Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the off yet.
Work, it's called 2022nd quarter Conference call.
At this time, all participants Arnie listen only mode.
After the speakers presentation, there will be a question and answer session.
Okay question. During this session you want me to press Star one on your telephone.
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Now they can the conference over to your speaker today, Mr., Glenn Wiener Investor Relations. Thank you Sir Please go ahead.
Hello, and welcome to Aviat Networks' fiscal 2022nd quarter results conference call or form 10-Q press release interrupted investor presentation can all be found on the Investor Relations section of our website, that's kind of a replay of today's call approximately one after one hour. After the call ends today's call will begin with opening remarks by obvious President Chief Executive Officer Pizza.
Yes, there will be followed by stand Gallagher Chief operating officer in principle Financial Officer, and then Eric Shang Senior Vice President and principal accounting officer. After their prepared remarks love them off the call for questions. Sean at fault Senior Vice President Corporate development is also with us and will be available during the Q any portion of the call.
During today's call webcast management.
They make forward looking statements regarding obvious business, including but not limited to statements relating to projections of earnings revenue business drivers the timing capabilities from new products network expansion by mobile private network operators and economic activity in different regions. These and other forward looking statements involve assumptions risks and uncertainties that could cause.
Actual results differ materially from those statements. Please note. These forward looking statements reflect the company's opinions only as of the data this call and the company undertakes no obligation to revise or publicly released the results of 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 gap.
Non-GAAP financial measures. Please refer to our press release and financial tables, there in which include a GAAP to non-GAAP reconciliations and other supplemental financial information.
Lastly, we encourage investors and analysts to ask questions and as always you can reach out to be following the call. We greatly appreciate your continued interest navient your ongoing support and I will now.
During the call over to Pete.
Thank you Glenn.
It's been about five weeks since our role as CEO I've spent the majority of my time travel into our sites getting to know our people some of our customers and reviewing our strategy to drive growth.
<unk> profitability and create value for all stakeholders.
It did a lotta research before taking this this roll my initial assessment of obviously, it's very much aligns with what I've learned thus far.
We have industry, leading technology, a diverse global customer base and strong relationships with both our customers and our partners our position in North America is.
And should continue to be a catalyst for us in the future specifically with private networks public safety and several vertical markets, such as utilities oil and gas among others. Additionally demand for our solutions in North America should only intensive but given the increased need for mission critical.
Works and the upcoming Buildout of networks in support of Fiveg.
Well, we've done well over the past years building, our foundation, expanding our customer footprint and developing new solutions for these customer segments. I believe there is significantly more we can do to drive growth and increase our share of demand.
Internationally, we have strengths and weaknesses on the positive side, our technology and customer footprint.
However, while we have added accounts and grown in some regions. It's been a consistent and I believe we can do a better job of commercializing products for specific customers and regions, while providing more.
More value added services that differentiate obviously from the competition.
That said, we will look at each market we're in.
There is we can expand into potentially aligned with other companies to lower our cost of entry, while providing customers with a one stop shop solution to make the buying cycle easier.
Well.
Career I've been fortunate to have worked with strong leaders and teams and in every position no matter what industry I've always focused on two things commercial excellence and operational excellence.
Yeah, I believe that we have good products that go head to head with any competitor in the industry housing.
Incorporate customer feedback.
Yes, the market opportunity and specific customer prospect needs and how we launch market himself to me could be significant organic growth drivers within the next few years that has nothing to do in future innovation, it's about leveraging what we have to do.
Call to do better service, the customer and whats commercial excellence is all about.
Operational excellence is underway and the team has done a great job of driving better efficiencies and collaboration on a gold global scale, we're continuing with the plans in place, we'll give you a lower fixed costs by improving.
Efficiency and getting a better return on our investments in technology.
Well the next couple of quarters of mortgage share with respect to our strategy ambition.
[noise] better execution is critical both on the commercial and then operations the strategy we.
In North America has and should continue to drive results Bravia and by working more closely with our customers to better understand their views into how we can support them I see opportunities to grow organically and leverage our technology.
To expand beyond our installed base.
