Aviat Networks (NASDAQ:AVNW) Q4 2020 Earnings Call

0:01 Ladies and gentlemen, thank you for standing by and welcome to the AVIAD Networks fiscal 2020 fourth quarter conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star and zero. I will now hand the conference over to Keith Vannerum.

0:33 Please go ahead. Keith Vannerum Thank you and welcome to Aviat Network's fiscal 2020 fourth quarter and full year results conference call and webcast. You can find our Form 10-K, 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 roughly one hour. As for today, Pete Smith Abiot's President and CEO will begin with opening remarks on the company's fourth quarter and fiscal year 2020, followed by Eric Chang, our CFO, who will review the financial results. Pete will then provide closing remarks on Abiot's strategy and outlook, followed by Q&A. As for Safe Harbor, during today's call and webcast, management may make forward-looking statements regarding Abiot'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.

1:38 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 those 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 IR section of our website at www.avionnetworks.com and financial tables therein, which include a GAAP to non-GAAP reconciliation and other supplemental financial information. At this time, I'd like to turn the call over to Pete.

2:24 Pete?

2:27 Good afternoon, everyone. Aviat Network continues to navigate the global pandemic. We wish our employees, customers, partners, shareholders, and their families health and safety. Before we get into the results, I would like to remind our investors, we are focused and focused on execution. Our key areas, one, increasing revenue. From our press releases since the last earnings call, we have announced partnership expansion and new customer wins. We have an excellent plan that will materialize as we navigate through the COVID-19 challenge. Two, capturing AVIAD's differentiation.

3:12 We have announced multi-band wins, demonstrated the viability of our frequency assurance software and received our first purchase order. Three, driving out costs. We are on track with the previously announced restructuring plan with annualized savings of 3.5 million, of which approximately 2 million will benefit fiscal year 21. Now let's focus on our results. Adjusted EBITDA was up 1.6 million versus Q4 of fiscal year 19. Our balance sheet remains strong. Our cash position is up over 9.7 million since the year began and 2.4 million sequentially compared to last quarter. Fiscal year 20 adjusted EBITDA was 13.5 million, which improved 4.8 million from fiscal year 19 and exceeded the top end of our prior guidance of 11 to 12 million.

4:16 This is quite impressive considering what we face, issues with the contract manufacturer in Q2, volatility in Africa, and now COVID-19. Revenue was slightly down this year as expected, but profitability was up. And we are better positioned going into next fiscal year to drive both the top line and the bottom line. We will be seeing growth as there are several actions that we are now taking that are different from the past. Initiatives that should lead to new customers and better performance. There are four areas I would like to highlight before turning the call to Eric. First, my observations on growth in North America.

5:03 Our North America business continues to perform well. We expanded into new states, cities, and applications. The North America team has worked diligently on expanding sales. In addition, the North America team has seized upon our differentiation. We have won initial business with our frequency assurance software, or FAS, in public safety, Utility, and Service Provider Account. FAS is the industry's only software expert system for the detection and reporting of interference on microwave links and is patent pending. Not only can FAS prevent outages by identifying interference events before they become real problems, but it also arms customers with data analysis to deal with regulators on interference issues.

5:56 FAS is critical for the reliability of mission-critical microwave links, especially with the emergence of Wi-Fi 6D, which allows unlicensed devices to operate in a key microwave band in the USA. In addition, the North America team continues to drive our core products into 5G applications. In Q4, we received new 5G-related orders in USA Mobile Operator Accounts, where we deliver 5G-ready capacity capabilities to our customers. Also, the North America team leveraged our e-commerce platform, the Aviat Store, to provide differentiation and value to our rural internet customers.

6:46 Second, international markets. Our international team started to implement then our commercial strategies. defend Tier 1 telecom business, win new Tier 2 accounts, expand reach through partnership, and capture value where we are differentiated. Expanding our reach through partnership, we signed a new partner agreement with Netronix to grow our presence in the Middle East, and we have another significant agreement in place that we have not named, which addresses other regions where we lack sales coverage. We have seen successes with our multiband solution, which is a highly differentiated offering, significantly reducing spectrum costs for our customers.

