Q3 2024 Aviat Networks Inc Earnings Call

Participants

Andrew Fredrickson; Director, Corporate Development and Investor Relations; Aviat Networks Inc

Peter Smith; President & CEO; Aviat Networks Inc

David Gray; Chief Financial Officer, Senior Vice President; Aviat Networks Inc

Jaeson Schmidt; Analyst; Lake Street Capital Markets

Theodore O'Neill; Analyst; Litchfield Hills Research, LLC

Scott Searle; Analyst; Roth MKM

Tim Savageaux; Analyst; Northland Capital Markets

Presentation

Operator

Good afternoon. Welcome to Aviat Networks Third Quarter Fiscal 2024 earnings call. At this time, all participants are in a listen only mode. 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 Stewart 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 w. w. w. dot onvia networks' dot com, along with a replay of today's call.
With me today are Pete Smith, our President and CEO, who will begin with opening remarks on the company's fiscal third quarter, followed by David Craig, our CFO, who will review the financial results for the quarter. He will then provide closing remarks on AMI, our 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 the 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 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 on the IR section of our website at www.realnetworks.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 Onvia's President and CEO, Peter Smith.

Peter Smith

Thank you, Andrew, and good afternoon, everyone. Let's review RVR networks' results for the third quarter of fiscal year 2024. We are pleased to report that RBI had continued execution of its organic growth strategy and made further progress on its PASOLINK acquisition highlights from the third quarter include total revenue of 111.6 million, which represents growth of 34% versus Q3 of last year. Core RV revenue growth of 7% versus the same period last year. Non-gaap gross margin of 35%, with core RBR 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 was $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 RBS operating model made possible, thanks to the effort and execution of the RBS team and our partners throughout the quarter.
Let's review key highlights of the third quarter. We continue to progress the integration of the Datalink 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 RBR moves away from transition services provided by NEC. The vascular business was nearly breakeven on an EBITDA basis in the quarter and was accretive to our free cash flow generation as we have onboarded nationally and customers. We have undertaken a customer profitability review to ensure margins are unsustainable levels, while work is still ongoing, and 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 all of our shareholders beyond the existing gasoline base.
The sales teams continue to build cross-selling opportunities where we are introducing pass away products to an historical RVSI 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 from the passenger 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 COGS savings will materialize in fiscal year 2025. Overall, the transaction is tracking to an IRR in excess of 2.5 times RBS weighted average cost of capital moving on to the core of our business in private networks, investments and upgrades to networks both in the US and internationally continued to support growth in this segment.
For the recent U.S. nationwide Tier one outage underscores the importance from private public safety and critical infrastructure networks. Our customers turn to RVR for design and operation of networks that are engineered with a high degree of redundancy that reliability ambiance equipment enables first responders, utilities and governments to continue communicating even went public networks are compromised. Driving further investment in private networks is the recent 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 six gigahertz band. This is an exciting development that will likely lead to our fixed wireless access usage. However, concern persists among many of our private network customers as their microwave backhaul largely utilized the six 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 the interference issues, our frequency assurance software, our FAS added software that analyzes customers' networks to detect interference and suggest remediation actions working on RVR, the radios and the radios have a leading competitor. Yes, allows the network operators have confidence in their network's reliability and performance even in the face of potential interference without having to move communication to a new band. Once the interferences detected and war for proactive customers who wish to avoid the possibility entirely Movianto offers to solution. First is an ultra high-power radio and 11 gigahertz to enable customers to move to a new bat. We estimate upwards of 80% or more than 90,006 gigahertz microwave links in the US can move to 11 gigahertz with this product.
Second, there's a new innovative multiband solution operating at six and 11 gigawatts and utilizing the 11 gigahertz UHP. radio specifically designed to protect longer list link distances. These new offerings represent a large opportunity for IVR to solve a 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 one plus one to hardware protection on our WTM radio platform. This is important to open the all door radio market in mission critical segments such as with public safety, federal and utility customers. We also released a new hardware variant from 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 today in international military application, which is an exciting adjacency market. Based on our redline acquisition in mobile networks, we continue to execute to serve our global Tier one and Tier two operators who in many cases are still in the middle of or just beginning to build out their microwave 5G networks to enable parceling 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 Pro-Vision management platform in Q4 fiscal year 2024. In India, we received our first orders for microwave backhaul radios. Previously, we have been selling all your e-mail band and multiband solutions. The microwave backhaul are as exciting as it represents, obviously, first sale into a 200 million Indian microwave segment that had previously been addressed by Onvia.
With that, I will turn it over to David to review our financials before coming back for some final comments, David, thank you, Dave, and good afternoon, everyone.

