems, but it also arms customers with data analysis to deal with regulators on interference issues. FAS is critical for the reliability of mission-critical microwave links, especially with the emergence of WiFi 6e, which allows unlicensed devices to operate in a key microwave band in the U.S.A.

In addition, the North America team continues to drive our core products into 5G applications. In Q4, we received new 5G-related orders in U.S.A. mobile operator accounts, where we delivered 5G-ready capacity capabilities to our customers.

Also, the North America team leveraged our e-commerce platform, the Aviat Store, to provide differentiation and value to our rural Internet customers. Second, international markets. Our international team started to implement our commercial strategy, defend Tier 1 telecom business, win new Tier 2 accounts, expand reach through partnership and capture value where we are differentiated. Expanding our reach through partnership, we signed a new partner agreement with Netronics to grow our presence in the Middle East, and we have another significant agreement in place that we have not named, which addresses other regions where we lack sales coverage.

We have seen successes with our multiband solution, which is a highly differentiated offering, significantly reducing spectrum costs for our customers. We have secured an important 5G win in Africa with Safaricom, due to our multiband value proposition and have expanded our presence in existing accounts as well. We are excited about the possibilities with this offering.

Third, costs. We are executing on our announced restructuring. We observed additional cost savings in Q4 due to an aggressive response to the COVID-19 environment. Fourth, generating shareholder value. To improve the shareholder value, we need to drive sales and lower costs. I am focused on growth, commercialization and new customer acquisitions while concurrently reducing expenses. We are in the early stages of building our sales funnel for Tier 2 customers internationally. Our sales funnel for multiband and our funnel for FAS, Frequency Assurance Software. As we execute on these initiatives over the coming quarters, we expect this to translate into top line growth.

As I said in the last call, we will focus on opportunities in markets and geography, where competitors cannot matter. Execution will lead to higher revenue, continued margin expansion and ultimately, higher profitability to drive shareholder value.

I'm going to turn the call over to Eric now to review our financials, but I do have a few additional comments after his remarks. Eric?

Thank you, Pete, and good afternoon, everyone. During my remarks today, I will review some of our Q4 and full year financial highlights, rather than reading through all line items that they can be found in both our Form 10-K and press release. All comparisons are between the fourth quarter of fiscal 2020 and the fourth quarter of fiscal 2019 and between full year fiscal 2020 and full year fiscal 2019, unless noted otherwise.

Although our Q4 and full year fiscal 2020 revenue both declined from the prior year, but we have seen significant growth in North America revenue for the full year. North America revenue has increased to $151.7 million for fiscal 2020 from $132.9 million for fiscal 2019, an improvement of $18.8 million, which is driven primarily by our private network business.

International revenue declined as expected, but the decline in the second half of the fiscal year was smaller than what we have experienced in the first half of the fiscal year.

Our book-to-bill ratio was well above 1 for both the fourth quarter and full fiscal 2020, and we exited fiscal '20 with a strong backlog.

A few other points. In Q4 of fiscal '20, North America comprised almost 61% of total revenue and continues to represent a higher percentage of mix. Q4 gross margins remained strong, both 34.9% on a GAAP and non-GAAP basis compared to 35.2% and 35.1% for Q4 of fiscal 2019. Q4 GAAP operating expenses were $19.7 million compared to $20.1 million and non-GAAP operating expenses, excluding the impact of restructuring charges and share-based compensation, were $17.5 million compared to $19.8 million.

Both our GAAP and non-GAAP operating expenses improved due to cost-cutting initiatives we implemented during the second half of fiscal '20 such as restructuring plans, a slowdown in hiring and reduced travel. As we noted in our Q3 earnings call, we have announced restructuring plans in March and April, and we recorded a restructuring charge of $1.9 million in the fourth quarter. We have realized some resulted savings during Q4, and the remaining savings will be realized in fiscal '21 and beyond.

Q4 non-GAAP net income was $4.1 million compared to $2.6 million for the same period last year. Q4 non-GAAP EPS was $0.75 per share compared to $0.47 per share for the same period last year. Adjusted EBITDA of $5.5 million was up approximately $1.6 million from $3.9 million for the same period last year.