7:34 We have secured an important 5G win in Africa with Safaricom due to our multiband value proposition and have expanded our presence in existing accounts as well. We are excited about the possibilities with this offering. Third, cost. We are executing on our announced restructuring. We observed additional cost savings in Q4 due to an aggressive response to the COVID-19 environment. generating shareholder value. To improve the shareholder value, we need to drive sales and lower costs. I am focused on growth, commercialization, and new customer acquisition while concurrently reducing expenses.

8:20 We are in the early stages of building our sales funnel for Tier 2 customers internationally, our sales funnel for multiband, and our funnel for FAS, Frequency Assurance Software. As we execute on these initiatives over the coming quarters, we expect this to translate into top-line growth. As I said in the last call, we will focus on opportunities in markets and geography where competitors cannot match up execution will lead to higher revenue, continued margin expansion, and ultimately higher profitability to drive shareholder value. I'm going to turn the call over to Eric now to review our financials, but I do have a few additional comments after his remarks.

9:05 Eric?

9:08 Thank you, Pete, and good afternoon, everyone. During my remarks today, I will review some of our Q4 and four-year financial highlights rather than reading through all nine items as they can be found in both our Form 10-K and Press Release. All comparisons are between the fourth quarter of fiscal 2020 and the fourth quarter of fiscal 2019, and between full-year fiscal 2020 and full-year fiscal 2019, unless noted otherwise. Although our Q4 and full-year fiscal 2020 revenue both declined from the par year, but we have seen significant growth in North America revenue for the full year. North America revenue has increased to $151.7 million for fiscal 2020 from $132.9 million for fiscal 2019, an improvement of $18.8 million, which is driven primarily by our private network business.

10:08 International revenue declined as expected, but the decline in the second half of the fiscal year was smaller than what we have experienced in the first half of the fiscal year. Our book-to-bill ratio was well above 1 for both the fourth quarter and full fiscal 2020, and we exited fiscal 2020 with a strong backlog. A few other points. In Q4 of fiscal 2020, North America comprised almost 61% of total revenue and continues to represent a higher percentage of mix. Q4 growth margins remained strong. both 34.9% on a GAAP and non-GAAP basis compared to 35.2% and 35.1% for Q4 of fiscal 2019.

10:58 Q4 GAAP operating expenses were $19.7 million compared to $20.1 million and non-GAAP operating expenses excluding the impact of restructuring charges and share-based compensation were $17.5 million compared to $19.8 million. Both our GAAP and non-GAAP operating expenses improved due to cost-cutting initiatives we implemented during the second half of fiscal 20, such as restructuring plans, a slowdown in hiring, and reduced travel. As we noted in our Q3 earnings call, we have announced restructuring plans in March and April, and we recorded a restructuring charge of $1.9 million in the fourth quarter.

11:43 We have realized some resulted savings during Q4 and the remaining savings will be realized in fiscal 21 and beyond. Q4 non-GAAP net income was $4.1 million compared to $2.6 million for the same period last year. Q4 non-GAAP EPS was 75 cents per share compared to 47 cents per share for the same period last year. Adjusted EBITDA of $5.5 million was up approximately $1.6 million from $3.9 million for the same period last year. For the full year comparisons, our non-GAAP net income improved to $8.2 million from $3.2 million. Fiscal 2020 non-GAAP EPS was $1.51 per share compared to $0.58 per share for fiscal 2019. Adjusted EBITDA improved to $13.5 million from $8.8 million for fiscal 2019.

12:46 Our full-year adjusted EBITDA, as Pete mentioned earlier, exceeded the top end of our prior guidance of $11 to $12 million. We can address any questions relating to our results during Q&A. Moving on to the balance sheet, our cash and cash equivalents stood at $41.6 million at the end of the fourth quarter, which is up $2.4 million sequentially from Q3 and $9.7 million since the end of fiscal 2019. Our cash flow from operations was $17.5 million for the full year 2020 compared to $2.9 million for fiscal 2019, an improvement of almost $15 million. Our net cash was $32.6 million at the end of fiscal year 2020 and is the highest level exiting the fiscal year since fiscal 2014.