David Gray

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 comprised 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 one project for the first nine months of fiscal 24, North America is up 3% versus the prior year, and bookings and backlog remained 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 RV business grew by $7.3 million or 19.6%. 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 one 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 REO inventory. So it will be replaced in the market by PASOLINK products as well as $0.6 million in amortization of the inventory step-up purchase accounting adjust non-GAAP margins were diluted and as expected by the impact of the Astrolink business, core RBR 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, any 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% percent, 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 expense. 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 0.55 million or 5.6%, driven by core revenue growth and margin expansion, partially offset by the addition of the additional R&D investments 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. This strong cash generation was driven by core operating results and a positive contribution from the passenger business from a working capital standpoint, our DSOs and inventory turns continue 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 are updating our full year 2024 revenue guidance to be in the range of 408 to $418 million and our EBITDA guidance to remain within the previously announced range. The softened guidance is primarily attributable to the slower ramp in PASOLINK revenue, cautious CapEx spend by Tier one customers and African mobile network business. We expect our EBITDA for the fiscal year 2024 to approximate the current consensus.
With that, I'll turn it back to Pete for some final comment.

Peter Smith

Thanks, Dave. And before Q&A, I would like to briefly discuss our outlook. The Datalink 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, our insight to core RBR business executed in line with our expectations, and we are achieving sustained growth ahead of the overall market growth rate.
With that, operator, let's open up for questions.

Question and Answer Session

Operator

(Operator Instructions) Jaeson Schmidt, Lake Street.
Hey, guys.

Jaeson Schmidt

Thanks for taking my questions. I just wanted to start on the stated our fiscal 2014 guidance. Dave, I know you kind of laid out kind of three drivers from that. But if we think about, let's call it, the 15 million delta at the midpoint between the two ranges, can you sort of rank order those three issues in terms of impact.

Peter Smith

So third, maybe rank order them, Jason one in capacity and grab.
And then I would say two would be Africa and three would be the Tier one environment.

Theodore O'Neill

Okay.

Jaeson Schmidt

That's really helpful. And I know you mentioned you guys are looking over sort of the PASOLINK business from a margin perspective. Curious if this changes your thoughts, Pete, on how you're looking at fiscal 25, I think last quarter you thought sort of five, 15 to five 1T. Is that still achievable?
Look, I think both, you know, we got a little bit on overly enthusiastic with respect to our partner, our number for FY 25. We typically put that on in the C August session. It I think we will we will update our guidance in August. And I would say that five 15 number will be probably the high end of the range, but we're not ready to do that. And we we we discovered some quote unquote, empty revenue and PASOLINK. So or we're not going to take.

Peter Smith

And what we're really really excited about is we're ahead of our plan on cash generation.
And we expect by September to be it EPS accretive, if not sooner.
Okay.

Jaeson Schmidt

That makes sense. And then just the last one for me and I'll jump back into queue. I know you previously said that you never expected the data big impact on calendar 24, but curious if you could just update your thoughts on how you're thinking about some of these government funding initiatives and what sort of timetable to an impact to the P&L.
And so we've been consistent that this is a calendar year 25.

Peter Smith

We are seeing some incremental orders from the Rural Digital Opportunity Fund and onto the American Rescue Act.
We we know that, that needs to be spent by the end of December 2026, and we are not forecasting anything, but we are well positioned to have a positive surprise. And when we get that, then we'll we'll update you all.

Jaeson Schmidt

Got it.
Thanks.

Peter Smith

A lot, guys.

Operator

Scott Searle, Roth Capital Partners.

Scott Searle

Hey, good afternoon. Thanks for taking my questions. Pete, maybe to dive in on PASOLINK. I think young back-of-the-napkin math is right at 22 million or so in the quarter and gross margins in the 28% range. I'm wondering if you could address where you think Kassling can get to.
I think the target number was getting 30, 35 million on the top line and being able to bring up gross margins or in line with a core. Obviously, what are the current thoughts there? How big is the magnitude?
We don't call it empty or hollow revenue that you are finding with?

David Gray

Absolutely.
Yes. So Scott, it's a matter of time on getting to the one 40 and our view on getting to 33% gross margins remains intact. And one of the drags on the gross margin right now is the impact of the transition services and that each quarter we progress that will get less less and less and that so that will have a positive impact. And then we are working on on reducing field service cost as well as cost of goods sold. So far, we feel we feel good about that data in.

