Aviat Networks Q4 2024 Earnings Call Transcript

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October 7, 2024

There are 7 speakers on the call.

Operator

Good morning. Welcome to Aviat Networks' 4th Quarter Fiscal 2024 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.

Operator

I will now turn the call over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. Thank you. You may begin.

Speaker 1

Thank you, and welcome to Aviat Networks' 4th quarter fiscal 2024 results conference call and webcast. You can find our 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. With me today are Pete Smith, Aviat's President and CEO, who will begin with opening remarks on the company's fiscal Q4 followed by Michael Conaway, our CFO, who will review the financial results for the quarter. Pete will then provide closing remarks on Aviat's strategy and outlook, followed by Q and 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 fiscal guidance, financial projections, business drivers, new products and expansions and economic activity in different regions.

Speaker 1

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 ks filed with the SEC. 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 a GAAP to non GAAP reconciliation and other supplemental financial information.

Speaker 1

At this time, I would like to turn the call over to Aviat's President and CEO, Pete Smith. Pete?

Speaker 2

Thanks, Andrew, and good morning, everyone. Let's discuss Aviat Networks' 4th quarter and full year of fiscal 2024 results and achievements. Highlights from the Q4 include total revenue of $117,000,000 which represents growth of 28% versus Q4 of last year revenue contribution from Passalink of $25,000,000 a 12% increase versus the Q3 adjusted EBITDA of 12,000,000 non GAAP EPS of CAD 0.72 adjusted EBITDA and non GAAP net income accretion from the Passalink acquisition in the quarter. For the full year fiscal 2024, Aviat achieved revenue of $408,000,000 growth of 19% versus last fiscal year adjusted EBITDA of $48,000,000 up 6% versus the prior year. Let's reflect on Aviat's accomplishments in fiscal 2024.

Speaker 2

We grew the core Aviat top line and expanded gross margins versus last year. Additionally, we closed the PathLink acquisition and exceeded our plan from a profitability perspective. This strategic transaction strengthened our product portfolio and significantly bolstered Aviat's international business to give us the scale necessary to serve our customers profitably in these overseas markets. We are pleased with the progress we have made on integration and are tracking ahead of our plans in terms of our investment thesis. Now let's discuss highlights from the quarter, starting with PathLink.

Speaker 2

We grew PathLink revenues in the quarter to CAD25 1,000,000 an increase versus the prior quarter's revenue contribution. Importantly, the Passolink acquisition was accretive to Aviat's financials on an adjusted EBITDA and non GAAP net income basis. We remain confident in the Passolink business being EPS accretive in the coming fiscal 2025 Q1, which is in line with our stated commitment to shareholders. Our dialogue with Passoline customers continues to strengthen and we remain confident in ramping the revenue in fiscal 2025. Aviat's voice of the customer process has been applied to Passlink and the desire for a more powerful network management solution has been communicated.

Speaker 2

We took this feedback and recently released PassLink support on ProVision Plus, Aviat's network management software. With over 800,000 active PassLink radios in the field, this will represent a significant opportunity for Aviat in the years ahead. Based on this and other capabilities such as ProVision Plus, our Access product line and FAS on competitor radios, we expect strong software business in fiscal 2025, up from our record software sales in fiscal 2024. We remain disciplined on costs within PassLink as is reflected in earnings contribution from the business. Transition services costs remain, but we anticipate these to continue ramping down in the second half of fiscal year twenty twenty five.

Speaker 2

In private networks, Aviat continues to distinguish itself as a leader. In the quarter, we had a significant statewide win, converting a new customer from a legacy incumbent. We're excited about this project and anticipate initial revenue in fiscal 2025. Aviat was able to secure this takeaway because of our product's performance and the level of service that we can provide to this public safety customer. Based on FCC filings, Avian has incrementally added to its share of demand for U.

Speaker 2

S. Private networks versus last year. There have been many outage incidents across the U. S. Over the past several months that emphasize the importance of reliable public safety networks.

Speaker 2

At least 8 states have seen statewide 911 outages so far this year, there is a wide gap in performance and reliability between the most modernized public safety networks and the least modern. Given the critical nature of these networks, there is a growing and persistent desire to ensure that all public safety networks across the U. S. Are modernized and are capable of handling the significant increase in technology and data bandwidth that travel across these networks. We remain confident in private networks being a growth driver for Avian.

