Aviat Networks Inc (AVNW) 2025 Q1 法說會逐字稿

Good afternoon. Welcome to Aviat Networks first quarter fiscal 2025 earnings call. At this time all participants are [in Alyssa only mode]. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host Mr Andrew Fredrickson, Director of Investor Relations. Thank you. You may begin.

Thank you and welcome to Aviat Networks first quarter fiscal 2025 results conference call and webcast. You can find our press release and updated investor presentation in the IR section of our website at www.avian networks.com along with a replay of today's call. With me today are Pete Smith, Aviat's President and CEO who will begin with opening remarks on the company's fiscal quarter followed by Michael Conaway, our CFO who will review the financial results for the quarter.

Pete will then provide closing remarks on Aviat's strategy and outlook followed by Q&A. As a reminder during today's [call and] webcast management may make forward-looking statements regarding Aviat's business. Including but not limited to statements relating to fiscal guidance, financial projections, business drivers, new products and expansions and economic activity in different regions.

These and other forward-looking statements reflect the company's opinions only as of the date of this call and webcast and involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements.

Additional information on factors that could cause actual results to differ materially from the statements expressed or implied on this call can be found in our most recent annual report on form 10-K filed with the SEC.

The company undertakes no obligation to revise or make [public any 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 which is available in the IR section of our website at www.aviatnetworks.com and financial tables therein which include a GAAP to non-GAAP reconciliation and other supplemental financial information.

At this time, I would like to turn the call over to Aviat's President and CEO Pete Smith. Pete.

Thanks Andrew and good afternoon, let's discuss Aviat Networks first quarter of fiscal year 2025. Total revenue of 88.4 million with Non-GAAP gross margin of 23%, adjusted EBITA of -7.7 million Non-GAAP EPS loss of 87¢.

As we previewed in our last earnings call, we expected the results in our fiscal Q1 to be difficult. In the quarter, our team dealt with the revenue impact from ongoing US Tier 1 CapEx weakness. As well as timing challenges from both private network and international projects. Additionally, management faced the priority of closing out the year end audit and completing our sec filings throughout the quarter which distracted from our execution.

To provide some additional perspective for investors, the global microwave market saw an 8% year over year contraction in the most recent quarter. Based on industry research from [Deloro], this is the fourth consecutive quarter of overall microwave revenue declines. The market softness has been driven principally by mobile network CapEx declines.

Aviat has been able to avoid the impact of the broader market decline until recently. Thanks to our private network business and our share gain funnel. However in the most recent quarter, we were unable to offset the Tier 1 weakness. [Nonetheless,] we have seen in the FCC coordination filings that Aviat has continued to grow its share of demand in North America and outperform the market.

[I had its growing share] of demand in the microwave space globally in recent quarters and over the past several years. We believe we have the best all outdoor radios on the market including a portfolio [ban] and multiband solutions that are on match. We also lead in all indoor solutions as is evidenced by our new state private network win and have a competitive split bound offering for international customers. Our access solutions are strong and highly penetrated in the segments we serve.

Gross margins were significantly impacted by lower volume and by mix shift away from North America and towards our international business. Based on our revenue and profitability, we aggressively managed our operating expenses and continue to do so where possible. We expect that our Q2 operating expenses will be lower than Q1.

As a reminder, we currently have some higher operating expenses associated with our preparation for the stoppage of transition services with [NEC] over the next two quarters. We anticipate that the back half of fiscal year 2025 will see more favorable operating leverage for Aviat.

Moving on to product and customer updates. Last quarter, we discussed our growing opportunity of selling Aviat network management software provision plus to [Palo] product customers. To provide more color to investors, we believe that this will be a $50 million upgrade opportunity over the next five years. There are over 1 million [palink] radios installed across 500 plus customers today.

Moving these customers to provision plus represents a significant upgrade for them in terms of usability and features over the prior NMS software they had access to. For Aviat is an attractive opportunity to grow our software revenues and further demonstrate our focus on offering value add products and services to those customers acquired as part of the [pa] transaction.

Our Prisa product line which was acquired in the ForEx transaction. Recently notched its first purchase order for our Prisa 5G router to an American utility company in the Southwest. This is an exciting development in the growth of Aviat's private 5 G business. I will also mention that we're already realizing cross selling revenues from the ForEx acquisition. As a reminder, approximately 90% of our combined private network customers are not overlapping.

