Q2 2023 Aviat Networks Inc Earnings Call
Good afternoon, and welcome to <unk> networks second quarter fiscal 2023 earnings conference 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 and now I'd like to turn the conference over to your host.
Mr. Andrew Frederickson director of Investor Relations you may begin.
Thank you and welcome.
<unk> second quarter fiscal 2023 results conference call and webcast.
You can find our Form 10-Q press release and updated Investor presentation in the Investor Relations section of our website at.
VW.
That works Dot com.
Along with a replay of today's call in approximately two hours.
With me today are Pete Smith.
Who will begin with opening remarks on the company's fiscal second quarter, followed by David Gray our CFO .
I'll review the financial results for the quarter.
Pete will then provide closing remarks on our strategy and outlook followed by Q&A.
As a reminder, during today's call and webcast management may make forward looking statements regarding <unk> business.
Including but not limited to statements relating to financial projections business drivers new products and expansion.
Pact of Covid, 19, 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.
Could cause the 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 annual report on Form 10-K filed with the SEC on September 14th 2022.
The company undertakes no obligations to revise or made 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 Investor Relations section of our website at Www Dot Avi networks, Dotcom 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 Avi.
Please go ahead Pete.
Thanks, Andrew and good afternoon, everyone.
Thank you for joining us to review Avi networks results for the second quarter of fiscal year 2023.
We are executing well against its plan this quarter and we continue to position ourselves to benefit from growth around the world and <unk>.
Broadband and private networks as well as drive meaningful bottom line improvement.
In the second quarter fiscal year, 2023, Avia deliver revenue of $90 7 million, which represents growth of 16, 5% versus Q2 of last year.
non-GAAP operating income margin of 12, 5%.
Adjusted EBITDA of $12 9 million or 27% increase versus the same period prior year.
non-GAAP EPS increase of 32%.
These results would not have been possible without the tireless dedication and execution of the Avianca team at our supplier partners, let's discuss some key highlights from the second quarter.
Global <unk> upgrade cycle continues to be a driver of Avianca business and outlook. Our recent <unk> win with Bharti Airtel in India is officially underway as we began delivering products in the second quarter. We are excited about this win in India as it represents an entirely new customer and.
Fee for Avia and demonstrates the value that we can deliver to customers through our products and services.
Elsewhere around the globe, we continue to gain <unk> business through increased customer focus part of this growth has come from execution on replacement opportunities from our largest competitor globally our share gain final against this competitor is approximately $60 million.
In fiscal year, 2023, we have booked over $19 million and such opportunities year to date and a <unk>.
Recognized over $8 million and year to date revenue.
We will continue to execute on these opportunities to take share of demand in terms of capturing new <unk> opportunities. We recently announced the release of our vendor agnostic multi band solution.
This allows customers to leverage obviously best in class E band and multi band solutions to seamlessly migrate their existing networks to <unk> with lower incremental investments. This creates a large upgrade opportunity for avia as it helps to overcome high switching costs the avi on multi.
Our band vendor agnostic solution works with existing third party microwave radios and as detailed in our investor presentation.
Our solution provides extended distance at a higher capacity alternatives versus competitive offerings.
With regards to our rural broadband business, we continue to execute well in the <unk> store remains a point of differentiation for the company. We recently refreshed the store to expand the products offered beyond our microwave radios and accessories to include software products like our health insurance software or HR.
Yes, and a frequency assurance software or Fas as well as integrating our access products from the redline acquisition.
Some additional commentary on the government funding programs pilots, we continue to anticipate art off rural digital opportunity fund to begin flowing the first half of <unk>.
Calendar year, 2023, and Avianca <unk> related revenue in the second half of the calendar year. The recent arda authorization for an industry leader using fixed wireless access in their deployments is encouraging and we anticipate more providers to use wireless technologies and their art.
<unk> deployments moving forward note that we anticipate a long ramp for R&R funding for.
Ordinarily avianca is still benefiting from customer spend from the cash connect America fund.
ARPA programs on the Horizon is the <unk> program broadband equity access been deployment, which we are optimistic about the VA program is allocated $42 5 billion to expand our high speed Internet access at all 50 U S States, there's much still to be seen about the implementation.
And allocation of the program, but risks should be a large beneficiary of bid, which bodes well for avia.
And private networks, we are maintaining our leadership in North America, and see increasing international opportunities for example in APAC, we secured a multiyear high margin win with our eclipse platform for a national public safety network, the integration of the Redline communication business, which we.
