Aviat Networks, Inc. (NASDAQ:AVNW) Q3 2021 Earnings Conference Call May 5, 2021 5:00 PM ET
Keith Fanneron - Vice President, Finance & Investor Relations
Pete Smith - President & Chief Executive Officer
Eric Chang - Chief Financial Officer
Conference Call Participants
Theodore O'Neill - Litchfield Hills Research
Tom Diffely - DA Davidson
Good afternoon. Welcome to Aviat Networks Third 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 would now turn the conference over to your host, Mr. Keith Fanneron, Vice President of Global Finance and Investor Relations. Thank you. You may begin.
Thank you, and welcome to Aviat Networks third quarter fiscal 2021 results conference call and webcast. You can find our Form 10-Q, press release and updated investor presentation in the IR section of our website at www.aviatnetworks.com, along with a replay of today's call in approximately two hours.
With me today are Pete Smith, Aviat's President and CEO, who will begin with opening remarks on the company's fiscal third quarter, followed by Eric Chang, our CFO, who'll review the financial results for the third quarter and first nine months of fiscal 2021. Pete will then provide closing remarks on Aviat's strategy and outlook followed by Q&A.
As a reminder, during today's call and webcast management 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.
These and other forward-looking statements reflect the company's opinions only as of the date of this call, and webcast and evolve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. Additional information on the factors that could cause actual results to differ materially from statements made on this call can be found in our annual report on Form10-K filed with the SEC on August 27, 2020. 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.aviatnetworks.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 Aviat's President and CEO, Pete Smith. Pete?
Thanks, Keith, and good afternoon, everyone. Thanks for joining us to review another successful quarter across the business. The company continued to execute on our key long-term focus areas of growth, margin expansion, expense reductions, and meaningful bottom line improvements. Focused commitment by all members of the Aviat team resulted in third quarter and year-to-date revenue growth of 8.2% and 15.5% compared to the same period last year. Third quarter and year-to-date adjusted EBITDA margins of 11.0% and 12.7%, a solid balance sheet and liquidity position, a significant customer win for our new software as a service SaaS offering. A five-year agreement with the US state government provides Aviat FAS and other software via hassle free subscription service.
North American third quarter revenue increased 12.8% year-on-year and for the first nine months increased 20.4% compared to the same period last year. The International third quarter revenue increased 1.1% year-on-year, for the first nine months increased 6.5% compared to the same period last year. Adjusted EBITDA was $7.3 million for the third quarter, representing an improvement of $3.8 million versus the same period last year. Adjusted EBITDA margins improved to 11.0% for the third quarter compared to 5.7% for the same period last year. The improvement in revenue and adjusted EBITDA for the third quarter and year-to-date basis was primarily due to gross margin expansion from higher volume of private network business, increased sales through our IVR store, which serves primarily the rural broadband space. Improved International Business driven by multiband winds and an increase in software sales. We also benefited from previously announced restructuring.
For the first nine months non-GAAP operating expenses decreased by 5.2% compared to the prior year. We continue to demonstrate Aviat differentiation in our products, software and services, and e-commerce. We've demonstrated the viability of these offerings with recent key wins in 5G, private networks and rural broadband. As I've mentioned on prior call, our high capacity single bots multiband radio platform provides the industry's simplest multiband solution which lowers the customer's total cost of ownership. During the third quarter, as previously announced Aviat was awarded a contract with this where Aviat was selected as the wireless backhaul supplier for their nationwide 5G network. This has also placed their first orders with Aviat in the quarter. Along with this during the quarter Aviat also announced a new win with LTD broadband for high speed wireless back [ph] rural broadband connectivity.
LTD broadband a leading us Internet Service Provider provides high speed connectivity to commercial and residential subscribers in Iowa, Minnesota, Nebraska, South Dakota, and Wisconsin. In addition to the next link internet win, we now have three out of the top 10 and nine of the top 30 rural digital Opportunity Fund winners in our customer base. To dish and LTD broadband wins are the result of Aviat lowest total cost of ownership offering driven by the industry's only single box multiband solution for optimum capacity. The highest system gain radios for smaller antennas and better reliability.