For the full year comparisons, our non-GAAP net income improved to $8.2 million from $3.2 million. Fiscal 2020 non-GAAP EPS was $1.51 per share compared to $0.58 per share for fiscal 2019. Adjusted EBITDA improved to $13.5 million from $8.8 million for fiscal 2019. Our full year adjusted EBITDA, as Pete mentioned earlier, exceeded the top end of our prior guidance of $11 million to $12 million. We can address any questions relating to our results during Q&A.

Moving on to the balance sheet. Our cash and cash equivalents stood at $41.6 million at the end of the fourth quarter, which is up $2.4 million sequentially from Q3 and $9.7 million since the end of fiscal 2019. Our cash flow from operations was $17.5 million for the full year 2020 compared to $2.9 million for fiscal 2019, an improvement of almost $15 million.

Our net cash was $32.6 million at the end of fiscal year 2020 and is the highest level exiting the fiscal year since fiscal 2014. We have a credit facility with Silicon Valley Bank, which is based on our eligible AR borrowing base. At the end of the fourth quarter, our loan balance was $9 million, which will be paid in full in July 2020, subsequent to our year-end.

Given our strong net cash position and as we expected our cash to continue to increase in fiscal year 2021, we may choose not to draw against the credit facility starting in the first quarter of fiscal 2021.

Although we did not repurchase our common stock in the fourth quarter, but for the full year, we have spent about $1.8 million in stock repurchases and $3.4 million remain available under the program.

This concludes my remarks. And we'll turn it back to Pete. Pete?

Thanks, Eric. Just a few additional comments before Q&A. North America has been strong this year and barring any unforeseen events, should be strong in fiscal year '21. The principal concern is the impact of COVID-19 on our customers' budgets and time lines and the ability to execute field services. Our international business has been contracting. We aim to stop the contraction and return to growth by execution of our sales and marketing processes, defending our Tier 1 accounts, winning new Tier 2 accounts, expanding our reach with partners and capturing our differentiation in products such as multiband.

Both our North America business and our international business have strong demand drivers, 5G rollout, mission-critical networks, rural broadband, we are well positioned for all of these opportunities. Expect announcements as we make progress in capturing the demand that results from these highly favorable market trends. Further, the COVID-19 challenge amplifies these demand drivers in the medium to long term. In the short term, we will navigate the COVID-19 situation.

To close the call, I would like to sum up fiscal year '20, our overall direction and provide some perspective for fiscal year '21. In fiscal year '20, we improved our cost structure and executed through uncertainty encountered with COVID-19. We delivered the highest annual profitability 5.7% adjusted EBITDA in the last 10 years of Aviat's history. We have maintained our revenue. We need to get into a growth mode. We have outlined a plan to achieve this.

In addition, we had key wins, including our first microwave upgrade agreement, MUA, subscription offering with a large county government, network rollout for the Virginia State Police, multiband wins that Safaricom and Globe for 5G deployment and a channel partner agreement with Netronics.

From a product standpoint, we launched our new multiband radio platform and Frequency Assurance Software, upgraded our North American mission-critical platform; and three, enhanced our all outdoor solutions for 5G. We have repositioned the leadership team to accomplish our fiscal year '21 and beyond goal.

One example, we have in-sourced our Investor Relations. Keith Fanneron will be our Investor Relations point of contact. We thank Glenn Wiener for all of his support and know that we could still call on him for his expertise.

Through these changes, challenges and successes, cash increased $9.7 million during fiscal year '20. I'm very proud of the team's accomplishment. I'm increasingly excited about our future opportunities. Our key takeaway messages for investment, focus and execution.

Aviat's goals remain the same: growth, margin expansion, expense reduction and meaningful bottom line results. Like everyone, we are still navigating the COVID-19 environment. Based on our sales focus, capturing value and execution on the cost front, we expect our fiscal year 2021 adjusted EBITDA and revenue to grow compared to fiscal 2020.

We expect to see benefits from our strategic focus, including new products, such as FAS and our focus on improved REIT and adding new customers. We will provide a more specific guidance when we have more certainty around COVID-19.

Operator, we are now ready for questions.

(Operator Instructions) And our first question is from Tim Savageaux with Northland Capital.

