Q1 2025 Aviat Networks Inc Earnings Call
Good afternoon, welcome to Aviant Network's first quarter
Speaker Change: 2,000 25 earnings call. At this time, I'll participate in the list in only mode. The 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. Thank you. You may begin.
Andrew Fredrickson: Thank you and welcome to Aviat Network's first quarter to school 2025 results conference call in webcast.
Andrew Fredrickson: You can find our press release and updated investor presentation in the IR section of our website at www.aviannetworks.com, along with a replay of today's call.
Andrew Fredrickson: With me today are Pete Smith, Aviat's President and CEO, who will begin with opening remarks on the company's fiscal quarter, followed by Michael Conaway, our CFO, who will review the financial results for the quarter.
Pete will then provide closing remarks on Aviab's strategy and outlook, followed by Q&A.
Andrew Fredrickson: including, but not limited to, statements relating to fiscal guidance, 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 expressed or implied on this call can be found in our most recent annual report on Form 10-K filed with the SEC.
Andrew Fredrickson: 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 in the IR section of our website at www.avianetworks.com, and financial tables therein, which include a gap to non-gap reconciliation and other supplemental financial information.
Speaker Change: At this time, I would like to turn the call over to Aviat's President and CEO, Pete Smith. Pete?
Pete Smith: Thanks, Andrew, and good afternoon. Let's discuss Avion Networks.
Pete Smith: First quarter of fiscal year 2025.
Total revenue of $88.4 million, with non-GAAP gross margin of 23%. Adjusted EBITDA of minus $7.7 million.
Speaker Change: Non-GAAP EPS loss of 87 cents.
Speaker Change: As we previewed in our last earnest call, we expected the results in our fiscal Q1 to be difficult. In the quarter, our team dealt with the revenue impact from ongoing U.S. Tier 1 CapEx weakness.
Speaker Change: as well as timing challenges from both private network and international projects.
Speaker Change: Additionally, management faced the priority of closing out the year-end audit and completing our SEC filings throughout the quarter, which distracted from our execution.
Speaker Change: To provide some additional perspective for investors, the global microwave market saw an 8% year-over-year contraction in the most recent quarter based on industry research from Deloro. This is the fourth consecutive quarter of overall microwave revenue declines.
Speaker Change: The market's softness has been driven principally by mobile network CapEx declines.
Speaker Change: Aviat has been able to avoid the impact of the broader market decline until recently thanks to our private network business and our share gain funnel. However, in the most recent quarter, we were unable to offset the Tier 1 weakness.
Speaker Change: Nonetheless, we have seen in the FCC coordination filings that Aviat has continued to grow its share of demand in North America and outperform the market.
Speaker Change: Aviaduct's grown share of demand in the microwave space globally in recent quarters and over the past several years.
Speaker Change: We believe we have the best all-outdoor radios on the market, including a portfolio of E-band and multi-band solutions that are unmatched.
Andrew Fredrickson: We also lead in all indoor solutions, as is evidenced by our new state private network win and have a competitive split-mount offering for international customers. Our access solutions are strong and highly penetrated in the segments we serve.
Andrew Fredrickson: Gross margins were significantly impacted by lower volume and by a mixed shift away from North America and towards our international business.
Based on our revenue and profitability, we aggressively managed our operating expenses and continue to do so where possible.
Andrew Fredrickson: We expect that our Q2 operating expenses will be lower than Q1.
Andrew Fredrickson: As a reminder, we currently have some higher operating expenses associated with our preparation for the stoppage of transition services with NEC over the next two quarters. We anticipate that the back-up fiscal year 2025 will see more favorable operating leverage for Aviat.
Andrew Fredrickson: Moving on to product and customer updates, last quarter we discussed our growing opportunity of selling Avion Network Management Software ProVision Plus to pathfinding product customers.
Andrew Fredrickson: To provide more color to investors, we believe that this will be a $50 million upgrade opportunity over the next five years.
Andrew Fredrickson: There are over 1 million Pass-a-Link radios installed across 500 plus customers today. Moving these customers to ProVision Plus represents a significant upgrade for them in terms of usability and features over the prior NMS software they had access to.