Additionally, recent events such as the cyber attack against America's largest water utility highlight the criticality of having secure private networks with trustworthy and dependable hardware for infrastructure providers. Just as we see a long upgrade cycle in public safety networks, we expect there will be a significant investment cycle in grid and utility infrastructure modernization.

As proof, we are already engaged in projects with two midwestern electric utilities that have selected our [Risa] access products as part of their network upgrades and modernization. These two contracts [totaled] more than 8 million are expected to begin shipping products by the end of this calendar year. We're pleased with how the ForEx Tuck in acquisition has progressed to date and expect to have more good news to report in the quarters ahead.

Lastly, we're beginning [tro plans] to transfer the manufacture of pass lane products from NEC's inhouse manufacturing in Japan to Aviat's contract manufacturer. We believe that this transfer will enable Aviat to more quickly and efficiently manage orders and inventory relating to [Pasolink] products and over time result in lower overall costs and better gross margins.

As a result of this manufacturing move and to ensure continued service to our customers, we anticipate and have already begun building an inventory stock of [Pasolink] products on the order of 20 million to 25 million. We expect that this inventory will subsequently be worked down over the next 18 months. Before coming back for some additional comment on our outlook, i will turn it over to Michael to review the financial results of the quarter.

Thank you very much, Pete and good afternoon everyone.

I'll review some of the key fiscal 2025 1st quarter results. Please note that our detailed financials can be found in our press release. And all comparisons discussed are between the first quarter of fiscal year 2025 and the first quarter of fiscal year 2024, unless otherwise noted. For the first quarter, we reported total revenues of 88.4 million as compared with 86.9 million for the same period last year.

An increase of 1.5 million or 1.7% year over year. North America, which comprised 48% of our total revenue for the quarter was 42 million. A decrease of 23% from the same period last year due to Tier 1 softness and timing of certain large projects in our private networks business. International revenue was 46 million for the quarter, an increase of 14 million or 44% from the same period last year.

This growth was driven primarily by the addition of revenues from the [Pasolink] acquisition. Our trailing 12 month book to bill was over one in the quarter. Gross margins for the quarter were 22.4% on a GAAP basis and 23.2% on a Non-GAAP basis. This compares to 35.9% GAAP and 36.2% Non-GAAP in the prior year.

The decline in our gross margins was driven principally by two items. First, lower overall volumes worked against us from a period cost and operating efficiency standpoint. And secondly, we had a mix shift away from higher margin projects and regions in the quarter.

We expect some of these factors to begin normalizing in the quarters ahead. Fourth quarter GAAP operating expenses were 35.4 million. An increase of 9.1 million from the prior year driven by the addition of [Pasolink] and ForEx related OpEx and increased R&D expenses, as we prepare to end [Pasolink] related transition services with any seat. Non-GAAP operating expenses which exclude the impact of restructuring charges, share based compensation and deal costs were 30 million. An increase of 6.2 million driven by [pass Alink], ForEx and increased R&D costs.

In the first quarter, we analyzed and reviewed expenses and head count to ensure that we are aligned with the current demand environment. There's still work ongoing here and we expect to show continued progress on cost out and improved earning results as the year progresses.

Fourth quarter operating income was -15.6 million on a GAAP basis and -9.5 million on a Non-GAAP basis. The first quarter tax provision benefit was 5.5 million. As a reminder, the company has approximately 450 million of net operating losses or [NOLS] that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future.

First quarter GAAP net income was -11.9 million and Non-GAAP net income which excludes restructuring charges, share based compensation, M&A related and other nonrecurring expenses. And the noncash tax provision was -11.1 million.

Fourth quarter Non-GAAP earnings per share came in at -87¢ on a fully diluted basis. Adjusted I do for the first quarter was -7.7 million. This was impacted by the lower gross margins and elevated OpEx in the quarter.

Moving on to the balance sheet. Our cash and marketable securities at the end of the first quarter were 51 million. In the quarter, we pulled down our revolving loan facility bringing our outstanding debt to 81 million at the end of the quarter. The consumption of cash was driven primarily by our purchase of ForEx and negative GAAP pretax earnings in the quarter.