Now referred to as access products continues to go better than anticipated. We are pleased with our progress from a cost takeout perspective, while we are beginning to see cross selling opportunities for <unk> backhaul into redline accounts and vice versa moving on to supply the supply chain environment. We continue.
To see improvements from approximately 98% of our supply we have returned to pre crisis performance Alas, we need 100%.
Currently we have 27 components to remain an allocation note that it takes approximately 2000 components to deliver a microwave system.
The remaining components on allocation semiconductor chips on the 28 nanometer node remain problematic we've come a long way, but are not done derisking the supply chain. Fortunately <unk> has been able to avoid significant supply chain interruptions through the crisis period.
The supply chain crisis, <unk> has held elevated inventory levels.
The elevated inventory levels started at the outset of COVID-19, and have persisted and increased through the recent China reopening.
Build that resiliency to the third derivative of the supply chain, which was subject to the reopening risk based on the past few years of execution and building inventories, we will declare our peak inventory levels at Avia and anticipate improvements over the next several quarters as lead times and allocation.
Continue to moderate this quarter, we saw no missed revenue opportunity due to supply chain shortages <unk> remains committed to build resiliency in our supply chain by proactively identifying at risk components and secondary suppliers, our work in moving redline manufacturing base over to Rvs.
Is a good demonstration of an opportunity where we believe we will see improved reliability and results through a stronger supply chain I will now turn the call over to David to review, our financials before coming back for some final comments David.
Thank you Pete and good afternoon, everyone.
During my remarks today I will review some of the key fiscal 2023 second 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 second quarter of fiscal 2023, and second quarter of fiscal 2022 unless noted otherwise.
For the second quarter, we reported total revenues of $90 7 million as compared to $77 9 million for the same period last year, an increase of $12 8 million or 16, 5% driven by strong growth in Asia Pacific Europe , and Latin America, as well as the contribution from the redline.
Acquisition.
North American revenue, which comprised 37% of the total revenue for the second quarter was 52.0 million and international revenue was $38 7 million.
We continued our trend of trailing four quarter book to Bill ratio of above one started back in fiscal 2018.
Gross margins for the quarter were 35, 5% and 35, 7% on a GAAP and non-GAAP basis as compared to prior year margins of 36, 2% and 36, 3% for GAAP and non-GAAP .
Current quarter margins were weighed down by the initial shipment of equipment for a large agent <unk> project.
These project margins will improve substantially in subsequent quarters as we recognize revenue on higher margin services and software.
Second quarter GAAP operating expenses were $22 6 million, an increase of $2 7 million from the prior year driven by the inclusion of redline operating expenses and a <unk> 9 million restructuring charge in the quarter.
Second quarter, non-GAAP operating expenses, which exclude the impact of restructuring charges share based compensation and deal costs were 21.0 million. This is an increase of $1 8 million from the prior year, primarily due to the redline acquisition on.
On a like for like basis, we continue to manage costs aggressively.
Second quarter tax provision was $3 1 million essentially flat to last year.
We continue to report our non-GAAP tax expense of <unk> $3 million per quarter based on a reasonable estimate of cash taxes, we expect to incur.
The company has over 500 million of Nols manifested as.
Almost $90 million.
Deferred tax asset on our balance sheet that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future.
We recorded second quarter GAAP net income of 6.0 million compared to $5 9 million last year.
First quarter, non-GAAP , net income, which excludes restructuring charges FX impacts share based compensation M&A related costs and noncash tax provision was $11 1 million compared to $8 5 million for the same period last year.
Second quarter non-GAAP EPS came in at <unk> 94 per share on a fully diluted basis compared to 71 per share for the same period last year, an increase of 32%.
Adjusted EBITDA for the second quarter was $12 9 million, an increase of $2 8 million or 27, 4% from the prior year.
Adjusted EBITDA margins were 14, 2% for the quarter.
Moving on to the balance sheet.
Our cash and marketable securities at the end of the second quarter were $21 6 million from $22 9 million the prior quarter.
Accounts receivable continued to be impacted by limitations on <unk> availability in certain emerging markets extending the collection cycle.
We continue to leverage our balance sheet to mitigate supply chain risks via buffer stock and supplier deposits.
Given the recent improvements in our supply chain. However, we will begin to unwind. These investments in future quarters. We continue to have a strong debt free balance sheet, leaving us well positioned to execute our long term plan.