Rational will be down this year, we knew that coming in and took into account. The current spending environment in Africa, we anticipate a downturn in the APAC region with respect to Asia. However, this is timing only and we had a very strong fiscal year 19, and our new agreement with globe.
Good yield an even stronger fiscal year 21, there are also opportunities to expand in Asia beyond the regions. We're now are in now and that is also something along the team will be looking at.
Our top line will be down a bit this year to the international markets, but we're growing in North America, and I expect that.
We continue margins are trending upwards costs are being removed and reinvested and I'm confident that the profitability will increase over fiscal year 19 as noted in our guidance.
Next year my goal is to drive both top and bottom line growth in a meaningful way and deliver the returns I believe we're capable of achieving.
I'm excited to take on this rule and more excited to deliver results for you. Thank you and I'll now turn the call over to staff.
Thank you Pete and good afternoon, everyone. When I first initiated its turnaround strategy in fiscal year 2016, our annual Opex stood at approximately $85 million on 200.
$68 million of revenue and non-GAAP gross margins were little less than 25%.
Over the course of three years, even on revenue that is lower by approximately 10% compared to the end of fiscal year 19, we have improved margins by over 760 points and reduced opex by approximately 12%.
Over a three year period, we have demonstrated substantial enhancement to bottom line profitability, while strengthening our balance sheet. Yet there is still a lot more that can and will be done to improve.
In fiscal year 20, we believe our financial results will continue to demonstrate our ability to deliver and the following year should be stronger.
With more compelling market dynamics working in our favor in a much stronger product and service offering than in past years.
Our objective is to grow our market leading position in North America, and we will accomplish this by continuing to invest in R&D to differentiate our offering versus the competition.
We believe we can increase.
Our share in Npls for public safety networks grow share with ice piece domestically and internationally with operators focused on developing new networks and help them lower their cost of ownership.
As Fiveg is fast approaching we have products that had been commercialized over the past year, which puts us in a great position.
To support both our installed base and capture new accounts.
For example, our Wtn 4800 E band and multi band platform is a perfect example, and interest in this solution is building fiveg should be a growth driver for us over the next two to three years and potentially sooner is operators are starting to invest now.
We also have several R&D initiatives underway and believe the new products introduced and those under development combined with more value added services could enhance our gross margins even further.
We have increased the intensity of our operational excellence programs. This fiscal year and as a result investors should expect to see SGN.
<unk> as percentage of revenue decline in future years, we have identified programs that will lower gionee, specifically as we move through the second half of fiscal 2020.
We have however incurred more sales related expenses due to our strong bookings and expect this to continue given our bookings performance and outlook.
Lowering fixed cost is it.
Priority to enable investments in our products services and sales related initiatives with a focus on driving growth.
We are not thinking about the status quo are modest growth, we want to capture the market.
In the interim we're challenging every cost in our business every region Department and transaction. This is not a restructuring.
Ramp rather it's a mindset to challenge in change what our core cost structure should be as we believe that there are probably a few million few million dollars of expenses that can be removed over time, even with growth anticipated.
This ties back to my past comments on investing in automation tools in AI, which has also contributed to some of our expense.
Leases and that point 20, we've already achieved rapid deployment of a number eight a number of AI tools, which we expect will generate savings in the early part of fiscal 2021.
As previously communicated our results were adversely affected due to bad actors launching a cyber attack at one of our contract manufacturers, although there was a short.
From impact to our business, we got through it.
Going forward to limit risk in this area. We have invested in stated the art solutions to protect our assets for example investments in the latest cyber security tools to withstand the continuous cyber intrusion attempts that every enterprise both small and large are exposed to each and every day our.
Contract manufacturer has made like investments to protect itself moving forward.
So to summarize we haven in place a team with the knowledge skills driving experience to take have yet to the next level I'm confident in that our operational excellence culture is continuing to mature and while cost will be up modestly. This year again much has to.
Do with expenses, we are making now to improve our foundation and drive growth. There are also expenses in F. Why 20 that are not anticipated to repeat next fiscal year.