With that, I'll turn it back to Pete for some final comments, Pete.

Thanks Michael. The first quarter was challenging. Tier 1 market weakness, project timing and execution combined degree results below our expectations. We remain optimistic that we'll see stronger results based on our current view of Q2 and the back half of fiscal year 2025. Based on the company's most recent results we're adjusting our fiscal year 2025 guidance as follows, revenue to be in the range of 430 to 470 [adjust the beta to be] in the range of 30 million to 40 million.

We see reasons to continue believing in Aviat's private network business and the global 5G opportunity. Our funnel and backlog remain attractive and the conversations we're having with our customers are encouraging.

Our bookings are growing and exceeded revenues in the first quarter. [Jan has] gained share of demand over the last several quarters despite a [dow] market and we see no reason to believe that this will change. With that operator let's open up for questions.

Thank you to ask a question. Please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question.

Our first question is going to come from the line of Jason Smith with Lake Street. Your line is open, please go ahead.

Hey guys, thanks for taking my questions. First want to start with gross margin, obviously soft in September. But can you help us think about the [trajectory?] And I guess more. So, how big of a snap back can it have in the December quarter?

Yeah, sure. Yeah, let's talk about about Q1 first. So our gross margins on a Non-GAAP basis were [23 2]. We're not going to break out past the link separately moving forward, but we would say that the margins and past the link were solid in the first quarter. So the majority of the erosion in margins was in the core business and there were really three reasons for it, mostly mix related. First, our America's business which typically trades at the highest gross profit rate, had a lower revenue quarter.

And on a year over year basis, most of those revenues were replaced and [augmented] by [A PAC] which mixes us down from a gross profitability perspective. That was second. We also had a weaker software outcome principally in the US. We think that this effect will normalize in 2 Q and the back half. And then lastly, in the first quarter we're dealing with some margin timing effects on hardware revenues in one of our large A PAC customers.

Which we also expect to [attenuate] as we move through the year end in 2025. So in terms of the rest of the year with see those three things certainly improving. So Q2 will be a nice step up verses Q1 in terms of gross profit margins and then Q3 and Q4 as the revenues ramp, we'll get a little bit of leverage on the period cost component inside a gross profit margin. So we see margins getting back to a more normalized rate in Q2, Q3, Q4.

Okay. That's really helpful. And then just as a follow up, I mean, it seems like September is really the primary driver for the downward adjustment to the full year outlook. I mean, just given the whole September starts and [I mean, it's going to] be a pretty [sizable] ramp sequentially December through June.

And I know you had expected that previously, it's just curious if you could provide some additional color on kind of what gives you this confidence and then relatedly how orders have been tracking for the first kind of month plus of the December quarter.

Yeah, I'll give up a couple of data points. So maybe just the guidance first. So we lowered the midpoint of the revenue guidance by 20 and then earnings by 14, the from a revenue standpoint. About half of the reduction is driven by Q1, about the other half is really just a little bit of a re rate in market expectations primarily driven by Tier 1 spending softness.

So that's kind of the guidance piece on on the earning side. You kind of half of the guidance retrogression was driven by taking down the volumes and then most of the remainder is all 1 Q. You know as it relates to the orders, we had a book to bill greater than one in the first quarter. And then Q2 is shaping up to be even stronger than Q1 and we've had a nice 1st month. So the orders trajectory is is better.

Yeah, Jason to comment on the orders [trajectory,] if things were to hold together, we would have record bookings in the December quarter. So, you know look, we want to own up to the late 10-K and the impact that had on us and the disappointment we have in the quarter that ended in September. But we see a demand bouncing back and we are encouraged.

Okay. That's really helpful. Thanks a lot guys.

Thank you one moment for our next question.

Our next question is going to come from the line of Scotts Rail with Roth Capital partners. Your line is open. Please go ahead.

Hey, Good Afternoon. Thanks for taking the questions. Hey Pete, might maybe just to follow up on Jason's question, you know if you look at your guidance it kind of implies on average 115 million to 125 million of the remaining three quarters of the fiscal year. Could you talk us through a little bit? It sounds like orders are coming back. You know, maybe by geography, you know, APAC was weak again, maybe how India was within that. It sounds like there's some private networks building in the pipeline as well.

