Aviat Networks, Inc. (NASDAQ:AVNW) Q1 2023 Earnings Conference Call November 2, 2022 5:00 PM ET Company Participants Andrew Fredrickson - Director, Corporate Development and Investor Relations Pete Smith - President and Chief Executive Officer David Gray - Senior Vice President and Chief Financial Officer Conference Call Participants Scott Searle - ROTH Capital Partners Erik Suppiger - JMP Securities Tim Savageaux - Northland Capital Markets Theodore O'Neill - Litchfield Hills Orin Hirschman - AIGH Partners ...

[Part I. Financial Information](index=4&type=section&id=Part%20I.%20Financial%20Information) [Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) Aviat Networks reported an 11.1% revenue increase to $81.3 million for the quarter ended September 30, 2022, yet recorded a $2.7 million net loss due to higher expenses, with total assets reaching $326.7 million and negative operating cash flow of $6.3 million [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased slightly to $326.7 million as of September 30, 2022, driven by acquisition-related goodwill and intangible assets, despite a decrease in cash and marketable securities, while liabilities rose and equity slightly declined Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 | July 1, 2022 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $21,607 | $36,877 | | Marketable securities | $1,252 | $10,893 | | Accounts receivable, net | $72,471 | $73,168 | | Inventories | $32,888 | $25,394 | | Goodwill | $4,950 | $— | | Intangible assets, net | $7,166 | $— | | **Total Assets** | **$326,728** | **$323,904** | | **Liabilities & Equity** | | | | Accounts payable | $48,236 | $42,394 | | Total current liabilities | $110,880 | $104,479 | | **Total Liabilities** | **$127,306** | **$122,151** | | **Total Equity** | **$199,422** | **$201,753** | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Total revenues grew 11.1% to $81.3 million for the three months ended September 30, 2022, but increased operating expenses and other non-operating costs resulted in a net loss of $2.7 million Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Oct 1, 2021 | | :--- | :--- | :--- | | Total Revenues | $81,251 | $73,158 | | Gross Margin | $29,454 | $26,081 | | Total Operating Expenses | $25,541 | $19,267 | | Operating Income | $3,913 | $6,814 | | Net (Loss) Income | $(2,746) | $4,682 | | Diluted EPS | $(0.25) | $0.39 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities was $6.3 million for the first quarter of fiscal 2023, with investing activities using $8.3 million primarily for an acquisition, leading to a total decrease of $15.3 million in cash and equivalents Cash Flow Summary (in thousands) | Activity | Three Months Ended Sep 30, 2022 | Three Months Ended Oct 1, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(6,314) | $682 | | Net cash used in investing activities | $(8,336) | $(349) | | Net cash used in financing activities | $(310) | $(804) | | **Net decrease in cash, cash equivalents, and restricted cash** | **$(15,307)** | **$(658)** | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Key notes include the $20.4 million Redline Communications acquisition, a new $2.0 million restructuring plan, shifts in regional revenue, and the company's $25.0 million credit facility with $22.0 million available - In Q1 FY2023, the company completed the all-cash acquisition of Redline Communications for **$20.4 million** (**$15.8 million** net of cash acquired), resulting in the recognition of **$4.95 million** in goodwill and **$7.29 million** in purchased intangible assets[79](index=79&type=chunk)[80](index=80&type=chunk) - A new restructuring plan (Q1 2023 Plan) was approved related to the Redline acquisition, resulting in **$1.95 million** in charges during the quarter, involving a reduction of approximately 20 employees[74](index=74&type=chunk)[75](index=75&type=chunk) Revenue by Region (in thousands) | Region | Three Months Ended Sep 30, 2022 | Three Months Ended Oct 1, 2021 | | :--- | :--- | :--- | | North America | $48,848 | $50,937 | | Africa and the Middle East | $10,984 | $10,702 | | Europe | $4,500 | $2,703 | | Latin America and Asia Pacific | $16,919 | $8,816 | | **Total Revenue** | **$81,251** | **$73,158** | - As of September 30, 2022, the company had **$22.0 million** available under its SVB Credit Facility, having borrowed and repaid **$15.0 million** during the quarter with no outstanding balance at quarter-end[53](index=53&type=chunk) [Management's