Aviat design software that simplifies network planning, the Aviat store for simplified purchasing and reduce logistics costs and next day shipping an Aviat local North American service and support. We remain excited about the 5G and rural broadband opportunities ahead. We believe 5G builds will drive new backhaul upgrades and that our rural broadband business will benefit from meaningful government funding including the $9 billion 5G fund for rural America and the $20 billion rural digital opportunity fund.
With respect to private networks, our business remains strong and is growing. Aviat has a highly differentiated offering, our leading RF performance along with our software and services capabilities are keys to Aviat success. We also recently announced groundbreaking new software available on the Aviat WTM 4000 radio platform. This new software called A to Z plus lowers customer cost by doubling the capacity without additional equipment by combining two or four separate channels onto a single antenna. Delivering the highest system gain enabling smaller antennas, thus reducing tower labor and leasing costs, simplifying spares and lowering power consumption.
Increasing capacity for multiband, enabling three plus zero in a single box and doubling the available microwave capacity. Competitive offerings require three or even four separate boxes with increased complexity and costs. Before turning the call over to Eric, let me provide a couple of additional observations and insights. First, this was a very good quarter and first nine months of our fiscal year. We remain focused and continue to execute. And those collective efforts are reflected in our financial and operational results. We've continued to demonstrate our ability to grow and to take share of demand and looking forward we see three significant drivers, 5G private networks and rural broadband. And we believe we are well positioned to capture significant opportunities with our differentiated products, software and services offerings.
With that, let me turn the call over to Eric to review our financials. Before coming back for some final comments, Eric?
Thank you, Pete, and good afternoon, everyone. During my remarks today, I will review some of the key third quarter and first nine-month 2021 financial highlights, noting our detail financials can be found in our Form 10-Q and press release, both of which were filed this afternoon. As a reminder, all comparisons discussed today are between the third quarter of fiscal 2021 and the third quarter of fiscal 2020, and between the first nine months of fiscal 2021 and first nine months of fiscal 2020, unless noted otherwise.
For the third quarter, we reported total revenues of $66.4 million as compared to $61.4 million for the same period last year, an increase of $5 million or 8.2%. During the quarter, the North American team continues to focus on expanding sales, and seizing upon Aviat's unique products and services differentiations. North America which comprised 63% of total revenue for the third quarter was $42 million an increase of $4.8 million or 12.8% from 37.3% for the same period last year, driven primarily by our private network business, group broadband and software licenses.
For the nine months of fiscal 2021 our North America revenue was $136.7 million, an increase of $23.2 million or 20.4% from $113.5 million for the same period last year. International revenue for the third quarter came in at $24.4 million compared to $24.1 million for the same period last year. For the nine months of fiscal 2021 our international revenue was $66.5 million, an increase of $4 million or 6.5% from $62.5 million for the same period last year. Our international team continues to implement our new commercial sales strategy, which as a reminder includes defending tier one telecom business, winning new tier two accounts, expanding our reach through partnerships and capturing value where we are differentiated.
While still early is execution we continue to see the benefits of all the international strategy paying off. Revenue for the first nine months of fiscal 2021 was $203.2 million compared $176 million for the same year ago period, an increase of 15.5%. Our booked the bill ratio for the third quarter in the last 12 months is well above one. And we are again pleased that our backlog exit in the quarter continues to remain above $200 million. Third quarter gross margins remain strong at 38.5% and 38.7% on a GAAP to non-GAAP basis respectively, as compared to 35.8% and 35.9% for third quarter of last year. Key drivers and strong gross margin is driven by higher volume of private network business increase sales through IVR store, which serves primarily the rural broadband space. Improve International business driven by multi band wins and increase in software sales.
Third quarter GAAP operating expenses were $21.5 million compared to $20.7 million for the same period last year, primarily due to restructuring charges and share based compensation. Third quarter non-GAAP operating expenses, which exclude the impact of restructuring charges, issue-based compensation was flat at $19.7 million year-on-year. R&D expense increased $0.3 million due to investment in software development. Sales expenses increased 0.5 million due to commissioner higher bookings while G&A expenses decreased by $0.8 million, primarily as a result of our previously announced restructuring.