Just trying to really get our hands around how that, how that recovery comes back. Why is there such a strong level of confidence, you know, in the snap back in the December quarter and sustaining that in March and June.

You know, [like] our book to bill over the past 46 quarters has been, you know let's say [1.05] and in this quarter, we just concluded it was higher than than that. Our, you know, when we look at our bookings we see, you know, we see the pass a link demand buildings sequentially. And, you know we will be owners of the business on a full year basis, but we had the start up. So we see, you mean, you know, we started out, we didn't hit a home run out of the [chute but] we've seen steady increases quarter over quarter.

And we see that persisting at least a few more quarters. So that is helping us and we on the private network side, our, our funnels in the east are good. Eastern US our funnels in the West are improving. So that's kind of the basis for why we are [bullish] given. We're [bullish] on demand, you know, we're disappointed in where we ended in September, Scott.

[Got you.] No, very helpful. And, and maybe to follow up on your comments on [pa] Pete. It sounds like that continues to build. Are you getting to, are you starting to see visibility to the levels that you originally anticipated when you acquired this business of that 30 million-plus type range. Is there enough activity going on there now that we're starting to hit that, I guess, kind of breakpoint where that they should in theory with better gross margins start to be nicely accretive in line with your original expectations.

Yeah, so it was a creative this quarter. And we think it will be more creative going forward. You know, when we moving forward we thought we could get it to 140. So that would be divided by $435 million a quarter run rate. We're getting increasingly confident that we will exit FY25 at that rate. So the past you know, talking with Michael and Andrew, we, you know, we want to get a little bit more highway behind us.

But I think we will, you know, maybe two quarters, three quarters from now, we'll come out and we'll discuss what the, you know, the returns are on that investment. But we are encouraged. Right. So, and where we're, where we've underperformed has been in the core, we understand the US Tier 1.

And you know, we had project timing issues with the public safety and utility business which we see reversing as we go forward this fiscal year.

Great, very helpful. And if I could just maybe two last follow ups, any updated thoughts in terms of India, what you're seeing there, the demand profile and then there's been chatter within the industry. I think about some MDU opportunities. I'm wondering if you had any thoughts or comments on that front. Thanks.

Okay. So India, you know, is still a growth area. It's lumpy and we see the our E band solution as having continued traction. And to I my plan is to go to India before the Roth show. So when we go to the Roth conference, we can give an India update. But you know, where things are with respect to India is the demand environment is still good. It varies from quarter to quarter, our E band and multiband solutions are good.

And then what I would also say the, you know, in our prepared remarks, we talked about the provision plus network management software for the [passa link] platform and the [passa link] is incumbent as one of the two biggest operators in India. And we, we think that that's going to be a chance probably 6 to 9 months from us. And then with respect to the MDU, this is because the reason you bring this up is that a certain US Tier 1.

So the new on the call, new MDU solution that's been in trial will be rolling out to serve MDU [us]. And we I don't, we are not the in the pole position there, but we will have a an opportunity to get some business out of that. It may be zero, but it may be something significant. And should we be chosen? We will certainly broadcast that. Why, you know, widely?

Great. Thanks so much.

Thank you. And one moment for our next question, our next question is going to come from the line of Theodore R. O'Neill with Litchfield Hill research. Your line is open. Please go ahead.

Okay, thanks very much. Pete, I was wondering if you could talk a bit about the opportunity in fixed wireless access. [I mean, a lot, there's a] lot of chatter in the industry about it and sort of go over what products you've got that sort of that what band it is, whether it's an urban suburban where the markets lay in that sort of thing.

Okay, so the you're right, there is a growing sense that fixed wireless access is a significant driver of growth in 5 G networks. There's increasing fixed wireless access connections when those things, when those connections are made, it's favorable for backhaul needs. And here's a little bit of data. You know, the average mobile user data consumption is about 20 gigabits per month. The average fixed wireless access data consumption is 300 gigabits per month.

The fixed wireless access connections are expected to grow annually 17%. And that's really driven by the data consumption. And it's actually more important in emerging economies. And you know, just to do the kind of the density in rural and suburban environments. It's certainly an attractive way to make the consumption and then to link this back to Scott's question about the MDU, right? We may or may not win MDU projects.

But what the what MDU stands for is [multidwelling] unit. It's a three letter acronym. It used to be called departments. And what happens is to get the connectivity with the bandwidth there.

