Aviat Networks, Inc. (NASDAQ:AVNW) Q1 2024 Earnings Call Transcript

Aviat Networks, Inc. (NASDAQ:AVNW) Q1 2024 Earnings Call Transcript November 1, 2023

Aviat Networks, Inc. beats earnings expectations. Reported EPS is $0.87, expectations were $0.79.

Operator: Good afternoon, and welcome to Aviat Networks’ First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow with formal presentation. Please note, this conference is being recorded. I’d now turn the conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. You may begin.

Andrew Fredrickson: Thank you, and welcome to Aviat Networks’ first quarter fiscal 2024 results conference call and webcast. You can find our 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. With me today are Pete Smith, Aviat’s President and CEO, who will begin with opening remarks on the company’s fiscal first quarter; followed by David Gray, 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 financial projections, business drivers, new products and expansions, and the 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 statements made on this call, can be found in our most recent annual report on Form 10-K, filed with the SEC. The company undertakes no obligations to revise or make public any revisions 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?

Peter Smith: Thanks, Andrew, and good afternoon, everyone. Thank you for joining us to review Aviat Network’s results for the fiscal first quarter of 2024. I’m pleased to report that Aviat continued its strong execution and achieved revenue and profitability expansion in the quarter. Highlights from the first quarter includes revenue of $87.6 million, which represents growth of 7.8% versus Q1 of last year. Adjusted EBITDA of $12.1 million, a 13.1% increase versus Q1 of last year. Non-GAAP EPS increase of 16.0%. Strong cash generation in the quarter. Aviat generated operating cash flows of $14 million and ended the quarter with $35.5 million of cash and marketable securities and a debt free balance sheet. These financial and operational results are driven by the continued implementation of Aviat’s operating system and made possible thanks to the effort and execution of the Aviat team and our partners throughout the quarter.

Let’s discuss key highlights of the first quarter. Aviat’s exposure across different verticals, geographies, and customers has made our business strong and diverse. We continue to see healthy demand in private networks, mobile networks, and rural broadband networks. In private networks, we continue to innovate in North America. Aviat sales in this region grew 14% in the quarter versus the same period prior year. Thanks in part to the strong private network demand environment. We have executed well and have grown a robust project backlog. We had a record Q1 private network bookings that remain excited about the outlook of this segment. Increasingly, states are turning directly to Aviat for our expertise. Recently, we announced wins of two large state public safety networks, which are examples of this trend.

These projects are made possible by the full breadth of products and services that Aviat offers. High power microwave radios, high availability routers, and management software, along with turnkey services for design, installation, support, and ongoing managed services. This full suite of solutions is why Aviat is the leader in private networks. We believe that demand environment in private networks will remain robust in the quarters and years ahead. State and city budgets remain strong and growing in the current fiscal year. State public safety spending is expected to grow ahead of overall budget rates, and city, police, and fire spending is growing faster this year versus the prior two years. Additionally, American Rescue Plan Act funds, or ARPA, which are now fully distributed to the states, are still in the early stages of utilization.

These funds must be spent by the end of calendar year 2026. We expect this will provide a meaningful tailwind to private network expenditures. We continued our momentum and had a very strong quarter in federal government projects. Our revenue from federal business over the last 12 months has nearly doubled compared to the prior 12-month period. Based on our bookings and the long lead time nature of these projects, we expect the recent strength in this segment to continue in the quarters ahead. We anticipate a short to medium term federal shutdown would have a minimal impact on our Federal Project business. Mobile network operators continue their investment in building the microwave portion of their 5G networks both in the U.S. and internationally.

Aviat’s unique product portfolio continues to attract operators by lowering their total cost of ownership and improving network performance. We are still early in the adoption of mobile 5G and we expect continued investment in microwave networks to support growing needs from both customers and business enterprises. In the U.S., the mix shift to microwave as the mode of backhaul is favorable. In this regard, a U.S. Tier 1 customer was significant for Aviat in the quarter. We believe that as the 5G buildout extends beyond urban areas, we will continue to see demand for our microwave products and services. Internationally, operators are planning and growing their 5G deployments and we are focused on winning new business and projects. That our role broadband business, Aviat continues with our distinctive e-commerce platform and it had a strong quarter of Aviat’s store performance.