On a year-to-date date basis both GAAP and non-GAAP operating expenses were favorably impacted due to restructuring plans announced in the second half of fiscal 2020 as well as in February 2021. And a slowdown in hiring and reduced travel. Moving on third quarter non-GAAP net income was $5.8 million, compared to $2.2 million for the same period last year, with their quarter non-GAAP EPS coming in at $0.49 per share, compared to $0.20 per share for the same period last year.
First nine months fiscal 2021 non-GAAP net income was $21.1 million compared to $4.2 million for the same period last year. The non-GAAP EPS coming in at $1.83 per share compared to $0.38 per share for the same period last year. Please note that our prior period EPS have been retro actively adjusted to reflect our two for one stock split in the form of stock dividend that was effected in early April 2021.
From income tax standpoint, during the third quarter, we released our US valuation allowance of approximately $92 million associated with our US and a wealth of about $400 million because we have been profitable in the US for the past few years. And it is more likely than not that our US operations will have sufficient future profits to utilize the deferred tax assets in the foreseeable future. Since we have no else to ask the income tax payments in the US, for non-GAAP reporting purpose or income tax expense will continue to be cash tax that we pay in our foreign jurisdiction under the respective transfer pricing agreements.
Adjusted EBITDA for the third quarter was $7.3 million, a $3.8 million improvement from $3.5 million we reported for the same period last year. With adjusted EBITDA margin coming at 11% for the quarter. For the first nine months of fiscal 2021 our adjusted EBITDA was $25.8 million, compared to $8 million for the same period last year. Adjusted EBITDA margins for the first nine months were 12.7% compared to 4.5% for the same period last year.
Moving on to balance sheet. Our cash and cash equivalents at the end of the third quarter was $45.8 million with no loan outstanding. During the third quarter, our inventory increased by approximately $4 million to mitigate supply chain constraints. Despite the increase inventory, our net cash increased $2.8 million sequentially from the second quarter and $13.2 million year-to-date. So our balance sheet remains very solid bring us well positioned to execute our long-term plans.
With that I will turn it back to Pete for some final comments. Pete?
Thanks, Eric. Just a few additional comments before opening it up for Q&A. I am extremely proud of the entire Aviat team for their significant contributions to our results. We recognize that there continues to be a lot of work in front of us, we are on the right path to achieve our long-term objectives. With that, operator, let's open it up for questions.
[Operator Instructions] Our first question comes from Theodore O'Neill of Litchfield Research. Your line is open.
Thank you very much. Congratulations on a great quarter. So Pete during this, this these current earnings period, we've been hearing a lot about supply chain issues. Heart [ph] shortages, semiconductors and other, we heard company actually having trouble getting labor in China, because migration back to the cities isn't happening as robustly as it hasn't been passed. And an all-in long lead times for parts and all this is driving up costs. Can you talk about how you've managed in this kind of environment?
Yes. So you know, the good news is our booked to Bill ratio is above one. And our demand is strong. So we are faced with the supply shortages and freight problems like many other companies, but I would say that these incremental costs didn't mean to have a material impact on our Q3. So real credit goes to our supply chain, they've overcome a myriad of issues. You know, we have challenges today. But what we really did from the beginning of COVID, we were just started COVID, we were nervous. So we've been leveraging our balance sheet, since we're in a basic zero interest rate environments to buy components ahead of demand. And we build up our inventory position. And that's allowed us to mostly meet our customers demand delivery.
So we're going to continue to do that. I don't want to be misleading there. There are risks. But I think, you know, when we look at industry reports, they say that we're distinguishing ourselves with respect to supply chain, and we want to continue to do that. And fortunately, we have the balance sheet that allows us to navigate that way.
It's great. The other thing I wanted to ask you about was the margins were so good in the quarter. And I know your Aviat store is sort of a better margin way for customers to buy product. Is that still more headroom to go raise those margins higher if the store continues to grow?
