Aviat Networks, Inc. (AVNW) CEO Michael Pangia on Q2 2019 Results - Earnings Call Transcript

Aviat Networks, Inc. (NASDAQ:AVNW) Q2 2019 Earnings Conference Call February 11, 2019 4:30 PM ET

Company Participants

Glenn Wiener - IR, GW Communications

Michael Pangia - President and CEO

Stan Gallagher - SVP and COO

Conference Call Participants

Michael Staiger - Odeon Capital

Operator

Good afternoon. My name is Ella, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aviat Networks Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.

Mr. Glenn Wiener, you may begin your conference.

Glenn Wiener

Thank you, Ella and welcome to Aviat Networks' fiscal 2019 second quarter results conference call. We just filed our Form 10-Q and issued our press release. You could also find our updated investor presentation. All documents can be found in the Investor Relations section of our website.

Speaking from management today will be Michael Pangia, President and Chief Executive Officer; and Stan Gallagher, Chief Operating Officer. Shaun McFall, Senior Vice President of Corporate Development is also with us and will be available during the Q&A portion of this call.

Before reading our Safe Harbor statement, I'd like to remind everyone the last month management presented at the 21st Annual Needham Growth Conference, which is very well attended and we filed the event’s transcript as an exhibit on Form 8-K. During that presentation, management had reiterated its most recent second quarter financial outlook and as you saw from the press release just issued, this is what transpired for both the top and bottom-line results.

With respect to Safe Harbor, during today's call, management may make forward-looking statements regarding Aviat's business, including but not limited to, statements relating to projections of earnings and revenue, business drivers, the timing and capabilities of new products, network expansion by mobile and 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 to differ materially from those statements.

Please note, these forward-looking statements reflect the company's opinions only as of the date of this call, and the company undertakes no obligation to revise or publicly release the results of any revision of these forward-looking statements in light of new information or future events. Additionally, during today's call, management will reference both GAAP and non-GAAP financial measures. Please refer to our press release and financial tables therein, which include a GAAP to non-GAAP reconciliation and other supplemental financial information.

I'd like to thank you all for your interest and support, and we certainly look forward to updating you on our progress.

With that, I will now turn the call over to Mike.

Michael Pangia

Thank you, Glenn. I'm really pleased with the strong results we delivered in the second quarter and our optimism moving into the second half of the year is positive. Our pipeline is building, the newer products we've introduced are being well received by both existing and prospective customers and we continue to take steps towards a more optimal financial model.

Operationally, we're continuing to build on the areas that we have already made more efficient. And we are training additional resources in the area of process excellence to support our growth initiatives. Simply put, our foundation is strengthening as evidenced by our financial performance over the past few years and we remain confident in our ability to meet our annual guidance.

A recap of our fiscal 2019 second quarter. We guided to revenue in the range of $61 million to $65 million and came in just above the top end. International revenue was up versus last year by over 12%, driven by continued momentum in Africa and Asia. North America surge nicely on a sequential basis, up 34% compared to Q1.

We guided to non-GAAP gross margins in the mid-30s, and we met the mark solidly at 34.6% even with international comprising a larger percentage of our total revenue mix. Non-GAAP operating expenses were in line with prior guidance of approximately $19 million, and we are continuing to invest more in the growth related areas of our business.

From a bottom line perspective, we guided to a non-GAAP operating income range of $2.5 million to $3.5 million and adjusted EBITDA of $3.5 million to $4.5 million. I'm very pleased to report that we delivered at the high-end on both fronts.

Our cash position increased by $3.1 million compared to the first quarter. Our balance sheet remains strong and we anticipate further improvements both in the fiscal third and fourth quarters. Through the first half of the year, we delivered 6.5% revenue growth and reported approximately $5.4 million of adjusted EBITDA. We were also profitable on an operating and net income basis.

The first half gross margin rate remains solid at 32.2% and our strong second quarter and fiscal second half outlook gives added confidence that from a financial modeling perspective, we can sustain our performance in the mid-30s as we look beyond this fiscal year.

Now, a few comments with respect to North America, as I mentioned, revenue was much stronger sequentially. Our private networks business continues to fire on all cylinders, as reflected in our recently announced wins with several utilities, new statewide networks with Florida and Alaska and a growing list of high quality prospects as we have ramped up our marketing and sales activities. Our relentless focus on providing outstanding service and support to Motorola, one of our key partners remains paramount. And as such, we were happy to share in their continued success.

Our North American service provider business continues to be steady, with a consistent level of bookings throughout the year. This vertical currently represents a smaller portion of our total revenue mix in North America, but as we have seen in the past, this could change when 5G deployments ramp up.

Beyond our traditional verticals, we remain excited about our work with ISPs, much of this is driven by expansion to rural broadband and we expect ISPs to become a bigger contributor to growth in the coming years.