Commercial excellence is on deck and with pizza experience and guidance, we expect the meaningful payback in the quarters in years to come.
While revenue is expected to be down after.
A period of modest growth remember Africa is one of the drivers in orders are anticipated to increase in the second half of the year. The APAC region is down but that is solely timing related and is expected to increase next year and in the years that follow due to our new agreement to support Globes, Fiveg launch, which we expect to have released on shortly.
We may also look to expand into new APAC regions.
We are winning new accounts, both domestically and abroad and our pipeline is building because of our new products as Pete mentioned earlier beyond just public safety and private networks the opportunities across multiple verticals segments in North America are growing and this is where we believe we have the.
Best offering in the industry to increase our share.
I will now turn the call over to Eric who will cover the financials Eric.
Thank you Stan and good afternoon, everyone.
All comparisons related to our fiscal 2020 in fiscal 2019 second quarter and six month financial results.
For the periods ended December 27, 2009, King and December 28, 2018, respectively, unless otherwise noted.
Fiscal 2022nd quarter revenue declined by 9.1 billion with North America revenue down approximately 800000.
International revenue was down.
Now 8.2 million and within that Africa in the Middle East declined by 5 million in Latin America, and Asia Pacific region down by 2.5 million.
As noted 222nd relief and in today's announcement, the cyber security attack at one of our manufacturing vendors led to lower than anticipated.
Revenue for the quarter.
For the fiscal 2026 month period total revenue was down 11 million with North America revenue up approximately 11 million well up while international revenue International revenue was down approximately 22 million.
With respect to North America.
Trump bookings in the second half of last fiscal year contributed to our strong fiscal 21st half performance.
Additionally, our North America bookings performance in the first half of fiscal 2020 was exceptionally strong which bodes well for our future.
While international revenue was down in the first half.
And is expected to be down for the full fiscal year did it's important to note that book to bill ratio for international with above one in the first half and is also expected to be above one in the second half of the fiscal year.
GAAP gross margin came in at 32.7% and.
Non-GAAP gross margin at 32.8% for the fiscal 2022nd quarter, a decline of 190 and 180 basis points respectively.
The decline ink gross margin was primarily due to lower mix of product revenue and increased supply chain costs.
For the six month period, GAAP and non-GAAP gross margin were 35.7% and improvement of 350 basis point, both GAAP and non-GAAP basis.
Looking ahead based on the mix of business anticipated, we anticipate gross margin for the second half of the year to be roughly in line.
For the first half representing an increase for the full fiscal year over fiscal 2019.
On the expense side, we reported GAAP operating expenses of 19.8 million for the fiscal 2022nd quarter.
Period to 19.6 million for the comparable year ago period.
The net increase consist primarily of an increase in restructuring charges of 400000 in SGN a expenses of 200000 offset impart by decrease R&D expenses of 300000.
On the non-GAAP basis.
Excluding the impact of restructuring charges and.
Based compensation total operating expenses were 19.1 billion relatively flat as compared to 19.2 million for the comparable year ago period.
For the six month period, we reported GAAP operating expenses of 40.9 million in fiscal 2020 compared to.
The 9 million for the comparable year ago period.
The net increase consisted primarily of an increased its unique expenses of 1.1 million and restructuring charges of 800000.
The increase the at Genie expenses was primarily due to the other employee related expenses while R&D.
<unk> expenses were essentially flat for the comparable periods.
On a non-GAAP basis, excluding the impact of restructuring charges and ship based compensation total operating expenses for the fiscal 2026 month period, or 38.6 million as compared to 37.4 million for the comparable.
People go period.
We reported a GAAP operating loss of 1.5 million compared to GAAP operating income of 2.9 million for the comparable year ago period.
For the six month period, we were essentially breakeven in fiscal 2020 and reported GAAP operating income.
1.4 million for the comparable year ago period.
On a non-GAAP basis, we reported an operating loss of 700000 for the fiscal 2022nd quarter compared to operating income of 3.4 million in the comparable year ago period.
For the six month of fiscal.
2020.
We reported non-GAAP operating income of 2.4 million as compared to 3 million for the comparable year ago period.