Discussion and Analysis (MD&A)](index=24&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes 11.1% revenue growth to international markets and the Redline acquisition, despite a North American decline, with gross margin improving to 36.3% and increased operating expenses due to integration costs, while liquidity remains sufficient Revenue Change by Region (Q1 FY2023 vs Q1 FY2022) | Region | $ Change (in thousands) | % Change | | :--- | :--- | :--- | | North America | $(2,089) | (4.1)% | | Africa and the Middle East | $282 | 2.6% | | Europe | $1,797 | 66.5% | | Latin America and Asia Pacific | $8,103 | 91.9% | | **Total Revenue** | **$8,093** | **11.1%** | - Gross margin improved to **36.3%** from **35.7%** YoY, primarily due to a higher volume of Private Network business and increased sales through the Aviat Store, which helped offset pressures from expedite fees and inflation[126](index=126&type=chunk) - Selling and administrative expenses increased by **$4.8 million** (**37.8%**) YoY, primarily due to variable compensation and costs associated with the integration of the newly acquired Redline business[130](index=130&type=chunk) - The company's principal sources of liquidity are **$21.6 million** in cash and cash equivalents and **$22.0 million** of available credit under its SVB Credit Facility[143](index=143&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=30&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks are foreign currency exchange rates, resulting in a $1.1 million translation loss on equity, and interest rate changes, which are currently considered immaterial - The company is exposed to foreign currency risk from its global operations, with the impact of translating foreign assets and liabilities to U.S. dollars resulting in a **$1.1 million** loss recorded in stockholders' equity for the first three months of fiscal 2023[155](index=155&type=chunk) - As of September 30, 2022, there were no forward contracts in foreign currency to hedge against exchange rate risk[154](index=154&type=chunk) - Interest rate risk on borrowings is not expected to have a material impact, as interest expense on the SVB Credit Facility was immaterial during the quarter[159](index=159&type=chunk) [Controls and Procedures](index=32&type=section&id=Item%204.%20Controls%20and%20Procedures) The CEO and CFO concluded that disclosure controls and procedures were effective as of quarter-end, with no material changes to internal controls over financial reporting - The CEO and CFO have concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[161](index=161&type=chunk) - No changes occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting[162](index=162&type=chunk) [Part II. Other Information](index=33&type=section&id=Part%20II.%20Other%20Information) [Legal Proceedings](index=33&type=section&id=Item%201.%20Legal%20Proceedings) The company is subject to various legal claims in the normal course of business but currently believes that none of these are likely to have a material adverse effect on its financial position - The company does not believe that any current legal claims or proceedings are likely to have a material adverse effect on its financial position[99](index=99&type=chunk)[165](index=165&type=chunk) [Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year 2022 - No material changes have been identified from the risk factors described in the fiscal 2022 Annual Report on Form 10-K[166](index=166&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=33&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not repurchase common stock during the quarter, with $8.0 million remaining available under its existing stock repurchase program - No shares of common stock were repurchased during the quarter[167](index=167&type=chunk) - As of September 30, 2022, **$8.0 million** remains available under the company's **$10.0 million** stock repurchase program approved in November 2021[67](index=67&type=chunk)[167](index=167&type=chunk) [Other Items (Items 3, 4, 5, 6)](index=33&type=section&id=Other%20Items) Items 3, 4, and 5 of Part II were not applicable for this reporting period, while Item 6 lists the exhibits filed with the report - Items 3, 4, and 5 of Part II are noted as 'Not applicable'[167](index=167&type=chunk)