13:45 We have a credit facility with Silicon Valley Bank, which is based on our eligible AR borrowing base. At the end of the fourth quarter, our loan balance was $9 million, which we repaid in full in July 2020, subsequent to our year end. Given our strong net cash position, and as we expected our cash to continue to increase in fiscal year 2021, we may choose not to draw against the credit facility starting the first quarter of fiscal 2021. Although we did not repurchase our common stock in the fourth quarter, but for the full year, we have spent about $1.8 million in stock repurchases and $3.4 million remain available under the program.

14:31 This concludes my remarks and we'll turn it back to Pete. Pete?

14:36 Thanks, Eric. Just a few additional comments before Q&A. North America has been strong this year, and barring any unforeseen events, should be strong in fiscal year 21. The principal concern is the impact of COVID-19 on our customers' budgets and timelines and the ability to execute field services. Our international business has been contracting. We aim to stop the contraction and return to growth by execution of our sales and marketing processes. Defending our Tier 1 accounts, winning new Tier 2 accounts, expanding our reach with partners and capturing our differentiation in products such as multiband. Both our North American business and our international business have strong demand drivers.

15:23 5G rollout, mission critical networks, rural broadband. We are well positioned for all of these opportunities. Expect announcements as we make progress in capturing the demand that results from these highly favorable market trends. Further, The COVID-19 challenge amplifies these demand drivers in the medium to long term. In the short term, we will navigate the COVID-19 situation. To close the call, I would like to sum up fiscal year 20, our overall direction, and provide some perspective for fiscal year 21. In fiscal year 20, we improved our cost structure and executed through uncertainty encountered with COVID-19. We delivered the highest annual profitability 5.7% adjusted EBITDA in the last 10 years of AVIAD's history. We have maintained our revenue.

16:17 We need to get into a growth mode. We have outlined a plan to achieve this. In addition, we had key wins, including our first Microwave Upgrade Agreement, MUA, subscription offering with a large county government, network rollout for the Virginia State Police, multi-band wins at Safaricom and Globe for 5G deployment, and a Chatham partner agreement with Medtronic. From a product standpoint, we launched our new multiband radio platform and frequency assurance software, upgraded our North American mission-critical platform, and three, enhanced our all-outdoor solution for 5G. We have repositioned the leadership team to accomplish our fiscal year 21 and beyond goals. One example, we have insourced our investor relations. Keith Fannerman will be our investor relations point of contact.

17:16 We thank Glenn Weiner for all of his support and know that we can still call on him for his expertise. Through these changes, challenges, and successes, cash increased $9.7 million during fiscal year 20. I'm very proud of the team's accomplishment and I'm increasingly excited about our future opportunities. are key takeaway messages for investors, focus and execution. Aviat's goals remain the same, growth, margin expansion, expense reduction, and meaningful bottom line results. Like everyone, we are still navigating the COVID-19 environment. Based on our sales focus, capturing value, and execution on the cost front, we expect our fiscal year We expect to see benefits from our strategic focus, including new products such as FAS and our focus on improved REITs and adding new customers.

18:20 We will provide a more specific guidance when we have more certainty around COVID-19. Operator, we are now ready for questions. Thank you. And ladies and gentlemen, if you have a question, just press star then one on your telephone keypad. To withdraw your question, press the pound or hash key. Again, to ask question, just press star one. Please stand by while we compile the Q&A roster. and our first question is from Team South Brazil with Northland Capital. Please go ahead.

19:05 Hi, good afternoon. Pardon me and congrats on the results. And, Pete, I guess I want to pick up on where you left off there with regard to the 21 outlook, which is, you know, pretty broad in terms of growth expectation. But maybe I want to try and marry that up. I see you filed your Q as well, and obviously you had a very significant increase in backlog for the year, on the order of 30%. Now, to be fair, backlog also increased last year and revenues were down. But given your commentary on bookings in Q4, which are, I think, much stronger than your Q3 commentary, which is sort of slightly above one, I wonder if you could maybe relate what you saw in terms of backlog growth, understanding some of that might be farther out with regard to what we should expect. It seems like we should expect double-digit revenue this year based on that backlog, but feel free to provide more perspective on that.