But just EBITDA for the fiscal 2022nd quarter was approximately 400000 and for the fiscal 2026 month period was.
4.5 million.
This compares to adjusted EBITDA of 4.5 million for the fiscal 2019 second quarter and 5.4 million for the six month period in fiscal 2019.
To reiterate capacity constraints for the cyber attack at one of our contract manufacturing vendors.
Along with higher sales commission based on stronger than anticipated bookings.
Others had the biggest direct impact on non-GAAP operating income and adjusted EBITDA.
As Tim noted earlier for the full fiscal year, we are anticipating revenue to be down overall.
But profitability to improve year over year.
Gross margin is also anticipated to increase year over year, but spending may increase slightly though we are continuing to look to reduce fixed costs and optimize our business further.
Moving onto the balance.
Sure.
Our cash and cash equivalent stood at 38.1 million at the end of a second quarter compared to 31.9 million at year end and improvement of 6.1 million. This also represents a sequential increase of 3.6 million compared to the end of it.
First quarter.
Our free cash was 29.1 billion at the end of fiscal 2022nd quarter compared to 22.9 million at year end.
Our cash flow from operations was 10.8 million in the fiscal 2026 month period.
Correct.
Okay. The cash use the operation of 600000 in the fiscal 2019, six month period, which was an improvement of 11.4 million.
As we noted that our last earnings call, we are expecting to finish the fiscal year with a higher cash balance year over year.
Please note during the second.
Sure we spent $653000 in share repurchases.
During the total to $1.4 billion for the first six months of fiscal 2020.
Under our $7.5 million repurchase program $3.8 million remained available at the end of the.
In quarter.
Inventory increased 4.7 billion from year end and 2.2 million sequentially, but again. This will this was directly related to the capacity constraint as discussed earlier, which impacted production and shipments as well as a result of the any Si channel.
No partnership we announced last quarter.
With a capacity constraint issue now behind us inventory is expected to decline.
Lastly capital expenditures in the second quarter and year to date totaled 1.1 billion and 2.4 million respectively.
We expect to spend approximately 4 million in the second half of the year with a full fiscal year in line with what we communicated last quarter.
This concludes my remarks, and operator at this time.
We are ready to open up the call for questions.
[noise].
Ladies and gentlemen, just as a reminder, if you'd like to ask a question.
Okay and then the number one on your telephone keypad once again that a star and then the number one we will pause for just a moment to compiled a roster.
[noise].
[noise]. Your first question comes from the line of Theodore O'neill with less Litchfield health.
Hi, I'm first question I have is about the contract manufacturer with the issue did did they wait three weeks before they told you or did it take in three weeks before they.
Got things back online.
Give some more color on that.
Hey, as Stan I be more unhappy too so I was actually called over the weekend when they actually identified.
Attack.
It took in three weeks to actually do the recovery process, we offered all of our assistance for our entire team because.
Their experience.
But that was primarily the remediation period to get back online and resume the production and shipments for us.
[music].
Now with what's going on in in China, right now if they if people don't get back to work.
On Monday, and it does it look like they're going to from what I've seen.
That interrupt any of your supply chain. If this goes on for another through through February or into March.
So so we've we have six of our supply chain people in China, and our head of operations is in the region a working on that.
Right. So our guidance reflects our best.
Knowledge today, if you go well look at a variety of other companies.
Guidance something Toby her badly some things I think they won't be heard very much and you know what what we have as our guidance reflects our knowledge.
Right now if we.
Some of that guidance does.
Anticipate a delay in folks getting back to work if it's if it's worse or there's more cases and there are less available worker workers, then we won't do as well and if it's not as bad as we models all we can do.
You can do better so the big problem or with us and everybody else was giving guidance.
On the Corona virus is the uncertainty right. So so what I what I hear we are doing everything that we tend to control.
Our operations in our suppliers the best viability.
But it does come down to the uncertainty of how many and how fast.
Or is the China employee base going to come back.
And deal do you have direct manufacturing, there or or a contract manufacturing and are there aren't coming from there.
So components are coming from China.
We don't have.
