Aviat Networks, Inc. (NASDAQ:AVNW) Q3 2024 Earnings Call Transcript May 1, 2024
Aviat Networks, Inc. beats earnings expectations. Reported EPS is $0.73, expectations were $0.59. AVNW isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. Welcome to Aviat Networks’ Third Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-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. You may begin.
Andrew Fredrickson: Thank you and welcome to Aviat Networks’ third 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 third 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 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 these 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 obligation 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. Let’s review Aviat Networks results for the third quarter of fiscal year 2024. We’re pleased to report that Aviat continued execution of it’s organic growth strategy that made further progress on it’s Pasolink acquisition. Highlights from the third quarter include total revenue of $111.6 million which represents growth at 34% versus Q3 of last year. Core Aviat revenue growth of 7% versus the same period last year, non-GAAP gross margin of 35% with core Aviat margins above 38%, adjusted EBITDA of $12 million, 11% higher than the year ago period, non-GAAP EPS of $0.73, strong cash generation in the quarter with $59.2 million of cash and marketable securities on the balance sheet and a net cash balance of $10 million.
These financial and operational results are driven by the continued implementation of Aviat’s operating model and made possible thanks to the effort and execution of the Aviat team and our partners throughout the quarter. Let’s review key highlights of the third quarter. We continue to progress the integration of the Pasolink business. In our first full quarter of ownership, we accelerated the execution of cost structure optimization and approached our near-term profitability goals. These efforts will continue to accelerate over the next two quarters as Aviat moves away from transition services provided by NEC. The Pasolink business was nearly breakeven on an EBITDA basis in the quarter and was accretive to our free cash flow generation. As we have onboard Pasolink customers, we have undertaken a customer profitability review to ensure margins are at sustainable levels.
While work is still ongoing, we expect that this will result in a slower ramp to the targeted $140 million annual run rate contribution. However, this should translate to more attractive business for Aviat shareholders. Beyond the existing Pasolink base, the sales teams continue to build cross-selling opportunities where we are introducing Pasolink products to historical Aviat customers and vice versa. We have already converted some of these into bookings and expect this will continue to grow in the quarters ahead. From a cost perspective, we are tracking to our internal plan to reduce cost of goods sold and excess inventory for the Pasolink business. We had some wins in the quarter and anticipate beginning to realize some more significant savings in the current fiscal fourth quarter, primarily from inventory rationalization.
Further, inventory optimization and cost savings will materialize in fiscal year 2025. Overall, the transaction is tracking to an IRR in excess of 2.5x Aviat’s weighted average cost of capital. Moving on to the core Aviat business. In private networks, investments and upgrades to numbers [ph], both in the US and internationally continued to support growth in this segment. The recent U.S. nationwide Tier 1 outage underscores the importance of private public safety and critical infrastructure networks. Our customers turn to Aviat for design and operation of networks that are engineered with a high degree of redundancy and reliability. Aviat’s equipment enables first responders, utilities and governments to continue communicating even when public networks are compromised.
Driving further investment in private networks is the recent authorization by the FCC at the end of February for companies to begin offering Automated Frequency Coordination systems or AFC for spectrum in the 6 gigahertz band. This is an exciting development that will likely lead to more fixed wireless access usage. However, concern persists among many of our private network customers as their microwave backhaul largely utilize the 6 gigahertz band, creating the possibility for interference. We’ve been preparing and have developed a comprehensive suite of solutions to protect these networks by detecting and correcting interference issues. Our Frequency Short Software or FAS is patented software that analyzes customers networks to detect interference and suggest remediation actions.
Working on Aviat radios and the radios have a leading competitor, FAS allows the network operator to have confidence in their networks reliability and performance even in the face of potential interference without having to move communication to a new band. Once interference is detected, or for proactive customers who do wish to avoid the possibility entirely, Aviat offers two solutions. First is an ultra-high power radio and 11 gigahertz to enable customers to move to a new band. We estimate upwards of 80% or more than 90,000 6 gigahertz microwave links in the U.S. can move to 11 gigahertz with this product. Second, is a new innovative multi-band solution operating at 6 gigahertz and 11 gigahertz and utilizing the 11 gigahertz UHP radio specifically designed to protect longer link distances.
These new offerings represent a large opportunity for Aviat to solve the growing problem for our customers. And we believe we are several quarters ahead of our closest competitor with these products. In the third quarter, we made several updates to our products to better address our private network customers. We released 1+1 Hardware Protection on our WTM Radio platform. This is important to open the all-outdoor radio market in mission-critical segments such as with public safety, federal and utility customers. We also released a new hardware variant of our CTR router to improve the interface and address the growing capacity needs of our router customers. These upgrades will help to sustain our leadership in the private network segment. Additionally, we won our first major LTE radio access network deal in an international military application which is an exciting adjacency market based on our Redline acquisition.
