If Aviat Networks (AVNW) is not a familiar name to you, do not feel badly. The company has made a lot of twists and turns in the past few years and you would need a playbook to follow the action. Although the corporate ownership and names have changed, their core business of providing microwave backhaul goes back many years and is part of the stable business which has provided long haul microwave circuits for telco firms for several decades.
Aviat incorporated in Delaware in 2006 to combine the businesses of Harris Corporation’s Microwave Communications Division and Stratex Networks, Inc. Aviat took on the name Aviat Networks after a rebranding in 2010 from the name Harris Stratex Networks. Harris Stratex itself was the result of acquisition/merger steps that we will not cover here.
After having just acquired the WiMAX vendor Telsima Corp for US$12 million in 2009, the company announced it was seeking a buyer for its WiMax business in May 2011. WiMax world revenues have generally failed to meet earlier frothy expectations. In the last quarter, Aviat started showing the WiMax results separate from operating results.
In the first nine months of FY11, Aviat’s sales decreased slightly from $356 million to $334 million and generated a loss of $70.7 million. During the period, they also burned $ 46 million in cash.
In July, the company also promoted their sales SVP, Michael Pangia to be president and CEO. Also in July, the company provided revenue guidance that 4Q revenue would be in the range of $115 to $120 million, that the book-bill ratio was greater than one and the cash balance should increase from the previous quarter.
The Core Business
Financially it has been a rough road for the company:
|July 2, 2010||July 3, 2009||June 27, 2008||June 29, 2007||June 30, 2006|
|Revenue from product sales and services (In millions)||$ 478.9||$ 679.9||$ 718.4||$ 507.9||$ 357.5|
|Cost of product sales and services||(345.5 )||(505.5 )||(528.2 )||(361.2 )||(275.2 )|
|Net loss||(130.2 )||(355.0 )||(11.9 )||(21.8 )||(38.6 )|
Source: Company 10-K Report FY2010
Aviat is no newcomer to this business, having competed for years against competitors like Ceragon (CRNT), Alcatel Lucent (ALU), Fujitsu, Ericsson (ERIC), NEC, Dragonwave (DRWI), and Nokia (NOK). The hope is that the company can now shed the WiMax distractions and get back to growth and profitability in its core high end backhaul business.
The wireless backhaul business, although decades old, has found some new life in the past few years as cellular carrier companies are having to ramp up their data capacity rapidly to accommodate smartphones and iPads. At the same time, most carriers are planning to convert to HSPA and LTE and while carriers are upgrading their cell towers, they tend to upgrade their backhaul at the same time.
Maravedis, a market research company that has long focussed on the backhaul market reported in May,2011 that the microwave backhaul equipment market is expected to surpass US$ 12 billion by 2016. During 2010 they stated PtP microwave backhaul market reached US$ 4.74 billion.
They also estimated that “During the next 5 years the microwave market will continuously grow, mainly driven by the need for operators to deploy new base stations to provide good quality of experience over LTE networks.”
Aviat has a small but significant share of in the wireless backhaul business. They have lost share to new upstarts like Ceragon and Dragonwave who focused on IP packet transmission while companies like Aviat were making the majority of their revenue from transmitting the legacy TDM circuits that have been typical in the telco industry.
However, the older line companies are gradually getting caught up as they produce more competitive and more IP oriented products.
Aviat has lost market share during the past five years, but still is one of the larger shareholders in the industry. They have continued to invest in R&D, while restructuring the business and reducing expenses in other parts of the business.
To get a sense of a potential valuation, we make the assumption that Aviat can return to a healthy income statement. This is partially based on our view that the market for backhaul will continue to be robust as the front line mobile carriers move toward high data rate 3G and 4G systems.
We’ve used the following key assumptions:
- Revenue growth rates in the short and long term will average 10% CAGR.
- Net income will continue to be negative in the coming year, but will improve to 7% of sales in the long term.
Aviat has a much smaller revenue line that they had three years ago and yet they have not adequately reduced their spending rate. From 2010 to 2011, spending rates have decreased by a few points but need to be reduce by a large margin at current revenue rates.
Inventory finished products had increased slightly over the previous year – this is a point of concern to be watched in the near term.
With the company going through reorganization, we would like to see more detail of the operating business numbers. Operating business revenues and operating income by product line and geography would be helpful.
Risk Assessment: Speculative
We assess Aviat’s risk level as speculative
On the positive side, the company has run a credible business in a business segment that should grow steadily (if not rapidly) for several years. They’ve almost spun off the WiMax business which was a distraction.
On the negative side, the company has not been profitable for years. Revenues have decreased significantly in the past few years, without the recovery or partial recovery that many technology companies delivered in 2010 and 2011. The new management needs to prove they can increase revenues while reducing costs.
VineSecurityJournal.com’s Proprietary Pricing Model
We assess technology stocks primarily based on their fundamental value. We estimate the revenue and earnings to be generated by a company over the next ten years. We look at the risk involved in the business, look at the assets and liabilities and we discount the value of the future earnings according to risk level. For companies with medium to high risk levels, we discount the value of future earnings more aggressively. Finally, we compare the value of those future earnings to the stock price. Are the shares “on-sale” – or are they expensive?
Aviat still has a relatively healthy balance sheet. IF our optimistic assumptions for growth and profitability could be achieved, we believe the stock could justify price in the $7 range. This indicates that the stock price has already been discounted to reflect recent poor performance. At current prices near $4.20 the market is already being cautious about Aviat. We agree with the market and we plan to wait and see how the new management executes. If we see a couple of quarters of steady handed execution, we would consider buying at current prices.
Conclusion – Sell, Watch and Wait
Why buy now? There just isn’t enough evidence that the ship has turned onto a positive course. Watch and wait is our plan for now.
Have a different opinion? Please leave a comment below.