Andrew Fredrickson: For Aviat, this is an attractive opportunity to grow our software revenues and further demonstrate our focus on offering value-add products and services to those customers acquired as part of the Pass-a-Link transaction.
Andrew Fredrickson: Our Priza product line, which was acquired in the 4RF transaction, recently notched its first purchase order for our Priza 5G router to an American utility company in the Southwest. This is an exciting development in the growth of Aviat's private 5G business.
Andrew Fredrickson: I'll also mention that we are already realizing cross-selling revenues from the 4-RF acquisition.
Andrew Fredrickson: As a reminder, approximately 90% of our combined private network customers are non-overlapping.
Andrew Fredrickson: Additionally, recent events such as the cyber attack against America's largest water utility highlight the criticality of having secure private networks with trustworthy and dependable hardware-free infrastructure providers. Just as we see a long upgrade cycle in public safety networks,
Andrew Fredrickson: We expect there will be a significant investment cycle in grid and utility infrastructure modernization. As proof, we are already engaged in projects with two Midwestern electric utilities that have selected our APRESA Access products as part of their network upgrades and modernizations.
Andrew Fredrickson: These two contracts totaled more than $8 million and are expected to begin shipping products by the end of this calendar year. We are pleased with how the 4-RF suction acquisition has progressed to date and expect to have more good news to report in the quarters ahead.
Andrew Fredrickson: Lastly, we're beginning troop plans to transfer the manufacturer of pass-linked products
Andrew Fredrickson: from NET's in-house manufacturing in Japan to Aviat's contract manufacturer. We believe that this transfer will enable Aviat to more quickly and efficiently manage orders and inventory relating to past selling products and over time result in lower overall costs and better gross margins.
Andrew Fredrickson: As a result of this manufacturing move and to ensure continued service to our customers, we anticipate and have already begun building an inventory stock of Pathline products on the order of $20 to $25 million. We expect that this inventory will subsequently be worked down over the next 18 months.
Speaker Change: Before coming back for some additional comment on our outlook, I will turn it over to Michael to review the financial results of the quarter.
Speaker Change: Thank you very much, Pete, and good afternoon, everyone.
Michael: I'll review some of the key fiscal 2025 first quarter results.
Michael: Please note that our detailed financials can be found in our press release, and all comparisons discussed are between the first quarter of fiscal year 2025 and the first quarter of fiscal year 2024, unless otherwise noted.
Andrew Fredrickson: For the first quarter, we reported total revenues of $88.4 million, as compared with $86.9 million for the same period last year.
Andrew Fredrickson: an increase of 1.5 million or 1.7% year over year.
Andrew Fredrickson: North America, which comprised 48% of our total revenue for the quarter, was $42 million, a decrease of 23% from the same period last year due to Tier 1 softness and timing of certain large projects in our private networks business.
Andrew Fredrickson: International revenue was $46 million for the quarter, an increase of $14 million, or 44%, from the same period last year.
Andrew Fredrickson: This growth was driven primarily by the addition of revenues from the Pasolink acquisition.
Andrew Fredrickson: Our trailing 12-month book-to-bill was over one in the quarter.
Andrew Fredrickson: Gross margins for the quarter were 22.4% on a gap basis and 23.2% on a non-gap basis.
Andrew Fredrickson: This compares to 35.9% gap and 36.2% non-gap in the prior year.
Andrew Fredrickson: The decline in our gross margins was driven principally by two items.
Andrew Fredrickson: First, lower overall volumes worked against us from a period cost and operating efficiency standpoint.
Andrew Fredrickson: And secondly, we had a makeshift away from higher margin projects in regions in the quarter.
Andrew Fredrickson: We expect some of these factors to begin normalizing in the quarters ahead.
Andrew Fredrickson: Fourth quarter GAAP operating expenses were $35.4 million.
Andrew Fredrickson: An increase of $9.1 million from the prior year, driven by the addition of Pass-a-Link and 4-RF related AuthX and increased R&D expenses, as we prepare to end Pass-a-Link related transition services with NEC.