Speaker 2

State and local government budgets remain healthy for fiscal 2025. Overall, state and city budgets are expected to grow 3% 7% respectively. Public safety spending is expected to grow approximately 5%. Investing in and improving public safety infrastructure remains a top priority across the political spectrum and we anticipate this tailwind for Aviat continuing in the years ahead. ARPA funding remains top of mind with government customers as ARPA funds must be obligated by the end of this calendar year.

Speaker 2

Our team remains engaged with customers to assist in ARPA related projects as this deadline approaches. In mobile networks, our international business continues to offset U. S. Tier 1 softness. India remains a bright spot for Aviat as we continue to grow the number of Aviat radios deployed in the country as well as build on the large PassLink base.

Speaker 2

Operators in India increasingly view Aviat as a technological leader as they evolve their networks to incorporate more e band and multi band radios. Elsewhere in the world, share gain from our largest competitor remains an opportunity for Aviat as was highlighted by the decision of the German government to move away from certain foreign vendors within the next 5 years. We anticipate more opportunities like this to continue to come to market and given our strong portfolio of products and services, we are optimistic we can convert at a rate above our current market share. In rural broadband, we had a strong year with our Aviat store and experienced continued demand from the WISP customer base. Revenue from the store represented approximately 7% of overall revenue in fiscal 2024.

Speaker 2

Government programs such as RDoS helped to keep spending strong in this space. Last, a few comments around our previous disclosed material weakness and delayed 10 ks filing will follow. Let me first apologize to our shareholders. We were disappointed in our ability to complete our year end audit in a timely fashion. This is overshadowed in otherwise good story coming out of our fiscal 2024.

Speaker 2

The material weaknesses relate to key accounting personnel turnover we had in the Q3 of fiscal 2024. This turnover led to key controls not being performed as designed. Although this has not resulted in material changes to our financial results, it is still disappointing. The review of our internal controls resulted in certain recommended improvements, which we are undertaking appropriately. In summary, the discovery of the material weakness, together with the Passolink acquisition made for a more lengthy and complicated order process than we anticipated, which led to our delayed 10 ks filing.

Speaker 2

We look forward to putting this event behind us and re earning the trust of shareholders in fiscal 2025. Before turning it over to Michael to review the financial results of the quarter and fiscal year, I'd like to provide a quick introduction. Michael joined Aviat from Honeywell, where he was Vice President and CFO of Honeywell's Energy and Sustainability Solutions segment. Prior to that, Michael led the finance function for various segment businesses at Honeywell, ABB and GE. Given his past success leading multibillion dollar P and Ls and operating in different end markets, Aviat's Board of Directors and I believe that Michael will upgrade Aviat's ability to scale his business as we grow and provide continued process discipline and productivity throughout the organization.

Speaker 2

With that, I will turn it over to Michael.

Speaker 3

Thank you very much, Pete, and good morning, everyone. I'll review some of the key fiscal 2024 Q4 and full year highlights. And please note that our detailed financials can be found in our press release and all comparisons discussed are between the Q4 of fiscal year 2024 and the Q4 of fiscal year 2023 and follow a similar rubric on full year 2024 year over year comparisons as well, unless otherwise noted. For the Q4, we reported total revenues of $116,700,000 as compared to $91,100,000 for the same period last year, an increase of $26,000,000 or 28.1 percent year over year. North America, which comprised 48% of our total revenue for the quarter, was $56,200,000 an increase of 2.5% from the same period last year due to ongoing strength in our private networks business.

Speaker 3

For the full fiscal year in 2024, North America recorded revenues of $206,100,000 which is up 3% versus 2023. International revenue was $60,500,000 for the quarter, an increase of $24,200,000 or 67 percent from the same period last year. On the year, our international business had revenues of $202,000,000 versus $143,800,000 last year, an increase of 41% year over year. And in total, we finished our 2024 fiscal year with $408,000,000 in consolidated company revenues versus $344,000,000 in 2023, an increase of 19% year over year in our 4th consecutive year of revenue growth. Our backlog at the ending of the fiscal year was 292,000,000 dollars This is up versus our prior year end reported backlog of $289,000,000 As a reminder, we report on this metric annually to avoid the inherent quarterly fluctuations with a project based business.

Speaker 3

Gross margins for the quarter were 35.3 percent on a GAAP basis and 35.9% on a non GAAP basis as compared to 35.9% GAAP and 36.2% non GAAP in the prior year. Within our core business, non GAAP gross margins were 38.7%. This strong result was driven by project and regional mix as well as the impact from increased software sales. CastleLink non GAAP gross margins for the quarter were 26%. This improvement versus the 3rd fiscal quarter of 2024 was driven by improved scale and cost benefits from freight and logistics optimizations.