Congrats on the results. And Pete, I guess I want to pick up on where you left off there with regard to the '21 outlook, which is pretty broad in terms of growth expectation. But maybe I want to try and marry that up. I think you filed your Q as well. And obviously, you had a very significant increase in backlog for the year in -- on the order of 30%. Now to be fair, backlog also increased last year and revenues were down. But given your commentary on bookings in Q4, which are, I think, much stronger than your Q3 commentary, which is sort of slightly above 1. I wonder if you could maybe relate what you saw in terms of backlog growth, understanding some of that might be further out with regard to what we should expect from -- it seems like we should expect double-digit revenue this year based on that backlog, but feel free to provide more perspective on that.

Yes. I don't -- I mean, I don't think we're going to sign up to double-digit revenue growth, but we're pretty confident in the revenue growth. When we think about the year, we are really excited that the book-to-bill is at 1.3. And then on a dollar value or correct me if I'm wrong, we're coming into the year with $50 million more of backlog. So we think that, that will translate into growth. And a lot of that's driven by 5G wins in the mission-critical space and as well as our Aviat Store, e-commerce platform to solve rural broadband opportunities.

So we feel good in terms -- I don't want to guide to -- so we're not going to be specific because we want to see how COVID plays out in the timing of certain deals. But we feel really good that we're going to be able to grow the International and the North America business. I wouldn't go so far as to 10% on the top line. And then on the bottom line, we are on track with our restructuring plan. What we've learned in COVID is that we can squeeze our costs a little more. So overall, I feel really good about the year, but I want to get a little bit more mileage under our belt before we put specific guidance out. And I think if we were to put out guidance right now, maybe we wouldn't take full credit for everything we have in the pipeline, give me a little more time and we'll be more specific.

And if I can add, so we exited fiscal '20 with a very strong backlog, right? As you see in the 10-K, it's about $210 million. If you compare that to the end of last fiscal year, it was $160 million. So it's actually a $50 million increase in backlog exiting the both fiscal years, right, the increase. And then the $210 million, a bulk of it is coming from North America private network business.

Okay. It's all right. That later. No. That's interesting. And I was kind of following into my next question, which is -- so it sounds like while you expect international to return to a growth profile, given that comment there about the nature of the backlog in U.S. private network strength, it sounds like you might continue to expect North America to grow faster, right? And I guess that's where I'm headed with that is with regard to gross margin profile, right? Obviously, there's a kind of a mix factor. So it sounds like you could still see, given that mix and strength in North America some upward pressure on gross margins.

So what we were prepared to talk to, and I think, Eric, you should give this is what -- I think in the past, we've been asked what our long-term model should be. And Eric, why don't you comment on our long-term model?

Yes. When it comes to long-term model, so this year, we -- our gross margin is about 30%, 35% for the year. And overall, I think, we do want to see continuous increase in that percentage. But from a bottom line standpoint, we do see -- we exited from an adjusted EBITDA basis, I think this year was 5.5%. and we do see that to continue to grow maybe on long-term model between 7% to 10% on a bottom line basis.

Got it. Well, we'll maybe covering the last piece of that. I mean, we've seen OpEx kind of lower-than-expected in pretty much across the board this quarter on reductions in travel and some promotional type expenses. But it sounds like the decline that you saw goes beyond that and is sort of more sustainable. And so I want to put, I guess, the previous comment about $2 million of restructuring benefit accruing into fiscal '21. How do we look at that relative to the full year for '20? Or I imagine the Q4 OpEx is kind of a low point, you expect it to come back up a bit as at least some things start to normalize from an expense standpoint?

So quite simply, we -- I think what we said in the script was that we're on track for adding $2 million of profit, [even] adjusted EBITDA in fiscal year '21 due to our restructuring. And we did have some COVID-related cost benefits in Q4 and we see them all repeating in Q1. And if we deduct a travel, that will go up. But then by the time that comes through, we think we'll be further along in our restructuring, which I think our restructuring, we've announced that in fiscal year '22, would be at a run rate savings of $3.5 million on adjusted EBITDA. So for modeling purposes, you can count on. We are on track for the $2 million in fiscal year '21. And if we're on track for '21, the $3.5 million that we've declared that we would save in '22, we were confident that, that's going to materialize.