Andrew Fredrickson: Non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation, and deal costs, were $30 million, an increase of $6.2 million, driven by PASA Link, 4-RF, and increased R&D costs.
Andrew Fredrickson: In the first quarter, we analyzed and reviewed expenses and headcount to ensure that we are aligned with the current demand environment. There is still work ongoing here, and we expect to show continued progress on cost-out and improved earning results as the year progresses.
Andrew Fredrickson: The first quarter tax provision benefit was $5.5 million.
Andrew Fredrickson: As a reminder, the company has approximately 450 million of Net Operating Losses, or NOLs.
Andrew Fredrickson: that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future.
Andrew Fredrickson: First Quarter Gap Net Income
Andrew Fredrickson: was minus 11.9 million.
Andrew Fredrickson: and non-GAAP net income.
Andrew Fredrickson: which excludes restructuring charges.
Andrew Fredrickson: share base compensation
Andrew Fredrickson: M&A related and other non-recurring expenses and the non-cash tax provision was minus $11.1 million.
Andrew Fredrickson: Fourth quarter non-GAAP earnings per share came in at minus 87 cents on a fully diluted basis.
Andrew Fredrickson: Adjusted EBITDA for the first quarter was minus $7.7 million.
Andrew Fredrickson: This was impacted by the lower gross margins and elevated OPEX in the quarter.
Andrew Fredrickson: Moving on to the balance sheet.
Andrew Fredrickson: Our cash and marketable securities at the end of the first quarter were $51 million.
Andrew Fredrickson: In the quarter, we pulled down our revolving loan facility, bringing our outstanding debt to $81 million at the end of the quarter.
Andrew Fredrickson: The consumption of cash was driven primarily by our purchase of 4-RF and negative gap pre-tax earnings in the quarter.
Speaker Change: With that, I'll turn it back to Pete for some final comments. Pete.
Pete Smith: Thanks, Michael. The first quarter was challenging. Tier 1 market weakness, project timing, and execution combined to create results below our expectations.
Speaker Change: We remain optimistic that we'll see stronger results based on our current view of Q2 and the back half of fiscal year 2025.
Speaker Change: Based on the company's most recent results, we're adjusting our fiscal year 2025 guidance as follows. Revenue to be in the range of $430 million to $470 million, and adjust EBITDA to be in the range of $30 million to $40 million.
Speaker Change: We see reasons to continue believing in Aviat's private network business.
Speaker Change: and the Global 5G opportunity. Our funnel and backlog remain attractive, and the conversations we're having with our customers are encouraging.
Speaker Change: Our bookings are growing and exceeded revenues in the first quarter. Aviana's gained share of demand over the last several quarters despite a down market, and we see no reason to believe that this will change. With that, operator, let's open up for questions.
Speaker Change: Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question.
Speaker Change: Our first question is going to come from the line of Jason Smith with Lake Street. Your line is open, please go ahead.
Jason Smith: Hey guys, thanks for taking my questions. First I want to start with gross margin, obviously soft in September, but can you help us think about the trajectory and I guess more so how big of a snapback can it have in the December quarter?
Speaker Change: Yeah, sure.
Speaker Change: We're not going to break out past the link separately moving forward, but...
Speaker Change: We would say that the margins in Pass-a-Link were solid in the first quarter, so the majority of the erosion in margins was in the core business, and there were really three reasons for it, mostly mix-related.
Speaker Change: And on a year-over-year basis, most of those revenues were replaced and augmented by APAC, which mixes us down from a gross profitability perspective. That was one. Second, we also had a weaker software outcome principally in the U.S.
Speaker Change: We think that this effect will normalize in 2q and the back half and then lastly
Speaker Change: In the first quarter we're dealing with some margin timing effects on hardware revenues and one of our large APAC customers
Speaker Change: which we also expect to attenuate as we move through the year in 2025. So, in terms of the rest of the year, we see those three things.
