Aviat Networks (NASDAQ:AVNW) Q1 2021 Earnings Call

0:00 Good afternoon. Welcome to Aviate Networks' first quarter fiscal 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I'll now turn the conference over to your host, Mr. Keith Faneron, Vice President of Global Finance and Investor Relations. Thank you. You may begin.

0:27 Thank you and welcome to Abiot Networks Fiscal 2021 First Quarter Results Conference Call and Webcast. You can find our Form 10Q press release and updated investor presentation in the IR section of our website at www.abiotnetworks.com, along with a replay of today's call in approximately two hours. As for today, Pete Smith, Abiot's President and CEO, will begin with opening remarks on the company's first quarter, followed by Eric Chang, our CFO, will review the financial results. Pete will then provide closing remarks on AVIAT's strategy, outlook, and follow by our Q&A. As for the safe harbor, during today's call and webcast, Mazarin 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, the impact of COVID-19, and economic activity in different regions.

1:29 These and other forward-looking statements reflect the company's opinions only as of the date of this call and involve assumptions, risks, and uncertainties that could cause actual results to differ material from these statements. 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, available in the PIR section of our website at www.avionnetworks.com and financial tables therein, which include GAAP to non-GAAP reconciliation and other supplemental financial information. At this time, I'd like to turn the call over to Pete.

2:14 Pete?

2:15 Thanks, Keith, and good afternoon, everyone. I hope everyone is remaining safe and well as we continue to face the challenges of COVID-19. Thanks for joining us to review what was in many respects a record quarter for the company and a quarter where our execution across our key long-term focus areas yielded many positive results for the business. During the quarter, we benefited from improving sales, operational execution, progress on our restructuring efforts, as well as increased software sales and improved mix. Adjusted EBITDA more than doubled in the first quarter coming in at 8.4 million for the quarter, up 4.2 million or 103% versus the same period last year. Up over 52% from our fiscal fourth quarter 2020 and equal 62% of our reported full year 2020 adjusted EBITDA of 13.5 million.

3:16 Our balance sheet remains strong with our net cash position up and many more. As I've mentioned on our prior calls, we are striving to demonstrate consistency and improvements in our performance by being laser focused on four key focal areas, increasing revenue, capturing AVIAD's differentiation, driving out costs and ultimately increasing overall shareholder value. The first quarter, we made excellent progress on all these fronts. Due to strong, focused sales execution, partnership expansion, and new customer wins, first quarter revenue increased almost 6% sequentially from our fourth quarter 2020, and 13% from the year-ago quarter. North American revenue increased over 14% year-over-year, with international revenue returning to growth, improving 10% year over year.

4:21 During the quarter, we continued to capture Aviat's differentiation with wins for our multi-band transport solution for 5G, demonstrating the viability of our offering. Our 10 gigabits capacity single box multi-band radio platform provides the industry's simplest multi-band solution, which lowers a customer's total cost of ownership are reducing microwave spectrum costs. We recently received initial orders for our frequency assurance software, or FAST, a unique and proprietary software system for interference monitoring and analysis, providing customers increased network reliability and uptime.

5:06 The Aviat FAST solution provides our customers with necessary data analysis to work with regulators regarding interference issues and is critical to the reliability of mission critical microwave links, especially with the emergence of Wi-Fi 6E, which allows unlicensed devices to operate in a key microwave band in the US. As I've mentioned before, our software and services platform is a key focus for long-term growth. And while we were pleased with the progress we've made thus far, we look forward to announcing new software solutions that will benefit our customers. Additionally, we also released our Extra High Power Mission Critical Radio into the U.S. federal market, which will allow us to expand our business in this important segment.

5:55 We continue to make progress on improving and optimizing our cost structure and remain on track to realize annual cost savings of $3.5 million as a result of our announced restructuring plans and other cost savings initiatives. We currently expect approximately $2-plus million of these savings to benefit fiscal year 2021 with significant credit to all of our Aviat team members, our suppliers, and partners. Before turning the call over to Erin, let me provide a couple of additional observations and insights. First, during the first quarter, our North America business continued to perform with the team working hard to expand sales and seize upon Aviat's unique products and Services Differentiation.