Speaker 3

We expect the gross margins from our Paso Link products to continue to improve during fiscal 2025 as we continue to rationalize our warehousing footprint and benefit from continuous improvement in our sourcing and supply chain operations. In aggregate, Aviat's core gross profit margins in 2024 were 38.4% versus 36.1% in 2023, an increase of about 2.3 points year over year. 4th quarter GAAP operating expenses were 35,700,000 dollars an increase of $9,300,000 from the prior year, driven by the addition of approximately $6,000,000 in PASIL Inc. Related OpEx, increased core R and D expenses and year end expenses. GAAP operating expenses include a $1,600,000 restructuring charge.

Speaker 3

At Aviat, we seek to continuously ensure that the company's cost structure is properly aligned with our business. The Pathsling footprint yielded an opportunity for cost rationalization that we executed on in the quarter. Non GAAP operating expenses, which exclude the impact of restructuring charges, share based compensation and deal costs were $31,300,000 an increase of $9,200,000 driven by pass link and increased R and D costs. As Aviat continues to ramp down the transition services related costs with NEC as a result of the Passlink acquisition, we expect our operating expenses to normalize in the second half of fiscal twenty twenty five. Note that this OpEx ramp down will be offset on a reported basis with the addition of our recent acquisition 4 RS cost structure as we report our financials throughout our fiscal year 2025.

Speaker 3

The 4th quarter tax provision was $3,100,000 compared to $2,000,000 last year. As a reminder, the company has approximately $450,000,000 of net operating losses or NOLs that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. 4th quarter GAAP net income was $1,500,000 and non GAAP net income, which excludes restructuring charges, share based compensation, M and A related costs and the non cash tax provision was $9,200,000 4th quarter non GAAP EPS came in at $0.72 per share on a fully diluted basis. Adjusted EBITDA for the Q4 was $11,900,000 or 10.2 percent of revenue. On a full year basis, our adjusted EBITDA was $48,100,000 in 20.24 versus $45,000,000 in 2023 or an increase of 6% year over year.

Speaker 3

Moving on to the balance sheet. Our cash and marketable securities increased by $5,400,000 to $64,600,000 driven by positive cash from operating activities of $8,300,000 in the quarter. As of the end of the 4th quarter, we are in a net cash position of $16,300,000 For the full year, we generated cash from operating activities of $30,500,000 With that, I'll turn it back to Pete for some final comments. Pete?

Speaker 2

Thanks, Michael. Before providing our fiscal 2025 guidance, I'd like to discuss our ForRx transaction announced in July. This was a tuck in acquisition that closed at the beginning of July in our fiscal 2025. 4 RF is known globally for their Apriso product line of narrowband, point to point and point to multipoint radios and private LTE and 5 gs routers. The company is based in Wellington, New Zealand, kilometers from Aviat's R and D facility in New Zealand.

Speaker 2

ORF's primary customer base is North American utilities. Given that neither our North American nor our New Zealand teams have engaged with integrating the PASA Link business, we are confident in being able to successfully and quickly integrate 4RF. Additionally, through our diligence process, we were highly encouraged by customer feedback regarding the quality and reliability of 4RF's products. Although 4RF is immaterial today compared to Aviat, we are excited about the customers it brings to Aviat as well as the strengthening of our private network wireless access portfolio. This opens the approximately $200,000,000 industrial SCADA market and the $1,400,000,000 cellular router market to Aviat, neither of which were previously in our addressable markets.

Speaker 2

Since approximately 90% of Aviat's and 4 RF's U. S. Utility and public safety customers are non overlapping, we are excited about their cross selling opportunity and we're already seeing some success. Ongoing investment projects in grid infrastructure, resilience, energy storage and modernization will drive opportunities for more connectivity and bandwidth needs within these private networks. With 4 RF as part of Aviat, we have a unique and compelling wireless portfolio to offer private networks.

Speaker 2

Aviat shareholders should expect 4 RF to be accretive to Aviat's overall gross margins. Turning to our guidance. Based on the company's outlook, we are establishing our fiscal year 2025 guidance as follows: revenue to be in the range of $450,000,000 to 4.90 $1,000,000 adjusted EBITDA to be in the range of $46,000,000 to $52,000,000 Based on our current order pattern and backlog, we expect revenue to build through the fiscal year with our Q1 being the smallest from a revenue and earnings perspective and the Q4 being the largest. In addition, we will be ramping up Aviat OpEx during the 1st 2 quarters of fiscal 2025 as we end the transition services agreement in late fiscal 2025 Q2. With that, operator, let's open up for questions.