Tier 1 operators are looking at putting in wireless solutions and whether or not Aviat wins something in the MDU side, it creates more fixed wireless access and it creates more backhaul and that's good for us.

Okay. And for Mike, a financial question here on the merger acquisition and other expense in the quarter of 4.4 million. You don't expect anything like that to be in the upcoming quarter, do you?

No, that those will attenuate as we move through the year. That'll unless we do something [incremental] from an M&A standpoint. But at this point, absolutely Q2 will be significantly less than Q1 and then Q3 and Q4 should be down as well to more normalized levels.

Okay. Thanks very much.

Thank you. And as a reminder to ask a question, please press star 11 on your telephone one moment for our next question.

And our next question is going to come from the line of Tim Savage with Northland capital markets. Your line is open. Please go ahead.

Hey, good afternoon and thanks. A couple of questions. First, I think, well, I guess you said you weren't going to break out past the link directly anymore. But I wonder if you could say if it was up in fiscal Q1 versus the June quarter.

From a you know, revenue and gross profitability standpoint, gross profitability was about the same sequentially and revenues were up a little bit.

I'm sorry, I am, but I'm, I think I'm going to miss the end of that answer there revenues for what.

Up a little bit, gross profit is about the same revenues is up a little bit.

Okay. Up a little great. And if we look at the performance in the US in fiscal Q1, it's pretty similar whether you look at last quarter or last year. But I wonder if you can kind of categorize that weakness $14 million or so, by, I think the two primary factors that you mentioned Tier 1 and state pushouts and give us a sense of kind of how those parts are moving around.

Yeah, I mean, you know, you're right, roughly about half and half Tier 1 verses pushouts and then the visibility into the backlog pushouts and you know, sequential mix effect in Q2 as the US comes back a little bit is another leg of the stool in terms of more confidence and gross profit margins getting better sequentially.

Okay, great. And that's kind of where I was headed next, which is, you know, to the extent Pete you're looking for a record booking quarter. I think you, you mentioned a couple of factors, but is it principally?

Well, I don't know if that's bookings or revenue, but the state the pushes in the state projects, you know, coming back a little bit or are there any other factors in Tier 1 and either in the US or internationally driving that.

I would say Tier 1 internationally looks favorable from a quarter over quarter perspective the push out or the you know, not finalizing frequencies or finalizing a private network design that's already in our booking. So, so that wouldn't incrementally add to our bookings. So we see a strong, you know, North America bookings environment after a low and we do see international Tier 1, what I as, as growing and I would say we are still in between projects with our US. Tier one.

Okay, good. And that's kind of where I wanted to finish, which is, you know, I guess most of the data points even on the wireless side that I haven't, you know, we've been seeing recently are actually not that bad and I know your business you might lag the cycle in certain ways with regards certainly to maybe base station installation. I'm not sure whether that's the case relative to network densification, which is kind of most of what appears to be going on now.

But I wonder if you could just sort of discuss that at a high level, which is, you know, the way in which, you know, your, business tracks, you know, higher level spending trends among, you know, big wireless operators and to the extent that's starting to turn up. Now, would you expect an, you know, an impact down the line for a?

Yeah. So, you know, through this cycle we've you know, you know, before this quarter was like, how come you're not impacted by the CapEx cycle, how come? Right. So, part of it was we're half private networks and I think the second the other part of this is we are a late cycle. So we didn't go down and now, you know, now we have taken our contraction and I think the advantage we have in bouncing back and not, you know, having to move back up slowly is the pass a link transaction.

The customers that we have exposure there are growing for us. So, you know, absent of passing transaction, maybe we'd have a couple of quarters of down. But we see that the exposure those to ones as being favorable and driving about, you know, let's call it a V shaped recovery to use an economist word or rather rapid bounce back. So I would say private networks is steady and you know, we have the US issue and internationally Tier 1's, you know, driven by [palink] is favorable.

Okay, thanks very much.

Thank you. I would now like to hand the conference back to Pete Smith for closing remarks.

Yes.

So thanks to our investors for listening in. We're working to put the late 10-K in the challenging first quarter behind us. We see positive signs with respect to bookings. We're looking forward to updating you on progress in 90 days. Thanks everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.