6:44 The North America team continues to drive our core products for 5G applications. Emerging 5G networks require backhaul solutions that have both the capacity to meet the growing data demand and the automation to simplify the ever-growing complexity of networks. Our solutions deliver capacity and reliability innovations in all parts of the network to meet mobile operators' 5G challenges. and finally, the team continues to leverage the industry's only e-commerce platform, the Aviat Store, to provide service and value to our rural broadband customers. With the Aviat Store, where customers can receive quotes and purchase Aviat's microwave products directly online, we are removing margin stacks from the business.

7:32 As such, we are disintermediating the value chain to provide a more economical sales channel with higher customer satisfaction to these rural customers. We believe we are well positioned to capitalize on the significant growth opportunities in rural broadband, driven in part by over $30 billion of current and planned FCC funding to subsidize the cost of building new network infrastructure and upgrading current networks for growing rural broadband needs. We've already seen growth in our rural B2B business recently from the $1.2 billion CAF2 Auction, and believe there could be meaningful upside in that business from the $20 billion Rural Digital Opportunity Fund and the $9 billion Fund for Rural America, each launched earlier this year. Turning to international growth opportunities, our international team began to implement our new commercial sales strategy, which includes defending Tier 1 telecom business, winning new Tier 2 accounts, expanding our reach through partnerships, and capturing value where we are differentiated.

8:39 While early in its execution, we are starting to see the benefits of our international strategy pay off, with international revenues up more than 10% versus the year-ago period, reversing the trend of contracting international revenues since fiscal 2018. To further support our international strategy during the first quarter, we strengthen our international sales team with the hiring of a new Vice President of Sales for Europe, Middle East, and Africa Regions, Steve Tateta, and a Vice President of Sales for our Asia Pacific Regions, Wen Lian. We welcome Steve and Wen to the Aviat family and look forward to great things from this organization. With that, let me turn the call over to Eric to review our financials before coming back for some final comments.

9:25 Eric? Thank you, Pete, and good afternoon, everyone. During my remarks today, I will review some of our first quarter financial highlights rather than reading through all line items as they can be found in both our Form 10-Q and press release. All comparisons are between the first quarter of fiscal 2021 and the first quarter of fiscal 2020 unless noted otherwise. We reported total revenue of $66.3 million in the first quarter as compared to $58.6 million for the same period last year, an increase of $7.7 million or 13.1%. North America, which comprised almost 69% of total revenue for the first quarter, was $45.5 million, an increase of $5.7 million or 14.4% from the same period last year, driven primarily by our private network business.

10:21 international revenue return to growth coming at 20.8 million for the first quarter as compared to 18.8 million for the same period last year. We also exited the first quarter with a backlog over 200 million. First quarter growth margins remain strong, 36.6% and 36.7% on a gap and non-gap basis, respectively, compared to 38.5% and 38.6% for Q1 of fiscal 2020. First quarter gap operating expenses were down approximately 16% year-over-year, coming in at $17.7 million for the first quarter of 2021 compared to $21 million for the same period last year.

11:08 Non-gap operating expenses, which exclude the impact of restricting charges and share-based compensation, were down approximately 12% as 17.2 million compared to 19.5 million last year. Both GAAP and non-GAAP operating expenses decreased primarily due to cost saving initiatives implemented in the second half of fiscal 2020, including our announced restructuring plans that slowed down in hiring and reduced travel. First quarter non-GAAP net income was 6.9 million, up nearly 138% compared to 2.9 million for the same period last year with first quarter non-GAAP EPS coming in at $1.24 per share compared to $0.52 per share for the same period last year.

11:57 Adjusted EBITDA for the first quarter was $8.4 million and 103% improvement from the $4.1 million we reported for the same period last year. Moving on to the balance sheet, our cash and cash equivalents at the end of Q1 2021 was $36.2 million with no loan or debt outstanding. On a net cash basis, our cash increased $3.6 million from Q4 fiscal 2020. As I mentioned on our last earnings call, we have a credit facility which is based on an eligible AR borrowing base. At the end of the fourth quarter, our loan balance was $9 million, which we fully repaid during the first quarter of fiscal 2021.