Our contract manufacturer, nor nor are we present in China for manufacturing. So so our our risk around the uncertainty of the Corona virus is based on.
Our our into component suppliers, the though we buy from more.
Our contract manufacturer buys from us.
Thanks Frank.
Thanks add to that clears it up for me. Thank you.
Your next question comes from the line of it can savageaux with Northland capital markets.
Hi, good afternoon.
In couple of questions.
<unk> core logistically around the the shortfall in fiscal Q2.
To recover.
All of that in Ukraine, which I know.
Historically seasonally as kind of a recur period for you and maybe.
Expect perhaps to offset that.
Okay, perfect got through the second half and.
And is there any regional bias that you can just turn to the shipments that were unable to be made your winter. There are headed north American or actually are impacted that breakout at all.
Yeah sure campaign, Stan glad to hearing on the call.
So for what we had identified in the recovery process for the second quarter. We actually ended up having finished goods. It got street. It before they can get a proven delivery so a lot of that.
Nevsun shortfall was.
Good.
Timing a few days after that we recovered and what we had planned for the second quarter.
That was biased towards North America, which is where the margin impact came from and I believe that.
We don't have any.
The other remaining items that were associated with that that carried over to Q3 or to the second half.
Got it and where you'd mentioned.
I think called out some extraordinary booking strength.
In North America, and I Wonder if you could be more.
Provide any more color on that on the nature of that right.
If you offered discussed international book to bills being above one so I assume extraordinary moon way above one.
But if there's any.
Anecdotal color you might be able to provide on north America booking strength and.
Maybe identify.
What the source of that might be.
So yeah, Tim I think the best way for me to answer that is to use some of the variable compensation expenses as a proxy.
You can see from an opex perspective than we did have some.
Upward pressure on that.
That was associated primarily to a lot of the orders performance that we've had.
What I'd say generally without getting into too many specifics isn't it is a an order flow that.
Is substantially higher than what we've seen in the past and it has been.
Consistent over the past week.
Orders.
With regards to specifics on those.
When we get our press released its approved in comes out that you'll see it.
Otherwise there theres significant strength in North America, we also have some additional strengthens occurring and.
The international regions, such as Asia Pac.
Got it and I'm.
Question for Pete and I Beg your.
Initial commentary.
And I know your strategic view is still evolving here.
But I thought the commentary around partnerships with others too.
Kinda develop a one.
One stop shop.
Approaching what I gather would be.
New International markets was interesting I wonder if you might be able to provide any more commentary on that in terms of what states as partnerships might be or what sort of players you might be looking to partnership are we talking about distributors here or other.
We're kinda and 10 equipment suppliers or.
He anymore color on that would be would be welcome.
All right. So you look a little color, but maybe not as much color as you would like right. So if you. If you think about the international business, it's quite a quote unquote the rest of the world and the rest of World is a big.
Please send difficult for us too.
Cover and were in some active discussions for partnership so we can extend our our reach and drive more volume through.
Indirect channels. So we know we so that would be one we're always evaluating.
Technology I wouldn't say that were close on any of those type partnerships, but we're we're close.
You know it in close doesn't really matter until you finalize it but we're close on some distribution deals that no hopefully, we can landon announced and.
User to drive growth.
Growth internationally.
That's helpful.
Youre right and I'm not quite as much as though no just kidding.
I had my first forecast.
Well that we are one for one.
Question for me and.
And your.
And I'm, probably jumping the gun here, but you didnt make no or number of comments about fiscal 21 or at least extending into that time that seem to point to an expectation.
Uh huh.
At least revenue growth.
<unk> expense decline, both of which sound reasonably good am I hearing.
And that the right way or or.
What are you kind of able to say about fiscal 2001 here now that we're able you're halfway through fiscal 2000.
So.
Look we want to do a bottoms up plan on.
21, but we see you know Stan mentioned the.
Things are you know the book to Bill ratio, improving and we see that in North America, we have that engine going Oh, we also see an opportunity to to lower our cost so.
I think you you've got it right for a.
21 and.
Directionally and we need to do more work before we can be more specific.