With that I will turn it back to peak for some final comments.
Thanks, David before opening up for Q&A I'd like to add a few comments and summarize our performance year to date, we have executed on our long term growth drivers of <unk> Rural broadband and private networks in North America and around the World, We continue to grow and capture additional share of wallet through our.
<unk> product software and services offerings, we also remain focused on increasing profitability and generating meaningful shareholder value over the long term.
Based on our results the hard work and dedication of the <unk> team and the demand environment, we are raising our revenue and profit guidance for fiscal year 2023.
We now anticipate revenue for fiscal year 2023 to be in the range of $340 million to $347 million and adjusted EBITDA for the fiscal year 2023 to be in the range of 45 million to $47 5 million. This was in.
Increase on both the lower end and higher end of guidance for both figures with that operator, let's open the call for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press star one on your telephone if you wish to remove yourself from the queue simply press star one again one.
One moment as we compile our roster.
And our first question comes from the line of Scott Searle from Ross Your question. Please.
Hey, good afternoon, Thanks for taking my questions nice job on the quarter maybe.
Maybe to jump right in on gross margins.
So they were down sequentially in the quarter.
Product revenue product gross margins were up I'm wondering if you could give us a little bit more color on that particularly given that you've got some initial contribution from <unk>, which tends to be lower gross margin and where we can expect that to go over the next couple of quarters as you start to see more normalization on the component side and then the other side of the ledger the service.
Gross margins they were down any one time items or something that we should be thinking about in that segment of the business going forward.
Hey, Scott This is David I'll take that so actually I'll start in reverse.
Service margins service margins tend to be a bit volatile to begin with right.
They're subject to kind of sort of.
Secrecy.
Recognition standard we have to go through a process of repricing every quarter.
Which impacts the allocation of revenue across that.
Services and equipment and this quarter we had.
It's called a carve out from from services that ended up in equipment.
It was kind of bucket the bucket so that did impact our service margins this quarter.
Also positively impacted equipment and kind of masked the dilutive impact of that that large tier one project that we talked about that again that should be temporary.
Impact to this quarter.
<unk> improve sequentially as we start mixing in higher margin services and software into that project.
So it's.
Fifth.
Radiosurgery synchronic, but.
Fundamentally I think we're in good shape and things are looking more positive going forward.
Scott just add when we when we won the Bharti Airtel business. We said, we were going to crank up our cost reduction machine.
That takes a little while.
We're going to get.
The volume benefits, so we see it.
Improvements coming on the margin side.
Taking me.
The part D business.
Improving over the right Todd over time was the right thing to do.
Got you very helpful and maybe just to follow up on that.
Dave I mean, how should we be thinking about gross margins, though over the next couple of quarters in aggregate should they be starting to tick up there and as we start to see some.
Alleviated pressure on the component cost and expedite front.
Offset a little bit by India is that the best way to be thinking about it.
Yes, I think that's a good way to think about it.
Definitely be moving north from from where we were this quarter I think the back half looks.
A relatively strong of course theres always some some give and take there.
<unk>.
Certainly probably at least 100 basis points higher than what we currently had this quarter.
And I think.
For the full year, we're probably still end up.
Higher than what we were for full year fiscal 'twenty two.
Great.
And if I could just lastly follow up in terms of the guidance.
A very strong December quarter, it looks like Youre guiding kind of in line with where the first half as you guys had tended to be a little bit conservative on that front historically and it sounds like <unk> start to kick in in the second half of calendar <unk>.
Calendar 'twenty three so I'm wondering what kind of visibility do you have in the near term given that your book to Bill has been running over one and what are some of the key elements and swing factors as we're looking in the first half year and should we basically then kind of very early but you're expecting a little bit of pick up certainly as we get into the back half of calendar 'twenty three thanks.
Yes, so I mean as far as visibility is concerned Russ.
Roughly 80% of our.
Coming quarters revenues are.
Coming out of backlog.
However, its not as quite as simple as it sounds because there are some big projects in there and the timing of the revenue recognition associated with those projects can be somewhat dynamic. So there's always a give and take there but.
We see.
Good about.
The rest of the year and I think thats reflected in our guidance adjustment.
Great. Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Eric <unk> from cheap MLP Securities. Your question. Please yes.
Yes, thanks for taking the questions and congrats on a good quarter.