Operator

Thank Our first question comes from Scott Searle with Roth Capital Partners. Your line is open.

Speaker 4

Hey, good morning. Thanks for taking the questions. Hey Pete, maybe just to quickly dive in on the comment on material weakness. Could you kind of update us in terms of what still remains outstanding on that front? Any details that are available behind it?

Speaker 4

And I guess as part of that, in terms of the historic restatement, it seems like it's a pretty small number given the amount of time that it's taken to get this done. I think it's about $2,000,000 or so in both $3,000,000 and fiscal 2024. Could you just kind of take us through where the revisions were historically in those numbers? Thanks. And I had a couple

Speaker 2

of follow ups. Yes. This is Scott. I think Michael will take the lead on this part. Yes.

Speaker 3

So there were, I'd say, 3 factors that drove the material weakness. The first was some key, I'll say, personnel turnover in the finance department in particularly in Q3 of 2024. That was 1. The second, the company needed to improve its COSO control monitoring framework. And then the third, there were also some controls that weren't performed effectively, particularly in the back half of the year and really particularly in the Q3, conjoined with the personnel leaving that I mentioned.

Speaker 3

So the first two drivers are well on their way to being fixed already within 2025. And we have every intention of getting this behind us and remediating the full scope of the material weakness within the year. So that's a little bit of an update on the material weakness and what drove it. As it relates to the financial statement revision, there were 2 main drivers of it. 1 was the services contract in North America that upon further review had to true up its estimated cost to complete.

Speaker 3

We think that contract in particular was an isolated incident and through our internal exposure checks, we didn't see any other issues of that ilk anywhere else within the North American contract book. And then the second one was the distributor arrangement that upon further review didn't meet revenue recognition criteria and we had to go back and revise the revenues in 2023. So those are the 2 big ones.

Speaker 4

Got you. Very helpful. And then Pete, maybe to just dive in terms of the guidance for fiscal 2025. It sounds like you'll continue to build over the course of the year from a revenue standpoint. Could you provide a little bit more detail in terms of maybe how September looks to start the year off and how that visibility is building into the December quarter at the current time?

Speaker 4

And maybe as part of that, let's kind of couple in, North America was extremely strong in the June quarter despite headwinds from that Tier 1 customer. I'm wondering if you could address that issue as well and the outlook for North America.

Speaker 3

Yes. Maybe I'll take the Q1 part and then pass it over to Pete as it relates to the Tier 1s. But so look, Q1 in terms of what we're seeing now, we expect to be the lowest of the year from a revenue and profitability perspective. The delayed 10 ks filing and audit did distract management from focusing on the execution of the business. So we expect muted growth in the quarter at this point.

Speaker 3

We'll talk revenues. We see revenues in the $93,000,000 to $99,000,000 range on the quarter.

Speaker 2

And so Scott, let me pick up the Tier 1 part, right? So if we look back over the past couple of years, there's been lots of headlines about Tier 1 CapEx spending and we've been largely unaffected. And last quarter, we expressed some concern about the U. S. Tier 1s and we would say that it's going to be most pronounced in this Q1.

Speaker 2

We're in which we completed a big project. We're in between projects. And I would say that if in the January through June timeframe, a couple of things that we have in our funnel materialized, then we would adjust our guidance in a positive way. And we also see with MTN, if you they're publicly traded, they're talking about a muted CapEx spend. So we would say in Africa and in the U.

Speaker 2

S, Tier 1 spending is down. And when I reflect on this, to use some words from my industrial background, I think microwave is a little bit more of a late cycle business, meaning the headlines were driven and the fiber equipment suppliers were hit up by the CapEx and we kind of were quizzed on why not Aviat. And it's because the way the networks get built out as you move to the suburbs and the rural areas, microwave keeps going. And I think right now, we're seeing the CapEx headlines that were over the past couple of years having a short term impact on us.

Speaker 4

Got you. Very helpful. And if I could one last one and then I'll get back in the queue. But just Mike to follow-up on your comments of the September guidance. Basically, if I'm looking at the mid to upper end of that range, you're looking at averaging 115,000,000 dollars to 125,000,000 from the Q2 to Q4.

Speaker 4

And I'm wondering if you could comment as well on NEC a little bit more. It sounds like there was a nice step up going into the June quarter, both from a revenue standpoint and a gross margin standpoint. I'm wondering how that continues into the back half of calendar 2020 5 here excuse me, calendar 2024 as we're looking at the December quarter and into the first half of calendar 2025? Thanks.