12:42 Given our strong net cash position, and as we anticipate our net cash position to improve throughout the remainder of fiscal 2021, subject to, of course, to customer timing delays, which may occur from time to time based on historical trends, we did not draw against the credit facility in the first quarter, but we continue to have the access to that line if necessary. With that, I will turn it back to Pete for some final comments. Pete?

13:10 Thanks, Eric. Just a few additional comments before opening up for Q&A. This was a very good quarter for Avia. We demonstrated that we can and that we are executing on our key initiatives and new long-term strategy. We also demonstrated that those efforts are leading to improved financial and operational performance. To put this quarter in context, our results for the first fiscal quarter of 2021 adjusted EBITDA margin was 12.7%. Thank you. Thank you. We saw a significant uptick in field service activities as lockdowns had been lifted at many of our customer sites. While we do anticipate some disconnects and challenges given the COVID environment, we do expect to continue to successfully navigate these situations as they arise, as we have done to date.

14:24 Given our current view of the business, the progress we've made so far on our strategic plans, and the overall market environment, We continue to expect fiscal 2021 adjusted EBITDA and revenue to grow as compared to fiscal 2020. Specifically, we currently anticipate revenue for fiscal 2021 to be in the range of $245 to $255 million and adjusted EBITDA to be in the range of $18 to $22 million. Our key takeaway messages for investors remain focus and execution. We have demonstrated the ability to grow. We need to and plan on maintaining this momentum and path. We must continue to capitalize on the opportunities where we can deliver value, and we must continue to lower our expenses to drive greater profitability and shareholder value.

15:19 Aviat's long-term goals remain the same, growth, margin expansion, expense reductions, and meaningful bottom line improvements for all shareholders. Operator, we are now ready for questions. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star and then the number one on your telephone keypad. Once again, that is star and the number one, and we will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Theodore O'Neill with Litchfield Hills Research.

15:55 Thank you. Congratulations on an incredible quarter.

15:59 Thanks, Theodore.

16:01 You haven't dropped that much to the bottom line. Last time you did, you had twice as much revenue. So a question for Eric. It looks like you're headed for a year-over-year reduction in operating expenses. And I was wondering if you could give us what are the highlights there that are making that possible for you?

16:21 Right. So if you remember, we announced in the fiscal fiscal 20 that we announced two restructuring plans. And the goal was to cut both and actually some of the cost of sales as well. Our target was annualized about $3.5 million. And for this year in fiscal 21, we back up that 3.5 million, at least more than 2 million. We should see that in the bottom line.

16:47 And then to add to that a little bit is, you know, we have tightened, you know, COVID was catalytic for us to tighten our expense control. So we're being more prudent with, you know, all of the dollars that we spend.

17:03 Okay. And Pete, when you do have a win in 5G with the multiband solution, what are the key drivers for customers there?

17:16 The key drivers for 5G?

17:18 For the multiband solution.

17:21 Okay. So that's, you know, we talked about total cost of ownership and where where there's mobile network operators that have a high spectrum cost, we deliver value basically where you can switch between bands at a low cost as opposed to putting in multiple radios or having to use more of the higher price spectrum. So if you think about it kind of from make an airliner analogy, we allow the operator to to run economy for as much as possible. But then when needed, we inexpensively, for the operator, bump them up into business class or first class with our multi-band solution, which is very difficult for any of our competition to do at the price point that we play at.

18:20 Okay.

18:21 Thanks very much. Got helpful? Yeah. Thank you. And ladies and gentlemen, if you'd like to ask a question, that is star and then the number one on your telephone keypad. And there are no further questions at this time.

18:43 All right. Well, so I will go to closing. So everyone enjoy and thanks. Thanks to the Avia team, our suppliers, and our customers. It was a great quarter. We're feeling more confident in the business, and that's why we gave guidance this quarter as opposed to last. And we're going to stay focused on 5G, on mission-critical networks, and our rural broadband business. And we look forward to talking to you in about 90 days. Thanks, everyone. Ladies and gentlemen, this does conclude today's conference call. We thank you for participation. You may now disconnect.