Wireless internet service providers and others continue to invest and plan for funding from the Rural Digital Opportunity Fund or RDOF and Broadband Equity Access and Deployment Program or BEAD. There has been recent commentary from several states for considering or plan to employ technological neutrality in BEAD-related projects. This is a positive development for the use of wireless backhaul as microwave is typically a more cost-effective technology than fiber for rural communities, while still providing low latency, high reliability, and a high bandwidth. This would be a win-win for citizens in states as microwaves can be deployed faster than fiber, while providing the bandwidth and speed needed. This also allows states to stretch their BEAD funding dollars further.

We are well-positioned to capture this business as we are already working with states and service providers alike to ensure Aviat is ready to supply these critical infrastructure projects. At the beginning of October, Aviat attended WISPAPALOOZA, an annual wireless ISP and rural broadband convention where we were encouraged by the upbeat tone of network operators. Deployments remain healthy and fixed wireless access continues to grow. We believe that the expansion of the 6 gigahertz frequency for unlicensed broadband services, which should be authorized by the FCC by the end of the year, will drive further uptick in wireless access. This is important for Aviat as fixed wireless access networks tend to use microwave as their backhaul at a higher rate than fiber-to-the-home networks.

Given the recent turbulence in the network equipment space, let me emphasize why Aviat’s demand environment remains strong and we continue to execute on our growth plans. First, as I opened with, Aviat’s business is diversified between the segments we serve. Private networks, mobile network operators, and rural broadband operators do not follow the same CapEx cycles. Additionally, Aviat benefits from our direct to the customer channel rather than relying on distributors. Roughly 90% of our business is direct. This allows us to have intelligence from customers about their needs and business forecasts. This also eliminates the risk of inventory buildup at distributors, which many companies are currently experiencing. This visibility allows us to better serve the customer and keep a pulse on market demand, which feeds into our new product and service development process.

Many network equipment providers, particularly fiber players, have struggled with their supply chains over the last couple of years that have recently experienced softening demand as a result of the overordering that occurred. I spoke at length about this on our last earnings call and these factors remain true today. Aviat has been able to avoid this problem and continues to execute favorably because of our supply chain resiliency over the last three years and our direct relationships with our customers. Our supply chain environment is normalized and we remain committed to constantly improving our performance. We are confident in our ability to meet customer demand and support our growing markets. Not only has near-term demand remained strong, but we also see our total addressable market growing over the long-term.

Historically, Aviat has been viewed as a microwave business serving a $3.2 billion market. To better serve our customers, we have added routers, managed services, and software to our portfolio. Our recent tuck-in acquisition of Access Products expanded the markets we can serve. As a result of the acquisition and our organic investments, our business today serves a TAM of greater than $11 billion. We believe that our current TAM will grow at 7% through 2027 to become a $15 billion market. This growth is driven by increasing data consumption on global networks and significant investments in private LTE and 5G networks. We expect our TAM to continue to expand as we find new ways to serve our customers. To continue our share gain plans, maintain our TAM and respond to recent investor inquiries, we will provide an update on our roadmap and semiconductor modem plans.

Our roadmap is focused on the following factors. Capacity, distance, total cost of ownership. Today Aviat delivers industry leading capacity at distance and our customers enjoy cost of ownership benefits. For example, today we provide five gigabits per second radios at 40 plus miles, 10 gigabits per second radios at 20 miles, and 20 gigabits per second radios at distances shorter than three miles, one of two such radios available in the market. While capacity is on the mindset of many technologists and investors, the 20 gigabit per second radio represents very little of our total demand. Extending beyond this capacity in any meaningful way requires new bands like D-Band, which I will touch on in a moment. The principal access of innovation is to deliver customer-required capacity at increased distances at the lowest total cost of ownership.