Great. Thanks very much.
Sure.
Your next question comes from the line of Marts data with Stanphyl capital.
Yeah, Hi, two questions first one is this the walk away.
Oh ban mean anything for you guys in rural infrastructure, I think I think I read somewhere that they're being banned there.
But that came out in the last two days and no no question.
Couple of months ago.
All right well there was actually in the Wall Street Journal article again, I guess in the last couple of days.
And there was a loss yeah look I think that that can only be good for us right.
Yeah, well part of it as a Pentagon thing, but I thought there was a separate directive for rural Telecom. So I was wondering if that is there anything you've had in any.
Back from yet.
Hey, Mark only when you're saying.
[noise] Nonsignificant.
Our lives.
While we Didnt maybe have a huge installed base. So we can all categories to go to go out so I wouldn't say zero, we did see some opportunity nothing we we will be a beneficiary to some extent.
But I don't think it's a big big.
The opportunity.
Okay Fair enough and then the second one and it's really a softball question, but Trump did say in his job.
State of the Union address that they wanted to spend $20 billion on rural broadband infrastructure and that was one of the few things with the Democrats actually stood up in.
Which makes me think that it can get passed is that you guys is gonna be able to get a piece of that.
Yes, I think where that's an area where we've been active in maybe we've had some new products there and.
We've been achieving some success with a rule.
Internet broadband.
And customers over the last a year or so and that's another area, where we are actively looking to expand to reach a little bit with some other activities there as well so in general either whatever trickle down effect raise from that into.
There is generally we see that as a positive.
Okay, Great My other questions were answered.
Thank you very much.
Thank you.
Ladies and gentlemen, just as a reminder.
Next question. Please press Star and then the number one on your telephone keypad.
Our next question comes from the line.
Steve Bush with Everglades resources.
Hi, guys. Thanks for taking my call.
No.
Hi, CZ, we're progressing on the French working to control.
Does that make any sense to just jettison. Some of these African businesses I'm just focus on North America, given our growth rates here or is that.
Not really something you want to go towards.
Well I think.
You know really.
The African business as a bid a volatile and what we know what we've talked about over the last month has been a how do we modulate our cost structure to match the demand and duds.
When we do have businesses.
It's positive contribution margin.
We need to manage it better and you know long term Africa, perhaps as the least amount of infrastructure in the world. So we think having a presence in Africa.
And simultaneously managing our cost structure with the.
Current period demand because the way to go we have more work to do.
In that regard, but that's that's the perspective that we have currently.
Okay. That's fair enough I mean, I know MTN is you know selling or looking to sell off some Nigerian assets and on on how that affects you or are they still a 10% customer where they stand though.
No they're not.
10% customer anymore and as we've mentioned before this is Dan we had de risked our plan as far as or annual operating plan a budget for Africa. This year, it's actually performing a little bit better than the de risk right now.
And the.
Activity. So we have in place or as Pete said, we're modulating that business and.
Matching that the cost structure so that.
We have the most favorable outcome.
But no they're not not that large and I don't anticipate to grow into a 10% customer in the foreseeable near future.
Okay, and how many 10% customers do we have this quarter.
So we.
Have any in the second quarter of our fiscal year, Motorola still was a 10% customer for the first time.
Right, Okay, so hasn't Motorola rollout going in Florida.
Well as you know Motorola stepped back a little bit towards the end of the year and did not.
Sign so we're now waiting for how the state of Florida is going to go in address that we still believe our prospects for.
Intact and very strong number we're going to have to let the state play that went out.
Right Okay.
Okay.
All right and how many shares did you buyback this quarter badly.
I know you gave a dollar number but let me circle back.
So almost 700 case dollars mice.
In a woman formula for the year to date.
Right. Okay. Thank you.
Good luck.
Alright. Thanks.
And there are no further questions at this time.
I'd like to turn it back over for any closing remarks.
Hey.
Very good we'll look at thanks, everybody for joining the call a we'll see you in 90 days.
[noise], ladies and gentlemen, this concludes.
Today's conference call. Thank you for your participation you may now disconnect.
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