Switching to the International markets. Our bookings were up very nicely and through the first half of fiscal 2019, international revenue is up $10.6 million or over 21%, driven by a substantial increase in Asia. In Asia, we've expanded our customer base on the strength of our new products, while demand from our leading customer in the Philippines has been especially strong as they have been aggressively expanding their mobile data services capabilities. Our business in Africa was up year-to-date and our customer relationships remain strong across the region.

I'm very pleased with the progress that we've been making on our product development programs. New products that we've introduced over the past year have been one of the key catalyst for growth. We are delivering a steady stream of innovations in the areas of transport routing, microwave and millimeter wave radios, cranking solutions [ph] and automation software including SDN. On top of this, we have an exciting new roadmap and the engagement level we’re seeing with current customers and new prospects is very encouraging.

There is no doubt that demand for data bandwidth is increasing globally. And while the maturity of 4G LTE and 5G technologies will occur at different times, there is a common underlying need to invest in network capacity, which is positive for our future business with service providers. We're also seeing more opportunities to leverage our expertise in mission critical networks into some new international markets, which also bodes well for our longer term position.

I'm going to turn the call over to Stan now, and we'll close with a few comments on our full year outlook. Stan?

Stan Gallagher

Thank you, Mike. Before I get into more detail on key financial highlights, I want to update you on some of our progress in driving process efficiencies and the positive impacts to our business.

As we have previously communicated, Aviat continues to invest in Lean Six Sigma with a focus on eliminating defects automating processes and developing AI or artificial intelligence. While engagement and collaboration are key success factors in transforming the business, nothing is more important than execution and accountability for achieving results. A great example of this is how we have improved our sales and operations planning or S&OP processes to develop robust forecast which translate to our guidance and subsequently support our ability to achieve our targets on a more consistent predictable basis.

Since initiating the S&OP process improvement project, we have eliminated over 70% of the resource requirements for creating and refreshing forecasts expanded the visibility horizon of the forecast 4x through data modeling and significantly reduced our forecasting variability. Perfections made at this level should positively impact our ability to achieve our business targets and create an opportunity to further improve the revenue cycle.

We have made great strides in this area, and I would use this quarter's results as an example of our progress. While we still have to manage the inherent business dynamics of binary deals and lumpiness in our customer CapEx, eliminating variation in the S&OP process allows us to more effectively manage the linearity challenge.

Looking to the future, we are actively engaged in evaluating new sales tools, including the modernization of our CRM platform. This will only enhance our capabilities and the level of automation and the depth of our analytics to proactively capture and convert sales opportunities. The widespread impact of these improvements can range from continued inventory management and capital allocation benefits to stronger revenue creation and cash generation.

Now to the financial highlights. For our FY2019 second quarter, revenue was $65.1 million, an increase of $3.4 million or 5.5% improvement compared to the second quarter of FY 2018 attributable primarily to a 12.3% in international revenue and a modest increase in North America revenue, as Mike discussed earlier.

Also our FY2019 second quarter revenue represents a sequential increase of $4.6 million or 7.6% versus Q1, 2019. Non-GAAP gross margin was 34.6% for fiscal 2019 second quarter as compared to non-GAAP gross margin of 35.3% in the comparable fiscal 2018 period, a decrease of 70 basis points. The year-over-year decline in non-GAAP gross margin was primarily attributed to higher international revenue as a percentage of the total mix. Sequentially as compared to fiscal 2019 first quarter, non-GAAP gross margin increased by 500 basis points.

Our non-GAAP operating expenses for fiscal 2019 second quarter were $19.2 million as compared to $18.8 million in the fiscal 2018 second quarter, an increase of $0.9 million or 5%. This increase in operating expenses was primarily related to higher investments in growth related activities, including sales, marketing and R&D.

Our non-GAAP operating income was $3.4 million for the fiscal 2019 second quarter as compared to $3.5 million for the comparable fiscal 2018 period. On a sequential basis, operating income improved by $3.8 million.

Adjusted EBITDA for Q2 fiscal 2019 of $4.5 million was relatively flat for the comparable prior year period, but on a sequential basis it improved by $3.6 million versus the first quarter of FY2019.

Moving on to some key balance sheet highlights. Our cash increased by $3.1 million this quarter due to stronger collections and improved cash management. It is worth noting that this is another area of process improvement focus and we anticipate continual enhancements in performance. Additionally, we still anticipate ending fiscal year 2019 with the higher cash balance than at the end of fiscal 2018, which includes our share repurchase activity.

Our cash collection cycle improved to 60 days compared to 70 days on a sequential basis, our net accounts receivables decreased to $48.6 million or $2.3 million on a sequential basis, which also benefited our DSOs moving down to 68 days compared to 77 days in the prior year. Including unbilled receivables, our DSOs were reduced to 113 days from 120 days in the prior quarter and we expect continued improvement throughout the remainder of the year.