Speaker Change: Q3 and Q4 as the revenues ramp we'll get a little bit we'll get a little bit of leverage on the period cost component component inside a gross profit margin so we see margins getting back to a more normalized rate in Q2 Q3 Q4
Speaker Change: Okay, that's really helpful. And then just as a follow up, I mean, it seems like September is really the primary driver for the downward adjustment to the full year outlook. I mean, just given the whole September starts in, I mean, it's gonna be a pretty sizable ramp sequentially, December through June. And I know you had expected that previously, just curious if you could provide some additional color on kind of what gives you this confidence and then relatedly how orders have been tracking for the first kind of month plus of the December quarter.
Speaker Change: Um...
Speaker Change: Yeah, I'll give a couple of data points, so maybe just the guidance first, so we lowered the midpoint of the revenue guidance by 20 and then earnings by 14 from a revenue standpoint.
Speaker Change: About half of the reduction is driven by Q1. The other half is really just a little bit of a re-rate in.
Speaker Change: Market expectations primarily driven by tier one spending softness
Speaker Change: So, that's kind of the guidance piece. On the earnings side, kind of half of the guidance retrogression was driven by taking down the volumes.
Speaker Change: and then most of the remainder is all 1Q. You know, as it relates to the orders, we had a book to bill greater than 1 in the first quarter and then...
Speaker Change: Q2 is shaping up to be even stronger than Q1, and we've had a nice first month. So the orders trajectory is better. Yeah, Jason did comment on the orders trajectory. If things were to hold together, we would have
Speaker Change: record bookings.
Speaker Change: We see demand bouncing back, and we are encouraged.
Speaker Change: Okay, that's really helpful. Thanks a lot, guys.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question is going to come from the line of Scott Terrell with Roth Capital Partners. Your line is open. Please go ahead.
Scott Terrell: Hey, good afternoon. Thanks for taking the questions.
Scott Terrell: Hey, Pete, Mike, maybe just to follow up on Jason's question, you know, if you look at your guidance, it kind of implies...
Speaker Change: on average $115 million to $125 million over the remaining three quarters of the fiscal year.
Speaker Change: Thank you.
Speaker Change: Can you talk us through a little bit, it sounds like orders are coming back.
Speaker Change: you know maybe by geography you know AIPAC was weak again maybe how India was within that and sounds like there's some private networks building in the pipeline as well just trying to really get our hands around how that how that recovery comes back why is there such a strong level of confidence you know in the snap back in the December quarter and sustaining that in March and June
Speaker Change: Thank you.
Speaker Change: It always
Speaker Change: It looks like our book's a bill.
Speaker Change: Over the past four or six quarters has been you know, let's say 1.05 and in this quarter We just concluded it was higher than
Speaker Change: When we look at our
Speaker Change: For bookings, we see the Paso Link demand building sequentially, and we will be owners of the business.
Speaker Change: All right.
Speaker Change: on a full year basis, but we had to start up. So we see, meaning, you know, we started up, we didn't hit a home run out of the chute, but we've seen steady increases, quarter over quarter. And we see that persisting at least a few more quarters. So that is helping us. And we,
Speaker Change: We
Speaker Change: On the private network side, our funnels in the east are good. Eastern U.S., our funnels in the west are improving. So that's kind of the basis for why we are bullish, given...
Speaker Change: We're bullish on demand, you know, we're disappointed in where we ended in September, Scott.
Scott Terrell: Gotcha. No, very helpful. And maybe to follow up on your comments on Paso Limpid, it sounds like that continues to build.
Scott: Are you getting to, are you starting to see visibility to the levels that you originally anticipated when you acquired this business of that 30-plus million type range? Is there enough activity going on there now that we're starting to hit that, I guess, kind of break point where this should, in theory,
Scott: with Better Gross Margins start to be nicely accretive in line with your original expectations.
Speaker Change: Yeah, so it was accretive this quarter and we think it will be more accretive
Speaker Change: going forward.
Speaker Change: You know, when we bought it, we thought we could get it to $140 million, so that would be divided by four, a $35 million a quarter run rate. We're getting increasingly confident that we will exit.
Scott: to FY25 at that rate.
Speaker Change: So, so the past, you know, you know, talking with Michael and Andrew, we, you know, we want to get a little bit more
Speaker Change: See you.
Speaker Change: highway behind us.