20:10 Yeah, I don't think we're going to sign up to double-digit revenue growth, but we're pretty confident in the revenue growth when we When we think about the year, we are really excited that the book to bill is at 1.3 and that on a dollar value, Eric, correct me if I'm wrong, we're coming into the year with $50 million more backlog. So we think that that'll translate into growth. And a lot of that's driven by 5G, wins in the mission critical space, as well as our Aviat store e-commerce platform development. to solve world broadband opportunities. So we feel good. I don't want to guide to, so we're not going to be specific because we want to see how COVID plays out and the timing of certain deals.

21:04 But we feel really good that we're going to be able to grow the international and the North America business. I wouldn't go so far as to 10% on the top line. And then on the bottom line, we are, on track with our restructuring plan. What we've learned in COVID is that we can squeeze our costs a little more. So overall, I feel really good about the year, but I want to get a little bit more, you know, a little more mileage under our belt before we put specific guidance out. And I think, you know, if we were to put out guidance right now, we'd, you know, maybe we wouldn't take full credit for everything we have in the pipeline.

21:49 Give me a little more time and we'll be more specific.

21:55 If I can add, we exited fiscal 20 with a very strong backlog. As you see in the 10K, it's about $210 million. If you compare that to the end of last fiscal year, it was $160 million. It's actually a $50 million increase in backlog exiting both fiscal years, the increase. And then of the $210 million, and a bulk of it is coming from North America private network business.

22:23 Okay. I guess I'll write that down later. No, that's interesting, and that was kind of following into my next question.

22:35 Go ahead.

22:37 So it sounds like while you expect international to return to a growth profile, Given that comment there about the nature of the backlog in U.S. private network strength, it sounds like you might continue to expect North America to grow faster, right? And I guess that's where I'm headed with that is with regard to gross margin profile, right? Obviously, there's kind of a mixed factor. So it sounds like you could still see, given that mixed strength in North America, some upward pressure on gross margins.

23:17 So what we were prepared to talk to, and I think, Eric, you should give this, is what, you know, I think in the past we've been asked what our long-term model should be. And, you know, Eric, why don't you comment on our long-term model?

23:32 Yeah, when it comes to a long-term model, so this year we, our gross margin is about 30, 35% for the year. And overall, I think we do want to see continuous increase in that percentage. but from a bottom line standpoint, we do see we exited on a form of just EBITDA basis. I think this year was 5.5% and we do see that to continue to grow to maybe on long-term model between 7 to 10% on a bottom line basis.

24:05 Got it. Well, we're maybe covering the last piece of that. I mean, we've seen, you know, OPEX kind of lower than expected pretty much across the board this quarter on Reductions in travel and some promotional type expenses. But it sounds like the decline that you saw, you know, goes beyond that and is sort of more sustainable. And so I want to put, you know, I guess the previous comment about 2 million of restructuring benefit accruing into fiscal 21. You know, how do we look at that, you know, relative to the full year for 20 or, you know, I imagine The Q4 OPEX is kind of a low point. You expect it to come back up a bit as at least some things start to normalize from an expense standpoint.

24:58 So quite simply, I think what we said in the script was that we're on track for adding $2 million of profit, adjusted EBITDA, in fiscal year 21 due to our restructuring. and, you know, we did have some COVID-related cost benefits in Q4, and we see them all repeating in Q1. And, you know, if we go back to travel, that'll go up, but then by the time that comes through, we think we'll be further along in our restructuring, which I think our restructuring, we've announced that in fiscal year 22.

25:43 We'd be at our run rate savings of $3.5 million of unadjusted EBITDA. So, you know, for modeling purposes, you can count on we are on track for the two in fiscal year 21. And if we're on track for 21, the $3.5 million that we've declared that we would save in 22, we're confident that that's going to materialize.

26:11 Got it. And last...

26:13 Sorry. Well, I was going to ask you if it was helpful. Go to the next question. Sorry.