Got it. And lastly, I'm sorry.

No, I was going to ask you, if it was helpful? Go to the next question, sorry.

Okay. Just one more for me, sorry. And that is really about kind of go-forward demand drivers. And you mentioned several kind of new product platforms. And it sounds like -- I guess my question is to what extent -- it sounds like given the private network strength in North America, do you expect those to be more meaningful or material contributors going forward than to the -- I guess, to what extent did some of those new products drive some of the strong order results that you talked about in Q4, in particular? And then as you look forward in terms of your growth drivers for '21, I guess, 5G, mission-critical networks were all broadband. Maybe you could kind of weigh those in terms of -- or rank order in terms of what growth drivers you're most excited about?

Well, that's like trying to say which one of my children, I love most. Look, they're really fantastic for all of us. So I think we're performing well historically and growing with the private network, the mission-critical private network, where we think we can have some top line growth, but margin expansion. We see the Frequency Assurance Software playing in there where -- so where we think we can get margin expansion with that software. The 5G rollout, we talked about, we do have a good position, and we did have good demand in Q4 with the U.S. network providers, but we also see that starting to ramp up internationally. And we saw that at the Globe and Safaricom.

What I would also add, we see internationally that the multiband where there's high spectrum costs that the multiband significantly lowers the total cost of ownership for the international operators. And that we see the multiband is -- we do have some North America demand for that, but the demand drivers are high spectrum costs outside of the U.S. And the small part of our business is rural broadband, but we deliver that through the only e-commerce platform in the microwave space, so we can deliver as kind of our standard products in 14 days.

So like in COVID, where work-from-home took off kind of overnight, the WISPs needed more capacity and we're able to deliver that. And we're starting to see -- that's going well in North America. We're starting to see that kind of a demand profile internationally, and we're getting set up to push the store out internationally. So I would say, I'm confident in the mission-critical space. We're doing well there. Growth drivers should be this e-commerce platform for the rural Internet. And as 5G goes, we think we have the right products to grow with them. So I would say at our core, our biggest part of the business, is mission-critical. We're confident in that, and we're really excited about the growth of the store and 5G is going to bring.

Our next question is from Theodore O'Neill with Litchfield Hills Research.

Congratulations on exceeding your EBITDA guidance for the quarter, I mean, for the year. The growth that you're seeing in 5G, can you attribute that to just the overall 5G growth? The pie getting larger? Or are you taking a larger piece of it?

So share in a growing market can sometimes be difficult to estimate, right? We -- there's some recent research over the last 2 quarters that indicated the microwave market was down, and we were up compared to the market. So I think we are gaining a little bit of incremental share. Yes, I would say that we are incrementally growing share, but that's really hard to estimate. It's a qualitative statement. Where we think that is perhaps occurring is in the rural broadband and with some of our recent 5G wins. And then the part that's really hard to estimate is how the large mobile network operators, how they're doing with respect to 5G, that's -- that would be hard for us to estimate. So qualitatively, I would agree with that, your suggestion, but it would be hard to pin us down to a number.

Okay. I asked this question on the last call, and I'll ask it again. How is your supply chain doing? How is it holding up relative with COVID?

So our supply chain and our team executed nearly perfectly in Q4. So it's holding up well. It's performing. And we would think that it's outperforming some of our peers. So we're really pleased. And then, look, I'll say, we did have issues that were short-term issues that we overcame within the quarter. But the good thing about that is, we're learning from and becoming more resilient. So a year from now, we'll expect near perfection week after week from our supply chain. So we are really, really pleased with our supply chain. And we also think our dependability gives us a platform to win new share, and that will play out over the next 6 to 12 months.

That makes sense. My last question is, are you seeing any uptick in activity looking at sort of M&A opportunities?

So we look for -- we have a pipeline of bolt-ons that we're looking at. Q4 with COVID, a lot of that got put on hold. We're going to continue to look for opportunistic deals that will be in line with our core competency and be accretive to growth. So we are looking, but we're not going to pull the trigger on something unless it fits, and we're going to be able to drive growth and realize the synergies.