Speaker Change: But I think we will you know, maybe two quarters three quarters from now. We'll come out. We'll we'll discuss what the
Speaker Change: We are encouraged, right? So, and where we've underperformed has been in the core. We understand the U.S. Tier 1. And, you know, we had project timing issues with...
Speaker Change: the public safety and utility business, which we see reversing as we go forward this fiscal year.
Speaker Change: Great, very helpful. And if I could just maybe two last follow-ups. Any updated thoughts in terms of India, what you're seeing there, the demand profile, and then there's been chatter within the industry I think about some MDU opportunities. I'm wondering if you had any thoughts or comments on that front. Thanks.
Speaker Change: Okay, so India, you know, is...
Speaker Change: still.
Speaker Change: still a growth area. It's
Speaker Change: It's lumpy, and we see the...
Speaker Change: My plan is to go to India before the Roth shows, so when we go to the Roth conference, we can give an India update. But, you know, where things are with respect to India is the India demand environment is still good. It varies from quarter to quarter. Our E-band and multi-band solutions are good. And then what I would also say...
Speaker Change: The you know in our prepared remarks we talked about the
Speaker Change: The ProVision plus network management software for for the Paso link platform and The Paso link is incumbent at one of the two biggest
Speaker Change: operators in India and we we think that that's going to be a chance probably six to nine months.
Speaker Change: from us.
Speaker Change: And then with respect to the MDU, this is because the reason you bring this up is that
Speaker Change: A certain U.S. Tier 1 says a new MDU solution that's been in trial will be rolling out to serve MDUs, and we are not in the pole position there, but we will have a...
Speaker Change: an opportunity to get some business out of that. It may be zero, but it may be something significant. And should we be chosen, we will certainly broadcast that widely.
Speaker Change: Great, thanks so much.
Speaker Change: Thank you, and one moment for our next question.
Speaker Change: Our next question is going to come from the line of Theodore O'Neill with Litchfield Hill Research. Your line is open. Please go ahead.
Theodore O'Neill: Okay, thanks very much. Pete, I was wondering if you could talk a bit about the opportunity in fixed wireless access.
Theodore O'Neill: There's a lot of chatter in the industry about it and sort of go over what products you've got that serve that, what band it is, whether it's an urban, suburban, where the markets lay in that, that sort of thing.
Speaker Change: OK.
Speaker Change: is a significant driver of growth in 5G networks.
Speaker Change: There's increasing fixed wireless access connections.
Speaker Change: 20 gigabits per month
Speaker Change: important in emerging emerging economies and you know just to do the
Speaker Change: kind of the density in rural and
Speaker Change: Scott's question about the MDU, right? We we may or may not win MDU projects, but what
Speaker Change: What MDU stands for is multi-dwelling unit. It's a three-letter acronym. It used to be called apartments. And what happens is to get the connectivity with the bandwidth there.
Speaker Change: Tier 1 operators are looking at putting in wireless solutions, and whether or not Aviat wins something in the MDU side, it creates more fixed wireless access, and it creates more backhaul, and that's good for us.
Speaker Change: And for Mike, a financial question here on the merger acquisition and other expense in the quarter of $4.4 million.
Speaker Change: You don't expect anything like that to be in the upcoming quarter, do you?
Speaker Change: No, those will attenuate as we move through the year, unless we do something incremental from an M&A standpoint. But at this point, absolutely.
Speaker Change: Q2 will be significantly less than Q1 and then Q3 and Q4 should be down as well to more normalized levels.
Speaker Change: Okay, thanks very much.
Speaker Change: Thank you and as a reminder to ask a question please press star 1 1 on your telephone. One moment for our next question.
Speaker Change: And our next question is going to come from the line of Tim Savageau with Northland Capital Markets. Your line is open. Please go ahead.
Tim Savageau: Hey, good afternoon and thanks. A couple of questions. First, I think...
Speaker Change: I guess you said you weren't going to break out past the link.
Tim Savageau: directly anymore, but I wondered if you could say if it was up in fiscal Q1 versus the June quarter.
Speaker Change: Thank you.
Speaker Change: From a revenue and gross profitability standpoint, gross profitability was about the same sequentially and revenues were up a little bit.