26:20 Okay. Just one more for me. Sorry. And that is really about kind of go-forward demand drivers. And you mentioned several kind of new product platforms. And it sounds like – well, I guess my question is to what extent – it sounds like given the private network strength of North America, you expect those to be – and many more meaningful or material contributors going forward. To what extent did some of those new products drive some of the strong order results that you talked about in Q4 in particular? And then as you look forward in terms of your growth drivers for 21, I guess 5G, mission-critical networks, rural broadband, kind of weigh those in terms or rank order in terms of what growth drivers you're most excited about?

27:15 Well, that's like trying to say which one of my children I love most.

27:21 Look, they're really fantastic for all of us. So I think, you know, we're performing well historically and growing with the private network, the mission-critical private network. where we think we can have some top line growth but margin expansion. We see the frequency assurance software playing in there so where we think we can get margin expansion with that software. The 5G rollout we talked about, we do have a good position and we did have good demand in Q4 with the U.S. network providers but we also see that starting to ramp up internationally, and we saw that at Globe and Safaricom. What I would also add, we see internationally that the multiband, where there's high spectrum costs, that the multiband significantly lowers the total cost of ownership for the international operators, and that we see the multiband, we do have some North America demand for that, but the demand drivers are and many, many, many, many, many, many, many, many, many, the WISPs needed more capacity and we're able to deliver that.

29:12 We're starting to see that's going well in North America. We're starting to see that kind of demand profile internationally and we're getting set up to push the store out internationally. I would say I'm confident in the mission critical space. We're doing well there. Growth drivers should be This e-commerce platform for the rural Internet. And, you know, as 5G goes, we think we have the right products to grow with them. So I would say, you know, at our core, you know, our biggest part of the business is mission critical. We're confident in that. And we're really excited about the growth that the store and 5G is going to bring.

30:00 Got it. Thanks very much.

30:02 Thanks, Tim. Thank you. Our next question is from Theodore O'Neill with Litchfield Research.

30:13 Thank you. Congratulations on exceeding your EBITDA guidance for the quarter, I mean for the year. Thank you. The growth that you're seeing in 5G, can you attribute that to just overall 5G growth? Is the pie getting larger? Are you taking a larger piece of it?

30:31 So, you know, share in a growing market can sometimes be difficult to estimate, right? There's some recent research over the last two quarters that indicated the microwave market was down and we were up compared to the market. So I think we are gaining a little bit of incremental share. Yeah, I would say that we are incrementally growing share, but that's really hard to estimate. It's a qualitative estimate. and a number of others. And then, you know, the part that's really hard to estimate is how the large mobile network operators, how they're doing with respect to 5G.

31:25 That would be hard for us to estimate. So, qualitatively, I would agree with that, your suggestion, but it would be hard to pin us down to a number.

31:35 I asked this question on the last call, and I'll ask it again. How's your supply chain doing? How's it holding up relative, you know, with COVID?

31:43 So, you know, our supply chain and our team executed nearly perfectly in Q4. So it's holding up well. It's performing. We would think that it's outperforming some of our peers. So we're really pleased. And then You know, look, I'll say we did have issues that were short-term issues that we overcame within the quarter. But the good thing about that is we're learning from it and becoming more resilient. So, you know, a year from now, we'll expect near perfection week after week from our supply chain. So we are really, really pleased with our supply chain. And we also think our dependability gives us a platform to win New Share, and that'll play out over the next six to 12 months.

32:38 That makes sense. My last question is, are you seeing any uptick in activity looking at M&A opportunities?

32:47 So we look for, you know, we have a pipeline of bolt-ons that we're looking at. You know, Q4 with COVID, a lot of that got put on hold. We're going to continue to look for opportunistic deals that will be in line with our core competency and be accretive to growth. So we are looking, but we're not going to pull the trigger on something unless it fits and we're going to be able to drive growth and realize the synergies. Okay, thanks very much. Thank you. Thank you. Our next question is from Mark Spiegel with Stanfield and Capital. Please go ahead.

33:31 Hi, Pete. I love your enthusiasm. Two quick questions. How is this potential six gigahertz interference affecting you guys? Obviously, I've seen the thing about your software, but that only tells you that you're being interfered with. Are people avoiding that spectrum? And if so, can you offer them an alternative?