So I think what drives our, what's draw if you go, I'd like us to look at a nine month right to not get caught up in a quarter to quarter because we have project business. What's really driving the margin expansion is the store, our software sales and we mentioned the those what we think is a bellwether wins. For us, the software as a service frequency is short service where we can start to build a recurring revenue model. And then, you know, one of the things that I brought when I came to the company was a market back approach. And we have our multiband radio which saves our customers 10s of 1000s of dollars a year. And we know for all the innovation that we put in there, we get a margin that to create it. So to kind of put a bow on this store is driving an increase in margins, our software, and we have aspirations to make that software as a service, and then our hardware where we're differentiated with products like multiband. And what I mentioned, our A2C, which really doubles capacity using some software algorithms. So those would be kind of three highlights with respect to the drivers of our gross margin expansion.
Okay, thanks very much.
Our next question comes from Tim [ph] of Northland Capital. Your line is open.
Hi, good afternoon, and congrats on the results. I wonder if you guys have an update - sorry about that, launched into it a bit quick. Do you guys have an update on guidance for the year? I think you provided a range of us revenue and EBITDA last quarter.
Yes, so Tim, there's no, there's no update from the guidance we provided last quarter, revenue wise is going to be on an annual basis between $255 million to $265 million, so there's no change. Likewise, adjusted EBITDA still between $28 million and $31 million for the full year.
So Tim, just to add to that last, you know, we have a project based business last quarter, we said that it was conservative, we still think it's conservative. But we want to stick to annual guidance and not get caught into quarterly guidance. Because, last quarter, we had a big project. And if we start getting into quarter-to-quarter guidance, we'll we won't manage the business as efficiently as we can. So you know, since we're at the last quarter, we don't want to update guidance. And what are just said is we're competent in meeting the guidance. And last quarter, we acknowledged that it was conservative. So we would stand by that without getting into any specific numbers.
Fair enough. Maybe looking at a bit further and I think you mentioned you received initial orders from dish. Correct me if I'm wrong there. I wonder if that's true of LTD as well. But if you look at these new winds, maybe we talk about dish separately from the, call it, rural broadband backhaul, you know, can you give us any metrics to try and size that opportunity? As you look out to next year, maybe in these kind of two buckets, from an annualized perspective, and then beyond that, are you seeing more of those types of opportunities as carriers ramp up 5G builds, and then we get going with our dots and rural broadband?
Okay. So, alright, you asked a lot of questions that are so well.
Two buckets. Yes, dish tier one and rural broadband, just a sense of the size of the, what you brought in to date and what might be out there?
Let me talk about rural digital opportunity fund. So we think that $0.04 about, let's say $0.02 to $0.04 of every dollar that in the world digital opportunity fund turns into a microwave order. So that's what we think the size of it is. And we have three of the top 10 and nine to the top 30 art off winners. So that's kind of how we're starting to think about that opportunity. So we think it's pretty, pretty big. You know, dish is a great customer. We know we've won that business because of our network planning our differentiated radios and our e-commerce. We think that that's a Greenfield 5G application. The international customers have stepped up and taken notice. We think that dish will be you know, small revenue next year, and but it's a bellwether win, and we're seeing interest from our international customer base based on that win. Is that helpful Tim?
Thank you. I did want to follow up on just expanding on the 5G topic a little more, we've obviously seen a lot of momentum toward increased 5G builds, in particular C band. From more incumbent versus Greenfield, 5G operators included among those some historical customers of yours, I wonder if you're seeing any opportunity coming out of the more traditional tier ones in the US, or maybe just in the US?
So we would say that, as the network's build, we see the opportunities, right. And, you know, there's a mix between the fiber deployment and the microwave deployment. And it seems like some quarters, they're focused on fiber and some quarters, they're focused on microwave. And when they're focused on microwave, we certainly enjoy the lift. And we're seeing that, I would say we're seeing that in the US. And we're also seeing that in certain international regions, Tim.
Great. Thanks very much.
[Operator Instructions] Our next question comes from George [ph] of Oppenheimer. Your line is open.
All right. Thank you for taking my question. Pete, maybe digging into the international opportunity a little bit more? Can you give us a sense of where you're displacing people, you know, how much of a differentiation the Aviat store is when you go into these markets? And you know, really, how long of a conversation are you having with the carriers and operators as far as getting in and are you displacing vendors? Are you normally getting new build opportunities?