Scott Searle

And maybe a follow-up from an OpEx standpoint. It seems like you guys have done lot of rationalization at this point in time. Is there more to go on that?
Yes. So certainly, we're disappointed with our enthusiasm on the top line. We are very, very enthusiastic about our ability to remove cost and squeeze both the operating expense and the gross margin line. And that's really why we gave the on the hENT about our IRR being 2.5 times our lag. And I think we'll give some more color on that in six months because we're all we're really, really, really pleased with off to the returns we're projecting. We will book we we the returns would be even better if we the faster we can get the some of the ramp issues out of the way. But net-net, we would still do this deal and work and we're happy about the customer engagements. We're happy about the return and we just need to be a little more circumspect with respect to capacity and Graham such a list of items.
I think quarter, have you had gross margins at 38% historically, that's tended to be a bit of an anomaly. So is that the sustained range going forward or does that come in a little bit in the June quarter. And lastly, new products and opportunities, India and then specifically some of the areas router in 11 gigahertz. I was wondering if you could just give us a time line of when you expect that to contribute? Thanks.

David Gray

Yes, Scott, I'll take the margin question first. So yes, are organic. Gross margins were very strong in the quarter at 38.4%. And year to date, we are right around 38%, which is a couple of hundred basis points better than our initial guidance for the full year of FY 24. We do expect a probably a modest pullback in Q4, but will still be well ahead of what we were projecting on a full year basis. So I think and yes, things are things are looking good from that standpoint. I think it kind of resets what the expectation should be going forward.
Okay. So somewhat limiting.

Peter Smith

Tom, should I should I let me jump in with the product question.
So the are the one plus one hardware protection or the WTM throughput rate that gives us a high reliability, high capacity, outdoor radio, but we think that that increases the addressable market by about a our $50 million.
We also mentioned our frequency assurance fund, some of our leading private network competitors are that create that's available now and we have received initial orders and you know, that's a high margin. We see the 11 gigahertz radio we have. We have previously announced twos or energy that is in the market. We think the opportunity size there. It is 120 and then the long distance link protection with the Multiband six plus 11. That's a smaller market, say 30 million. And it's in our it's in our toolbox right now. And the reason we bring all that stuff up is because of the <unk>, the six gigahertz unlicensed band opportunity, which we think will drive more of the backhaul and is good for the fixed wireless folks.

Scott Searle

Well, thank you.

Operator

Theodore O'Neill, Bill Hill's Research.

Theodore O'Neill

Thank you very much. Pete, you mentioned in your prepared remarks that you are seeing cross selling and I was wondering between the PASOLINK and your products, are you seeing any are there any surprises there that you weren't expecting?

Peter Smith

So you know, that's actually making it difficult to kind of keep the business separated.
And we see our opportunity in services to take off to provide services where we didn't have footprint and vice versa. So that's a pleasant supported surprise that's masked by our slower than expected ramp, but we're really excited about that. And I would say for six months out from being able to bring some of the obvious software and put it on top of the passenger car radio. And what I would say, this doesn't show up in the financials, but we're we're enthused about the customer engagement and the desire for us to make things like fast and has that our network management software will work on the the PASOLINK radios.
Okay.

Theodore O'Neill

And on the the first India microwave backhaul order did something something unique happened in India as it opened up this opportunity for you?
I think we proved ourselves with the band and multiband at our vendor-agnostic software as well as our delivery. And what that was an opportunity to do was to go after some some of the incumbents and the feedback do you receive rightly, we did well when we got the small opportunity and on the feedback we're getting now on the microwave pieces of daylight, the technical performance of our product, the simplicity of the design and some of our key, a key feature. So more pumps, we executed on that to take hold. And it seems like it's going to pave the way for future growth.
Okay. And for David, on the selling and admin expense, I'm wondering how it should trend from here.

David Gray

There's 1.7 million of M&A in the current quarter, and I'm wondering if that continues now that that should go down significantly from here on out?
I wouldn't expect to it would be yes, some straggling costs as well, tackle certain things, but no, there we'd like to mention that the one that would help margins also help our OpEx is the reduction in some of the transition services costs quarter over quarter as we go forward. So we expect to get be getting more of those costs out going forward. So that should be working in our favor.

Theodore O'Neill

Okay. And my last question, Pete, I think every company should be filing an S-3 Shelf filings of, however, much of that money they can get. But I was wondering if you could share your thoughts on putting that in place for RBS?
Yes. So we we have an existing shelf from three years ago that expires on May fourth. And I know that some investors I get it. I'm concerned about on Dow, I think we've done a prudent on deployer of capital.