Can you talk a little bit about some of the competitive dynamics with Huawei.
That part of the factor of.
While you are international.
It was particularly strong this quarter.
So.
Yes.
Well we would.
We'd all like to name a specific competitors, but thats the large competitor in the script that we alluded to.
In part.
There is share gain.
In India.
I would say Huawei contributed to that.
And you know we.
We put together the script.
Our story.
Tom.
On Monday, and then on the.
The 30th.
The Huawei restrictions came out from.
From the department of Commerce, So we haven't fully digested.
Be more favorable for us but we've.
I think we said we have $60 million of.
Our funnel and we're starting to execute on that so we think there Doug.
A favorable trend.
The restrictions that were announced on January 30th.
<unk> will.
Give us some time to figure out if that's.
It's either new worst it's neutral.
If it is going to be positive will.
We will be able to figure it out over the next 90 to 180 days.
Okay very helpful.
Just talk a little bit about.
The play between fiber and microwave anything any updates there in terms of kind of general.
Option trends, one one versus the other.
Yeah I think.
Sure.
About steady.
Third.
Competitive front between fiber and microwave and what I would point to in terms of making Avi.
More.
Robust with respect to the fiber competition is our multi band extended distance and our multi band vendor agnostic innovations allow us to vendor agnostic allows us to work with.
Third party microwave and the extended distance that's explicitly designed to make us more competitive.
Versus fiber, but overall we.
We have a chart in our investor presentation.
I Wouldnt say that theres any share shifts between <unk>.
Fiber and microwave at this at this at this point in time.
Okay last question.
North America grew I think a couple of percent.
Are you seeing impact from macro economics.
Is that much of a factor there or how are you thinking of the north American business from a economic perspective.
Yes, so we think.
North America, our whole business is project base North America's growth was.
A little muted this quarter.
But we see that the backlogs up.
Almost double digits versus the same period.
And time.
Last year.
So we have.
Our backlog, that's increasing we have I would say longer prop.
Projects, our North America business is dominated by private networks, which we haven't seen any.
Slowdown so we.
<unk>.
We read the headlines like everybody else. So we're hard pressed to say that there is macroeconomic.
The impact to the North America or the <unk>.
Overall, avia business and the growth in Q2 is really a project timing.
Impact rather than something in the macro.
Very good thank you very much.
Sure.
Thank you one moment for our next question.
And our next question comes from.
Tim.
Tim <unk> from Northland Capital Your question. Please.
Yeah.
Hi, good afternoon, and congrats on the results stay with North America I think another.
Feature of the quarter as Verizon, making.
The 10% customer list, which I think is when the last time that happened was but feel free to let me know and.
Is that indicative and I guess I asked this question both from a north American and global perspective.
I mean do you see five G. Backhaul here, obviously, you've got the party deal ramping.
Taking a greater role.
In terms of driving the company's growth.
Throughout the balance of the year or short term than your other two major growth drivers.
We know the parties have while we replacement win what's driving the strength at Verizon and follow up.
So.
We look.
A little bit about Verizon they've been a long term.
Customer of Avia <unk> typically been right under the tent.
Threshold.
We see.
We see overall connectivity driving.
The oxygen.
Verizon two.
It's a combination of LTE LTE advanced <unk>.
So that.
<unk>.
<unk> drives the need for more and more.
<unk> backhaul to.
The fixed wireless access transport. So we we see all of those trends.
We like all of our growth drivers <unk> private networks and rural rural broadband.
But for.
For the next couple of quarters, I think our our growth is going to be driven by <unk>.
Tim we have been kind of running dialogue about what is <unk> going to have.
Have an impact in <unk>.
I think the recent developments would point in the.
The back half of the calendar.
Calendar year 2023, so.
We think.
And our guidance would probably probably factors in.
<unk> over the next couple of quarters and as we start to think about our guide for fiscal year 'twenty four.
We will see.
The impact of rural broadband.
And the funding.
Which is perhaps more definitive that I assets.
Duly noted.
And you mentioned a bunch of numbers there that I want to go back through it because I think they are.
Pretty interesting was the <unk>.
$60 million.
Is that.
The estimate of the opportunity for share gain over a certain period of time I think you mentioned with regard to your.
Big competitor and then when you went through I think some bookings and revenues.
Recognized $19 8 million, respectively, I, just wanted to get a sense of how significant a piece of that.
India businesses versus what Youre seeing globally.
So I would say.