So okay, so let's talk about the store, internationally, we have that going in Europe, we will roll it out later this year, this calendar year, in an Asia Pac [ph]. And what we're finding, particularly for tier two operators, they like the inventory management that they don't have access, and obsolete and what it often is different. It's the whole package between our network planning, our high capacity, radios, sometimes our software, and then our delivery platform, the store. So that's helping us win new accounts in Asia Pac, in Africa, and in Europe. So that's kind of stuff that's in the pipeline that hasn't hit, is that helpful. So where wherever the store plays internationally is particularly in tier two operators.
Alright, and then when you do look at the game that you are seeing, you know, are you displacing vendors, are you seeing expansion and kind of new networks, and that's where you're getting the bigger opportunity to drive your growth.
So, dish was a new network, we would say, the bulk of our growth is due to share gains.
Right, and then maybe just one last question. Do you feel the vertical strength that you're seeing here in the U.S is that something you can replicate in other parts of the world? Is that opportunity just as robust?
So, we're in the beginning of that, I think in EMEA, our leader in EMEA has deep telecom experience from Cisco and he sees that we're going to be able to move into the private networks in the EMEA regions step by step. So we're pretty hopeful over the next couple of years that we can land some design wins and talk to you about it. So, we think it is a capability that we can replicate. And our international sales leadership is starting to see that opportunity. And the number of private network sales funnel opportunities is increasing International.
I know I said that was my last one last one, just on the pricing environment, do you given how tight the supply chain is, is pricing pretty firm? And do you have the ability to actually go to your customers and say, hey, you were able to hold pricing either where it is and not kind of follow the normal price go down?
Yes. So here's how I'd like to answer that. So we're actively managing this and we believe we can maintain our margins. So is that helpful enough?
Yes. Thank you very much.
Thank you. Our next question comes from Tom Diffely of DA Davidson, your line is open.
Yes. Good afternoon. I appreciate you taking the question. Then question on the Rural Development Opportunity Fund? What is the timing of that? And some of the programs that you're seeing? Is there time for you to expand beyond the three of the top 10, or none of the top 30 that you're currently involved with?
Well, we sure hope that we can get more, more of the top 10 and more of the top 30. And we would say it's early days, in terms of the deployment of the RDOF funding. And, you know, it's really hard to track the, the precise timing of the disbursement. We're not sure that any of the funds has flowed from the government to our customers to us. So we're really happy with our position in rural broadband, and we just think that there's going to be growth ahead from that.
Okay, that's helpful. And then just a quick follow up on the gross margin, you said there is some lumpiness on a quarterly basis. So if I look at the nearly 300 basis point improvement on a year-to-year basis, is that fairly true progression? For what you've done?
Yes, so as PMS [ph] earlier, right, what's driving the driving was much, especially coming from sales through our e commerce platform, right. And it's also more software sales year-on-year, as well as your private network still at about two thirds of our business. And we're still expanding that from a from a margin standpoint. So when the height 30, so I want to come score as margin, I think is something that we can we can maintain.
And Tom just, so I think we can maintain it. In previous calls, we've been asked that we can fit into 40 gross margin, that's our aspirations. But we haven't guided to that. But the way to think about it is as we get more multiband wins. As we get more software and we leverage the e commerce platform, our margins will go up. And then one caveat I'd like to put in there is, you know what I say to the team is we don't get paid a percentage, we get paid in dollars. So if we have a chance to do a share gain of a big customer at a lower margin with a plan to mix up over time, we will do that. But I think for modeling purposes, what Eric said, keeping it flat when we come out next year. We'll think more about our margin and our mix. But we think, you look taking the nine-month view is there's a safe assumption.
Okay, that makes sense. It's the margin dollars that pays the bills. Okay, I appreciate your time today.
[Operator Instructions] One moment please. I'm showing no further questions. At this time, I'd like to turn the call back over to Pete Smith for any closing remarks.
Alright, thanks, everyone for joining. Aviat continues on its continuous improvement journey. We look forward to speaking next quarter. Next quarter will illustrate our full year progress and take some more time to discuss our products and differentiation. Thanks again. Take care.
Ladies and gentlemen, this does conclude today's conference. Thank you all for participating You may disconnect. Have a great day.