Peter Smith

And so us just putting the shelf in place is a good corporate housekeeping.
If some opportunity were to present itself. We're in position to capitalize on it. But I want to be clear, we currently have no active deal in our M&A pipeline that would necessitate pulling down the shelf. But we just wanted the flexibility and then a couple of investors I'll put in some questions since that filing came out, you know about our firepower and we were comfortable using debt up to three times our 12 months trailing EBITDA or three times the pro forma combined our EBITDA. So we think we have some significant firepower.
And then the additional question was if you use that data, what would the rate be? And we think it will be in the sulfur plus 250 to sulfur plus 300 basis points.

Operator

Okay.

Theodore O'Neill

Thanks very much.

Operator

Tim Savageaux, Northland Capital Markets.

Theodore O'Neill

Hey, good afternoon. You mentioned 7% organic growth for RBR in fiscal Q. three. I wonder if you can give us it's similar estimates, not a similar number, but the same type of estimate for organic growth you're implying here for Q4, and I think that brings you in right, are likely bring in somewhere around 5% for the year. Is that sort of rate maybe a little bit below your historic growth rate. But would you expect at least as you look at it now, would you expect that to persist into fiscal 25 or maybe something more typical kind of mid to high single digits in terms of or great organic growth rate for obvious things?

David Gray

Yes, I think I'm I think in that mid-single digits where we where we would end this year as we carry forward into into 25, we're not done and we're not going to estimate in the high single digits at this point so look, yes, for modeling purposes, polluted had mid-single digits and you know, we are.
So of course, we're going to China do better than that. And we talked about two other headwinds, Tier one and Africa. We think that the on Africa is off is really are kind of at a bottom, and that's largely our interest rates and another data point that I'd like to add is on a constant currency basis, our revenue was down about 4%. It would have been 4% higher if we didn't have the emerging market on our currency issue, and we would have had about 1.9 million more high EBITDA. So far, we believe that we beat the consensus on the bottom on the bottom line despite that. So you know, our number one focus is to drive the PASOLINK our revenue up quicker. And you know, we I would say the the African currency issue, that's that's beyond the control of RVR, but we're well positioned when that Dama.
Dan Briggs.

Theodore O'Neill

Okay, thanks. And maybe just going to follow up with that with hopefully a discussion on some of the puts and takes around that organic growth rate. You mentioned Africa, although that sounds like it's impacting this year. And if it's bottoming, maybe that could be a tailwind. Imagine the rural broadband growth drivers to get stronger next year than again, you mentioned finishing up the Tier one project and maybe that's a tough compare. So Pete, I wonder if you might just go through some of those puts and takes around that mid-single digit growth rate and what could drive it either way beyond and so on.
And the Tier one project is a tough compare. We think we have about 35%, 35% share of rural broadband. And if the Argos kicks in in a meaningful way, that's going to be very, very positive for us. A reversal in the currency with respect to Africa is going to be good.

Peter Smith

And then it also has let me come back to the U.S. Tier one.
This is a question that we've gotten.

Tim Savageaux

Yes.
And then in the quiet period is about ARM on some some are multi-dwelling unit trials that we can't disclose the customer, but we will acknowledge those. And if that were to as we get across the goal line, there would be a significant uplift to offset the completion of the project. So we were pretty happy with our funnel and on we know we think that the future is rather bullish for us and on sort of the puts and takes the deployed is the completion of the U.S. Tier one, we see new new projects with our major U.S. Tier one customer that could be a lift for us. We see Africa currency at the bottom and we need high as interest rates moderate, that's going to reverse and we need to get the PASOLINK ramped up to where where it should be.

Theodore O'Neill

And that's a good place to end for my last question, which is, would you hope to have that up to the target run rate by the end of fiscal 25? And that's it from OpEx?
Yes, yes, yes, that's a product where we usually give you a hard time firm for that being.

Peter Smith

I have directed my answers and rightfully so from your perspective, my answer on that is a clear crystal clear.

Theodore O'Neill

Yes, when received in crystal clear fashion.
Thanks.

Operator

Thank you. And as a reminder, to ask a question, please press star one one one moment for our next question.
I'm actually showing no further questions at this time. I'd like to turn the conference back to Pete Smith for closing remarks.
Thanks, everyone, for joining us, and we're looking forward to updating you in about 90 days. We are remain enthusiastic about the business. We think our products, customers and our cost reduction program are on track, and we're certainly bullish about the future. Thanks, everyone.
This concludes today's conference call. Thank you for participating, and you may now disconnect.