Speaker Change: Okay, I'm sorry.
Speaker Change: I am, but I think I'm going to miss the end of that answer there. Revenues were what?
Speaker Change: Up a little bit. Gross profit is about the same. Revenue is up a little bit.
Speaker Change: Okay, up a little. Great. And if we look at the performance in the U.S.
Speaker Change: in fiscal Q1. It's pretty similar whether you look at last quarter or last year, but I wonder if you can...
Speaker Change: kind of categorized that weakness, 14 million bucks or so, by I think the two primary factors that you mentioned, Tier 1 and state pushouts.
Speaker Change: and give us a sentence.
Speaker Change: kind of how those parts are moving around.
Speaker Change: Yeah, I mean, you know.
Speaker Change: you're right roughly about half and half tier one versus push outs and then the visibility into the backlog push outs and
Speaker Change: You know, sequential mix effect in Q2 as the U.S. comes back a little bit is another leg of the stool in terms of more confidence in gross profit margins.
Speaker Change: getting better sequentially.
Speaker Change: Okay, great, and that's kind of where I was headed next, which is, to the extent, Pete, you're looking for a record book and quarter, I think you mentioned a couple of factors, but is it principally...
Speaker Change: I don't know if that's bookings or revenue, but the state, the pushes in the state projects.
Speaker Change: You know, coming back a little bit.
Speaker Change: or are there any other factors in Tier 1 land either in the U.S. or internationally driving that?
Speaker Change: I would say tier one internationally looks
Speaker Change: not finalizing frequencies or finalizing any private network design, that's already in our booking, so that wouldn't.
Speaker Change: wouldn't incrementally add to our bookings so we see we see a strong you know North America bookings environment after a low and we do see international tier ones what I
Speaker Change: has growing, and I would say we are still in between projects with our U.S. Tier 1.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Okay, good, and that's kind of where I wanted to finish, which is...
Speaker Change: You know, I guess most of the data points, even on the wireless side.
Speaker Change: that I haven't, you know, we've been seeing recently are actually not that bad and I know your business...
Speaker Change: Yo.
Speaker Change: might lag the cycle in certain ways.
Speaker Change: with regards certainly to maybe base station installation. I'm not sure whether that's the case.
Speaker Change: relative to network densification, which is kind of most of what appears to be going on now.
Speaker Change: But I wonder if you can just sort of discuss that at a high level, which is...
Speaker Change: you know the the way in which you know your your your business tracks
Speaker Change: you know, higher level.
Speaker Change: spending trends among, you know, big wireless operators and...
Speaker Change: to the extent that's...
Speaker Change: starting to turn up now, what do you expect, you know, an impact down the line for Avio?
Speaker Change: Yeah, yeah. So, you know, through through this cycle, we've, you know,
Speaker Change: Hey.
Speaker Change: before this quarter was like, how come you're not impacted by the CapEx cycle, how come, right? So part of it was we're half private networks, and I think the second...
Speaker Change: The other part of this is we are late cycle, so we didn't go down
Speaker Change: And now, you know, now we have taken our contraction.
Speaker Change: And I think the advantage we have in...
Speaker Change: The customers that we have exposure there are
Speaker Change: are growing for us, so, you know, absent a pass-only transaction, maybe we'd have a couple of quarters of down, but we see...
Speaker Change: We see that the exposure of those tier ones is being favorable and driving about, you know, let's call it a V-shaped recovery, to use an economist's word, or rather rapid bounce back. So I would say private networks is...
Speaker Change: Steady, and you know, we have the U.S. issue, and internationally, Tier 1s, you know, driven bypass link is favorable.
Speaker Change: Thank you.
Speaker Change: Okay, thanks very much.
Speaker Change: Thank you. I would now like to hand the conference back to Pete Smith for closing remarks.
Pete Smith: Thank you.
Pete Smith: So...
Pete Smith: Thanks to our investors for listening in. We're working to put the late 10K and the challenging first quarter behind us. We see positive signs with respect to bookings. We're looking forward to updating you on progress in 90 days. Thanks everyone.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.