The path to achieve this key innovation requirement is the integration of switch technology, modem technology and the microprocessor. In our view, the best way to achieve integration is with an economical advanced semiconductor technology node, or said in another way, geometries. The better semiconductor technology node permits increased functionality, integration, and lower power consumption. We believe our roadmap has advantages here. Beyond capacity, distances, and cost of ownership, roadmap discussions often mention spectrum, frequency ranges or bands. Our roadmap will support products where spectrum is currently available and where spectrum is anticipated to be available in the coming years. Recently, one of our competitors highlighted D-Band spectrum as a 6G product targeting 2030.

We tend to agree and we will be ready. With that, let me turn the call over to David to review our financials before coming back for some final comments. David?

David Gray: Thank you, Pete, and good afternoon, everyone. During my remarks today, I’ll review some of the key fiscal 2024 first quarter financial highlights noting our detailed financials can be found in our press release and 10-Q filed this afternoon. As a reminder, all comparisons discussed today are between the first quarter of fiscal 2024 and the first quarter of fiscal 2023 unless noted otherwise. For the first quarter, we reported total revenues of $87.6 million as compared to $81.3 million for the same period last year, an increase of $6.3 million or 7.8% driven by strong growth in the Americas and Europe. North America, which comprised 63% of our total revenue for the quarter, was $55.5 million, an increase of $6.7 million or 13.6% from the same period last year, driven by our private networks and Tier 1 business.

International revenue was $32.1 million for the quarter, a decrease of $0.3 million or 1.1% from the same period last year. Strong growth in Latin America, the Middle East and Europe was offset by cyclical weakness in African mobile operators CapEx spending. Our trailing 12-months book-to-bill ratio remained above one as it has since fiscal 2018. Gross margins for the quarter were 36.4% and 36.6% on a GAAP and non-GAAP basis as compared to 36.3% and 36.5% in the prior year. The improvement was driven by strong growth in higher margin North American business. First quarter GAAP operating expenses were $26.3 million, an increase of $0.8 million from the prior year. First quarter non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation and deal costs were $21.3 million, an increase of $0.9 million.

The increase in both GAAP and non-GAAP operating expenses were driven by higher investment in R&D. Our disciplined cost management continues to deliver operating leverage on revenue growth. First quarter GAAP and non-GAAP operating income were $5.5 million and $10.7 million compared to prior year GAAP of $3.9 million and non-GAAP of $9.2 million, or increases of 41.8% and 17.7% respectively. First quarter tax provision was $0.6 million compared to $3.9 million last year. Last year’s figure included a one-time discrete charge of $2.6 million related to our legal entity restructuring. As a reminder, the company has nearly $500 million of NOLs that will continue to generate shareholder value via minimal cash tax statements for the foreseeable future.

First quarter GAAP net income was $4.0 million as compared to a loss of $2.7 million last year. Last year’s results included a one-time loss of $1.7 million on marketable securities and the previously mentioned discrete tax provision charge. First quarter non-GAAP net income, which excludes restructuring charges, share-based compensation, M&A related costs, and non-cash tax provision was $10.3 million compared to $8.8 million for the same period last year, an increase of $1.5 million or 17.6% driven by revenue growth and margin expansion. First quarter non-GAAP EPS came in at $0.87 per share on a fully diluted basis compared to $0.75 per share for the same period last year, an increase of 16%. Adjusted EBITDA for the first quarter was $12.1 million, an increase of $1.4 million or 13.1% from the prior year.

Adjusted EBITDA margins were 13.8% for the quarter. Moving on to the balance sheet, our cash and marketable securities at the end of the first quarter increased to $35.5 million from $22.1 million in the prior quarter with no debt. The $13.3 million increase in cash for the quarter was driven by solid profitability coupled with improvements in accounts receivable and inventory balances. Our balance sheet remains very solid, providing us with flexibility to continue executing our long-term plans. With that, I’ll turn it back to Pete for some final comments. Pete?