That's a really good way for to get us to back out.
The India business, So I would say the India business of that.
The revenue is.
Over half so Wade.
So to kind of put it in the ballpark it's over it's over half.
And.
But it's not over.
Let's say maybe.
25% of the funnel so so.
And the reason I make that statement.
Our funnel is.
A mosaic of opportunities, where we're not just dependent.
Im taking share from one or two accounts, we see that as these restrictions are having abroad.
<unk> empowered and we're getting.
<unk>.
We're getting looks at customers that.
Historically, we have not.
That's helpful got it to the funnel was the $60 million correct, yes, the funnel is the $60 million.
Great and then last question for me you mentioned a record.
non-GAAP operating margins 12, 5%.
And obviously you did have some nice revenue upside there in the quarter, but.
Longer term have you guys given some consideration as to where those obviously, it's dependent on gross margins to some degree swaths of some revenue growth but.
Do you have a sense for where operating margins can go over time now that you.
Kind of achieved this recent milestone.
But I would tell you that we are stated milestone is for EBITDA margins to reach 15% were in spitting distance, but we're not quite there yet.
Ill tell.
Tell you this we're heading into our strategic planning.
And here.
So we'll probably have.
Kind of desktop.
They both Darren and figure out where we want to be from that standpoint, and well yes.
To respond to your questions as well so pay specific attention to our operating margins.
Got it thanks very much.
Thanks Chip.
Thank you and as a reminder, ladies and gentlemen, if you have a question at this time. Please press star one on your telephone one moment for our next question.
And our next question comes from line of Theodore O'neill.
Hills Research. Your question. Please thanks, very much and congratulations on the good quarter.
I appreciate you discussing the inventory turns and dsos in the prepared remarks I was wondering if you could talk about if you're seeing anything on the inflation side, either either improving or not improving.
Yes, it's been fairly stable right I mean, we're still.
Having some instances on select components, where we will have to pay some some expedite fees, but as far as general price increases or concern.
They've been few and far between and actually we are we are trying to push the push the tide. The other way at this point and start realizing some.
Calling some of that back that we've incurred over the past year year and a half.
So.
More to be seen on that but for right now we see the.
The situation is stable.
And can you give us an update on the E.
The new chip you're building with next linear some timing on that and if that chip is going to help with some of the semiconductor allocation issues you've got.
So we.
We're still in the.
We still haven't given the.
When we expect it out but that project is progressing.
Nicely, we think our investment has helped us get.
Prioritized with respect to access to the.
The modem supply chain.
And I think a couple of quarters from now we will give more definitive time.
Timeline on when the chip will start to impact are our top and bottom lines.
And will those chips to be part of a new product line or will they go into existing products.
For both.
Both.
Okay, alright, thanks very much.
Thank you.
Thank you.
And we have a follow up question just one moment.
Our follow up comes from the line of Scott Searle from Roth. Your question. Please.
Maybe just a follow up on redline Youre a couple of quarters in now I'm wondering if you could give us a little bit of an update about how thats tracking from a revenue standpoint, it sounds like youre starting to get some cross synergies from a sales perspective in terms of backhaul capabilities, but I'm wondering what that pipeline of opportunities looking like on the private networks front.
How we should think about that going forward over the next 12 plus months.
So the private network funnel is starting to grow we haven't had a win.
Well, we got prep for the call we've thought about talking about that more in we we said we wanted to have a win before we.
Started too.
Kind of put that in.
The earnings deck, so, we but we see.
When we made the acquisition of Red line, we thought that.
All our channels and our access to private networks and the product portfolio was going to work.
It's not working yet, but we think were one to two quarters away from saying, yes. The investment thesis is prove it with respect to <unk>.
Revenue and contributed less than 10% it was accretive to our gross margins and we are we are ahead of the EBITDA guidance. We gave for the year on Redline. We said there was one to one four and we've factored that into our.
Our increased.
EBITDA guidance.
We mentioned at the end of the.
We have recorded call.
Great. Thanks.
Thank you.
<unk> does conclude the question and answer session of today's program I'd like to hand, the program back to Pete Smith for any further remarks.
Okay.
Thanks to everyone for attending the call and your support Fortunately.
The line stayed open during the Austin.
Historically, we are looking forward to updating our progress in 90 days and lets stay in touch thanks, everyone.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
The conference will begin shortly two reasons lower Johan during Q&A, you can dial one one.
[music].