Our next question is from Mark Spiegel with Stanphyl and Capital.

Pete, I love your enthusiasm. Two quick questions. How is this potential 6 gigahertz interference affecting you guys? Obviously, I've seen the thing about your software, but that only tells you that you're being interfered with. Is it -- are people avoiding that spectrum? And if so, can you offer them an alternative?

So that's -- so we have not seen any change in the demand pattern for the 6 gigahertz spectrum. So I would say we haven't seen that play out. If someone was really concerned and wanted to go away from the 6 gigahertz spectrum, we do have a full range of products that we could put them in. Is that helpful?

Yes. Very helpful. And I forgot my second question. If I think of it, I'll get back in the one.

Our next question is from Steve Busch with Everglades Resources.

Great job. Great quarter. So most of my questions have been answered, but how does your Safaricom customer compared to MTM's prior revenue growth -- revenue side? Is it much smaller?

Yes. So they are a smaller operator. Let me give you the color that I think maybe you're looking for, right? That Safaricom win is important because it proves out our multiband and the economics that we advertise when we got that design win. And a lot of what MTM operates in is the microwave, high spectrum cost microwave. And I wouldn't say this specifically about MTN, but all of our customers were they have high spectrum costs are taking notice of what's going on with Safaricom and asking for presentations or asking for the economic analysis as well as we have a variety of proof-of-concept tests that are ongoing. So we do -- what the Safaricom did do for us was they created a big funnel that as we convert the funnel and the opportunities we think that it's going to translate into revenue growth and in particularly in the Africa region.

That's really good color. So was MTM -- they kind of switched their supplier to Huawei or someone, was that what happened? And maybe we can get some of that back, is what you're saying?

I think that's a reasonable hypothesis. I don't want to comment on one specific customer, but Huawei was the -- did take that share. And we think that we have a highly differentiated offering that would make us more competitive versus Huawei and others, right?

Great. No, that's perfect. So you mentioned that you have a patent pending. I don't know if you could add any more color to that versus -- I mean, you also had that in the press release with MTI Wireless. And there's a bunch of patents mentioned in that. Is it the same line? Or who owns the patents with the MTI Wireless? And how is the other one you're talking about that's pending?

So the MTI Wireless, that's the antenna supplier that goes along -- that provides an antenna solution for multiband. So separate that patent out. So on our Frequency Assurance Software, we do have a patent pending, and that patent is around the algorithm, right? So the algorithm for detecting interference, which ultimately leads to the resolution. So we have some really smart guys that we're able to sort out how we could basically solve difficult signal and noise problem. And we filed with the patent office, and we're hopeful that we get granted the patent in the time that the patent office needs to review it. And I would say that the -- we think it's unique. And it really doesn't matter what we think, think about our customers. What we did say in the script was that we have received our first orders for that. And that's the ultimate proof if the customer is going to buy. So I hope that's enough color on the patents that have been out in the press around Aviat.

Right. That's fine. I appreciate that color. And I have to say, I'll just leave it with this kind of comment. I like the fact that you said you're focused on execution and that you need to get into growth mode because I think that's what's the next driver for the stock it's getting our top line and bottom line moving together. And I wish you well in that endeavor.

Thank you.

And our next question is from Mark Spiegel with Stanphyl Capital.

Pete, just one quick follow-up. I remember what I wanted to say. I do hope that you guys will be super, super cautious on acquisitions. And the reason I say that is, you're selling it around -- on an EV enterprise value basis, you're selling at only around 0.3x revenue. And I think in this market, it would be really hard to find a decent business selling anywhere near that cheaply. So although it may be somewhat growth or earnings accretive, it won't be accretive on that multiple, which is maybe the most attractive thing about the company. So obviously, you know what you're doing. I just wanted to throw my $0.02 in there on that.

_

Thank you for that input, Mark.

And sir, you can go ahead with your final remarks. There is no more in the queue.

_

To close the call, I'd like to thank everybody, wish everyone health. We're really, really excited about the business. Our restructuring is on track. We have a great funnel, and we're excited to talk to you about the progress in a couple of months as we wrap up Q1. Thank you, everyone.

And thank you, ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.