Peter Smith: Thanks, David. Before opening up for Q&A, I’ll provide a few updates and closing commentary. First, I would like to thank Jim Stoffel for his years of service as an Aviat Board Member. Jim served on our Board of Directors for over 16 years. During that time, he helped navigate Aviat from the merger that created the company, through to the exciting position we were in today as the leading wireless transport company. His leadership and knowledge have been a tremendous asset, and we thank him for all those contributions to the company. Second, we currently expect the NEC transaction to close in December 2023. We continue to progress on regulatory approvals, and the exact date remains subject to customary closing conditions.

We can add some qualitative updates. The integration planning is progressing smoothly. Based on our learnings today, we now believe that the transaction will be accretive in the fourth quarter after close as compared to the fifth quarter previously stated. Based on the company’s outlook, we are affirming our fiscal year 2024 guidance exclusive of the NEC business. We will update our guidance to include the NEC business after the closure of the transaction. Note that our guidance is on a full-year basis and reflects the project basis of our deployment. In Q1, we had a few projects that were accelerated and positively impacted the quarter. Based on the current project pipeline, we expect Q2 to be sequentially up from Q1. To reiterate, our fiscal year 2024 guidance is as follows.

Revenue to be in the range of $367 million to $374 million, and adjusted EBITDA to be in the range of $51 million to $56 million. With that, Operator, let’s open up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. One moment for our first question. Our first question comes from the line of Scott Searle with Roth. Your line is now open.

Scott Searle: Hey, good afternoon. Thanks for taking my questions. Pete, Dave, great job on the quarter. Maybe just to start, Pete, it sounds like you’ve got a high degree of confidence in terms of the near term and intermediate term outlook, which is really divergent from what’s going on in the rest of the world. I didn’t hear India as part of your commentary. I was wondering if you’d give an update there. And then looking at the private networks business, it seems like there continues to be a lot of strength there. How far out do you have visibility on that front? And looking at your fiscal ’24 guidance, I was wondering what are the swing factors to the upside? You’ve been pretty conservative, I think, in terms of how you look to the outer quarters and guide for the year. I’m wondering what the factors are that would help you out to the upside of the range that you’ve provided?

Peter Smith: I think just thinking about India, we see probably 30% year-over-year growth. What quarter that it didn’t hit in this quarter, and it’s probably more likely to be in the January to June time frame. So we see India as being solid. With respect to visibility in the private network space, we came in with tremendous growth in backlog, our July 1 to June fiscal year. Again, this quarter, we were pleasantly surprised that our bookings of North America private networks were the highest they’ve ever been in a first quarter for Aviat. And that gives us confidence in the business, in the medium to long-term, because those projects typically, if we get a booking like now, we go into a design phase and revenue can start one quarter to three quarters later.

So we think that that is going to play out and our backlog mostly would cover the next 12 months, the next 24 months, and very little goes past the 24 months period. So I think you might ask three questions and I hit on two of them so.

Scott Searle: Yes, Pete — just swing factors to the upside, Pete. Where do you see it? Because it seems like we’re early days in terms of ARPA contribution in RDOF. I don’t know if there’s a number of percentage of the mix that you could quantify now, but it seems like it’s early stages on that front. But looking to fiscal ’24, where do you see the swing factors to the upside?

Peter Smith: Yes, so we’ve seen some small design orders with respect to the RDOF and we would say that the RDOF funding looks like we’ll get some more of it in the January to June time frame. The — in the quarter we announced two large public safety wins. We think some of that came from ARPA. We see a lot of the ARPA money as being unspent and stretching out, needing to be spent by the end of 2026. So we think that that’s going to be good and more immediate data. We really didn’t expect to have record private network bookings in North America in our first quarter, and we did. So we think we’re starting to see ARPA impact the demand environment and we think it will grow going forward.

Scott Searle: Great. And lastly, if I could just to follow-up on NEC. It’s nice to see that you’re comfortable enough to move up the timeline of expected accretion. But it sounds like the integration ahead of the deal closing is progressing in line to better. But I’m wondering what the responses that you’re getting from customers. How are you feeling about revenue attrition, how the customers like the deal, and kind of the expectations on that front going forward? Thanks.