33:54 So we have not seen any change in the demand pattern for the six gigahertz spectrum. So I would say we haven't seen that play out. If someone was really concerned and wanted to go away from the six gigahertz spectrum, we do have a full range of products that we could put them in. Is that helpful?

34:20 Yeah, very helpful. And I forgot my second question, so I thank you for that one. If I think of it, I'll get back in the line.

34:27 Thank you. Great. Thank you, Mark. Thank you. Our next question is from Steve Bush with Everglades Resources. Please go ahead.

34:38 Good afternoon, guys.

34:39 Great job. Great quarter.

34:41 Thank you.

34:42 So most of my questions have been answered, but how does your Safaricom customer compare to MTM's prior revenue growth, revenue side? Is it much smaller?

35:00 Yeah, so they are a smaller operator. Let me give you the color that I think maybe you're looking for. That Safaricom win is important because it proves out our multiband and the economics that we advertised when we got that design win. And, you know, a lot of what MTM operates in is the microwave, high-spectrum cost microwaves. and I wouldn't say this specifically about MTN, but all of our customers where they have high spectrum costs are taking notice of what's going on with Safaricom and asking for presentations or asking for the economic analysis as well as we have a variety of proof of concept tests that are ongoing. So we do what the Safaricom did do for us was they created a big funnel that as we convert the funnel and the opportunities, we think that it's going to translate into revenue growth, and particularly in the Africa region.

36:13 That's really good color. Thank you for that.

36:15 So was MTM, they kind of switched their supplier to Huawei or someone? Was that what happened? And maybe we can get some of that back, what you're saying?

36:29 I think that's a reasonable hypothesis. I don't want to comment on one specific customer, but Huawei did take that share, and we think that we have a highly differentiated offering that would make us more competitive versus Huawei and others. Great. That's perfect. Thank you.

36:54 So you mentioned that you have a patent pending. I don't know if you could add any more color to that. versus, I mean, you also had that press release with MTI Wireless, and there's a bunch of patents mentioned in that. Is it the same line, or who owns the patents with the MTI Wireless, and how is the other one you're talking about that's pending?

37:12 So the MTI Wireless, that's the antenna supplier that goes along, that provides an antenna solution for multiband. So separate that patent out. So on our frequency assurance software, we do have a patent pending, and that patent is around the algorithm, right? So the algorithm for detecting interference, which ultimately leads to the resolution. So we have some really smart guys that were able to sort out how we could basically solve a difficult signal-to-noise problem.

37:57 We've filed with the Patent Office, and we're hopeful that we get granted the patent in the time that the Patent Office needs to review it. I would say that we think it's unique, and it really doesn't matter what we think. Think about our customers. What we did say in the script was that we have received our first orders for that, and that's the ultimate proof if the customer is going to buy from you. I hope that's enough color on the patents that have been out in the press around Avia. That's fine. I appreciate that color.

38:35 And I have to say, I'll just leave it with this kind of comment. I like the fact that you said you're focused on execution and that you need to get into growth mode because I think that's what's the next driver for the stock is getting our top line and bottom line moving together. And I wish you well in that endeavor. Thank you. Thank you. And our next question is from Mark Spiegel with Stanfield and Capital. Please go ahead.

39:02 Yeah, hi, Pete. Just one quick follow-up. I remembered what I wanted to say. I do hope that you guys will be super, super cautious on acquisitions. And the reason I say that is you're selling it around – on an EV enterprise value basis, you're selling it only around 0.3 times revenue per and, you know, I think in this market it would be really hard to find a decent business selling anywhere near that cheaply. So although it may be somewhat growth or earnings accretive, it won't be, you know, it won't be accretive on that multiple, which is maybe the most attractive thing about the company. So obviously you know what you're doing. I just wanted to throw my two cents in there

39:42 on that. Thank you. Thank you for that input, Mark. Thank you. And, sir, you can – Go ahead with your final remarks. There is no more in the queue.

39:56 To close the call, I'd like to thank everybody. Wish everyone health. We're really, really excited about the business. Our restructuring is on track. We have a great, great funnel, and we're excited to talk to you about the progress in a couple months as we wrap up Q1. Thank you, everyone. Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.