In Mobile Networks, we continue to execute to serve on global Tier 1 and Tier 2 operators who, in many cases, are still in the middle of or just beginning to build out their microwave 5G networks. To enable Pasolink customers to better manage their networks and to further expand the addressable market for our software, we will roll out support for our Pasolink portfolio in our ProVision Management platform in Q4 fiscal year 2024. In India, we received our first orders for microwave backhaul radios. Previously, we had been selling only our EBAND and multiband solutions. The microwave backhaul order is exciting as it represents Aviat’s first sale into a $200 million Indian microwave segment that had previously been unaddressed by Aviat. With that, I will turn it 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 third 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 third quarter of fiscal 2024 and the third quarter of fiscal 2023, unless noted otherwise. For the third quarter, we reported total revenues of $111.6 million as compared to $83.5 million for the same period last year, an increase of $28.1 million or 33.7%. On a constant currency basis, our revenue would have been $114.5 million. North America which comprise 40% of our total revenue for the quarter was $44.4 million, a decrease of $3.6 million from the same period last year, due to the near completion of a large Tier 1 project.
For the first 9 months of fiscal 2024, North America is up 3% versus the prior year and bookings in backlog remain strong. International revenue was $67.2 million for the quarter, an increase of $29.8 million or 79.7% from the same period last year. The addition of the Pasolink business contributed $22.5 million of that growth while the core Aviat’s business grew by $7.3 million or 19.6%. The strong organic growth was driven by Latin America and Asia Pacific regions offsetting weakness on the African continent. Our trailing 12-month book to bill ratio remained above 1 as it has since fiscal 2018. Gross margins for the quarter were 32.7% on a GAAP basis and 35.2% on a non-GAAP basis, as compared to 35.7% GAAP and 35.9% non-GAAP in the prior year.
GAAP margins were impacted by $2 million write down of Aviat inventory that will be replaced in the market by Pasolink products, as well as $0.6 million in amortization of the inventory step-up purchase accounting adjustment. Non-GAAP margins were diluted as expected by the impact of the Pasolink business. Core Aviat non-GAAP margins for the quarter were very strong at 38.4% driven by product mix and operational productivity. Third quarter GAAP operating expenses were $31.5 million, an increase of $9.2 million from the prior year driven by the addition of approximately $5.5 million in Pasolink related OpEx, M&A expenses and increased core R&D expenses. Non-GAAP operating expenses which exclude the impact of restructuring charges, share-based compensation and deal costs were $28.5 million, an increase of $7.9 million driven by Pasolink and increased R&D.
Third quarter operating income was $5.0 million on a GAAP basis and $10.8 million on a non-GAAP basis, compared to prior year GAAP of $7.5 million and non-GAAP of $9.3 million, were a decrease of 32.9% and an increase of 16.2% respectively. Third quarter tax provision was $0.6 million compared to $2.2 million last year. Starting in Q3, we have increased our non-GAAP cash tax estimate from $0.3 million to $0.5 million per quarter as a result of the Pasolink acquisition. As a reminder, the company has nearly $500 million of NOLs that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. Third quarter GAAP net income was $3.4 million, down from $4.9 million last year due to the previously mentioned M&A related expenses.
Third quarter non-GAAP net income which excludes restructuring charges, share-based compensation, M&A related costs and non-cash tax provision was $9.4 million compared to $8.9 million for the same period last year, an increase of $0.5 million or 5.6% driven by core revenue growth and margin expansion, partially offset by the addition by the additional R&D investment and modest dilution from the Pasolink business. Third quarter non-GAAP EPS came in at $0.73 per share on a fully diluted basis, compared to $0.75 per share for the same period last year, a decrease of 2.7% as a result of the shares issued in connection with this Pasolink acquisition. Adjusted EBITDA for the quarter was $12.0 million or 10.8% of revenue, an increase of $1.2 million or 11.1% from the prior year.
Moving on to the balance sheet. Our cash and marketable securities increased by $13.3 million to $59.2 million, driven by strong cash from operating activities of $15.3 million in the quarter. As a result, we moved from a net debt position of $3.6 million last quarter to a net cash position of $10.2 million at the end of the third quarter. The strong cash generation was driven by core operating results and a positive contribution from the Pasolink business. From a working capital standpoint, our DSOs and inventory turns continued to be impacted by the addition of the Pasolink assets which added roughly 20 days to DSO for Q3 and reduced inventory turns from 7.8 excluding Pasolink to 4.9 as reported. We expect these impacts to moderate over the coming quarters as the Pasolink business ramps and working capital levels normalize.
Moving on to our fiscal 2024 guidance. We’re updating our full year 2024 revenue guidance to be in the range of $408 million to $418 million and our EBITDA guidance to remain within the previously announced range. This soften guidance is primarily attributable to the slower ramp in Pasolink revenue, cautious CapEx spends by Tier 1 customers and African mobile network business. We expect our EBITDA for the fiscal year 2024 to approximate the current consensus estimate. With that, I’ll turn it back to Pete for some final comments.
Peter Smith: Thanks, David. Before Q&A, I would like to briefly discuss our outlook. The Pasolink acquisition is ahead of plan from an EBITDA and free cash flow perspective and we continue to expect it to be EPS accretive by September 2024 quarter. Additionally, the acquisition is tracking well ahead of plan. From an IRR perspective, we still believe the business will get to $140 million run rate level. Previously discussed and our EBITDA margin goals for Pasolink are in sight. The core Aviat business execute in line with our expectations and we’re achieving sustained growth ahead of the overall market growth rate. With that operator, let’s open up for questions.
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