Speaker 3

Yes. Maybe I'll just do kind of the progression on revenues point. I'll just put simply, I would just confirm your mathematics. That is the way that we see revenue shaping up across 2025 is a little bit more muted in Q1 and then 115 plus in the rest of the quarters and then maybe pass it over to Pete on Passlink.

Speaker 2

Yes. And on the Passlink side, why are we modeling it that way, right? In the September quarter bookings would support that ramp. So I think a lot of investors are worried about the acquisition. The acquisition is incrementally performing and incrementally ramping up and are so we're getting more and more confident in the PASLINK NEC transaction and we need to work our funnel to offset the CapEx decline in or leveling off in Tier 1s.

Speaker 4

Great. Thanks so much. I'll get back in the queue.

Operator

One moment for our next question. Our next question comes from Jaeson Schmidt with Lake Street. Your line is open.

Speaker 5

Hey guys, thanks for taking my questions. Just sticking with sort of the guide for fiscal 2025, curious if you could share any sort of backlog numbers you have coming into fiscal 2025?

Speaker 3

$292,000,000 Yes. I mean, we kind of mentioned it in the remarks, it was right around $290,000,000 So up a little bit on a year over year basis is where we're at on backlog.

Speaker 5

Okay, perfect. And then I know you mentioned 4F is immaterial compared to the core Aviat business, but do you expect growth from that business here in fiscal 2025?

Speaker 2

I would say it will be we'll see a little bit of growth and we'll see an immaterial amount of earnings contribution. So a little bit of growth, I mean, the little bit of growth will be offset in overall Aviat with what we're seeing in the U. S. Tier 1 space, but so far so good on the 4 RF transaction.

Speaker 5

Got you. And then just the last one for me and I'll jump back in the queue. I assume gross margin will be down sequentially just given the top line number in September, But would you expect gross margin to also be able to build throughout fiscal 2025?

Speaker 3

Yes. We do. I mean, when you think about it year over year, the gross margin story on a full year basis will be a little bit dampened just given some of the mix dynamics, Jason. So you'll see Paso Link, of course, ramp pretty significantly from a volume perspective year over year. That will have a little bit of a dampening effect on gross margins in total for the business just given the mix.

Speaker 3

And then Pete alluded to the Tier 1 dynamics that's if you were to piece that apart, it's a bit more pronounced in North America from just a sheer volume perspective. So that also has a bit of a dampened mix effect. But to answer your question more specifically about just kind of how we see gross margins from a modeling standpoint, we do expect that gross margins will similarly improve throughout fiscal year 2025 from a quarterly progression standpoint. Okay, really helpful. Thanks a lot guys.

Operator

Our next question comes from Theodore O'Neill with Litchfield Hills Research. Your line is open.

Speaker 6

Thank you. Congratulations on the results for the quarter. Pete, my first question is, if you could give us sort of a trend in private network and perhaps mobile 5 gs business and your view on market share there?

Speaker 2

Yes. So with respect to private networks, that's principally in the U. S. Aviat's FY24 was the highest private network revenue in the last 3 years. Q4 was the highest quarter in the last 11 quarters.

Speaker 2

We look at our share of demand and we would say it's trending in a favorable incrementally in a favorable direction. And then the you asked about share mobile network operators. Look, this is the reason for our guidance. The U. S.

Speaker 2

Tier 1's CapEx is muted. We also see muted CapEx in Africa. What I should say is the so the historical core Aviat Tier 1s are underperforming or muted, but the spending environment in the Paso Link Tier 1s is favorable. So that's kind of the geographic spread of the Tier 1s. And I would say when we did the PASO Link transaction, we thought that we would get more geographic diversity, get have less risk with respect to any single customer and that's certainly true.

Speaker 6

Okay. Ed, my other question sort of echoing what was asked by the first analyst is the regarding the restatement, the actual adjustments are relatively minor relative to the impact of the share price and how much work you clearly had to do to reconcile and report it all. So I was wondering if this impacted your view on the buyback program, particularly since you bought nothing back in the fiscal Q4?

Speaker 2

When we look at our capital allocation and our share price, we would certainly lean into share buybacks. The difficult we have with the late K is the persistence of quiet periods. So I think your question is kind of leading the witness, but I would confirm what your question suggests, Theo.

Speaker 6

Okay. Thank you very much.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Pete Smith for any closing remarks.

Speaker 2

Okay. I'd like to thank everyone for dialing in. We appreciate the patience while we were to get the payout. And given our lateness, we will connect again soon and look forward to a good fiscal year 2025 and providing you updates. Thanks everyone.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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Aviat Networks Q4 2024
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