Accounts payables of $34.8 million was up $1.4 million sequentially. Our total inventory position incorporating the effects of the accounting change and the first like-for-like comparison on a sequential basis is $9.7 million versus $10 million in the prior year. Inventory turns increased to 17.6 versus 17 in the first quarter.

In closing, I want to recognize the many employees and leaders in Aviat for their dedication and focus in making operational excellence a way of life. The level of engagement and crisp focus on results are moving the needle in many areas of our business, but most importantly for our customers and shareholders. I am confident in our ability to continue positive transformative change that should be recognized in our future performance.

I'll turn the call back over to Mike now and again, I look forward to sharing more accomplishments in the coming quarters. Mike?

Michael Pangia

Thanks, Stan. In each of the past three years, we've made considerable progress. We are sustaining our profitability on a quarterly basis. We have improved bottom-line performance on an annual basis and we have turned Aviat to growth. Our positive outlook for this fiscal year remains in place and our expectations are for continued improvements.

Now, I'd like to discuss our outlook for the second half of the year. Revenue in the second half of the fiscal year is expected to be between $125 million to $130 million, which would result in a full year revenue range of $250 million to $255 million or growth between 3.1% to 5.2% year-over-year. We expect the fiscal fourth quarter revenue to be higher than the fiscal third mostly driven by the international market.

Non-GAAP gross margins in the second half are anticipated to be very healthy in the 34% to 35% range, with the fourth quarter expected to be modestly better than the third, primarily due to the higher volume. And for the full fiscal year approximately 33% gross margin rate or higher, if we end up near the top end of our second half range.

Non-GAAP operating expenses are expected to be approximately $38 million to $39 million almost evenly split between the two quarters, with the higher end variable with top and bottom line expectations. For the full fiscal year, this would result in total operating expenses of $75.5 million to $76.5 million, up modestly to fiscal year 2018.

Moving on to the bottom line for the second half of fiscal 2019, using the midpoint of the range provided would result in non-GAAP operating income of approximately $4.9 million and adjusted EBITDA of approximately $7.5 million. There is some variability that can impact, but behind low end of the ranges provided, but for the full fiscal year, we anticipate non-GAAP operating income in the range of $7.5 million to $8 million and adjusted EBITDA of approximately $12.5 million to $13 million.

And lastly, our cash position expected to continue to improve and we anticipate ending the year with more cash than we began. Although, we have more to do, I'm very proud of what the Aviat team has accomplished. We have and we will continue to execute with a persistence focus on driving value for our stockholders, customers and employees.

Operator, we're know ready to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Michael Staiger. Your line is open.

Michael Staiger

Hey, how are you guys doing? Thanks for taking my questions. Nice job in the quarter. Just a couple here one, on the Alaska contract, are you expecting that to be I guess challenged by any of your competitors or do you think that's going to roll into the guidance numbers in the back half of the year? That's the first. And the follow-up would be, can you give us any color on the ISP percent of revenues and what sort of competitive environment you see there and what will happen over next back half the year? Thanks.

Michael Pangia

Yes. Sure. So first on the state of Alaska, we've already been receiving purchase orders related to that particular contract. So I don't anticipate there to be any delays. I think that that will be as an example of an opportunity where we expect to see the value of that business to continue to grow. So I don't expect it to be significant this fiscal year, but it will continue to build and be one of the drivers as we look to a very strong next fiscal year, especially as we look at North America.

In terms of the other question, sorry.

Stan Gallagher

Sorry, can you repeat the back Mike.

Michael Pangia

Remind me the second part of it again. ISPs

Michael Staiger

Yes. What percent of revenues and kind of what you’re seeing from a competitive perspective there as the rural broadband look for more capacity.

Michael Pangia

Yes. So we definitely are seeing traction, what I mean by traction, is our funnel is growing and we're starting to receive a few initial awards. But when I take a look at some of the opportunities that we have in front of us, we have some exciting ones that are driven by the introduction of our new products combined with our operational excellence in the area of service and support in particular in the U.S. market. The Aviat store which provides a very easy online experience for several of these ISPs to make their ordering very simple and with fast deliveries is also playing into it.

And that's I think the combination of all those together is gives us some nice competitive differentiation. We never really addressed this market in the past, so I can see it again in line with my comments around some of the new state awards. I can see it being critical to looking at our growth prospects for North America as we look into next fiscal year.

Michael Staiger

I'll see the floor. Thanks.

Operator

[Operator instructions]. There are no further questions, you may continue.

Michael Pangia

Okay, with no further questions. Thank everybody for their time today and we look forward to continuing to communicate and continue to drive results in our business. Thank you

Operator

Excuse me, sir, I am sorry, we have a question from the line.

Michael Pangia

Okay.

Operator

[Operator instructions].

Stan Gallagher

Okay, we’re waiting for a question.

Operator

There are no further questions. And this concludes today's conference call. Thank you for your participation. You may now disconnect.