Financial Data and Key Metrics Changes - For Q4 fiscal year 2022, Aviat Networks reported revenue of $77.4 million, an increase of 8.0% compared to Q4 of the previous year [9][23] - Adjusted EBITDA for Q4 was $9.1 million, reflecting a 31% increase year-over-year [9][27] - Non-GAAP EPS increased by 52% [9][27] - For the full fiscal year 2022, revenue grew by 10.2% to $303.0 million, marking the second consecutive year of double-digit growth [9][23] - The company repurchased $5.4 million in shares during the fiscal year [9] Business Line Data and Key Metrics Changes - Revenue from private networks grew by 11% in fiscal year 2022, with the highest bookings year in history for this segment [12] - Multi-band solutions sales increased by over 80% year-over-year [13] - Management and application software sales rose by over 50% compared to fiscal year 2021 [15] Market Data and Key Metrics Changes - North America accounted for 63% of total revenue in Q4, with revenue of $48.8 million, a 5.1% increase from the previous year [23] - International revenue reached $28.6 million in Q4, up 13.3% year-over-year [24] - The backlog increased by 9% year-over-year to $245 million [24][21] Company Strategy and Development Direction - The company aims to leverage its strengths in private networks, multi-band solutions, and software offerings to capture market share [10][21] - The acquisition of Redline Communications is expected to add approximately $20 million in revenue and enhance gross margin and earnings in fiscal year 2023 [22][30] - The company is focused on expanding its e-commerce platform to address demand from government funding initiatives [18] Management's Comments on Operating Environment and Future Outlook - Management highlighted the challenges posed by supply chain disruptions but noted successful navigation of these issues [19][20] - The company anticipates improved margins moving into fiscal year 2023, with expectations of a positive impact from government funding initiatives like RDOF [33][38] - Management expressed confidence in the company's strategy and product differentiation, particularly in the context of competition with Huawei [45][30] Other Important Information - The company has over $500 million in net operating losses (NOLs) that will minimize cash tax payments for the foreseeable future [26] - The company is in the process of rolling out a new e-commerce platform to enhance its market readiness [18] Q&A Session Summary Question: Impact of inflationary costs on gross margins - Management indicated a significant impact on margins, estimating a reduction of 60 to 70 basis points, but expects margin improvement moving forward [33] Question: Strength of services margins and Redline integration - Services margins were strong due to successful projects in North America, with expectations for improved service margins overall [35] Question: Guidance for fiscal year 2023 and RDOF contribution - Management stated that RDOF is not included in guidance but could serve as a positive catalyst if materialized [38] Question: Demand in Europe and impact of the Ukraine war - The company reported strong demand in the UK, with minimal impact from the Ukraine-Russian conflict [50] Question: Backlog mix between products and services - The backlog was skewed towards services this quarter, but no fundamental shift in the mix is expected [56] Question: Organic growth rate and backlog potential - Management acknowledged the potential for organic growth, especially with RDOF funding, and indicated that guidance would be revisited as the year progresses [64]

Financial Data and Key Metrics Changes - The company reported revenue of $74.5 million for Q3 2022, representing a growth of 12.2% compared to Q3 2021 [7][17] - EBITDA for the quarter was $9.5 million, reflecting a growth of 23% year-over-year [7][21] - Non-GAAP EPS increased by 38% to $0.67 per share compared to $0.49 per share in the same period last year [21] - GAAP net income was $6.0 million, a significant decrease from $94.7 million in the previous year, primarily due to a one-time benefit from deferred tax assets in the prior year [20] Business Line Data and Key Metrics Changes - North America accounted for 66% of total revenue, amounting to $49.0 million, an increase of 16.7% year-over-year, driven mainly by the private networks business [17] - International revenue was $25.5 million, up 4.5% from the previous year [17] - The backlog remained above $200 million, with a trailing 12-month book-to-bill ratio above one [17] Market Data and Key Metrics Changes - Strong demand was noted across three main market segments: 5G, private networks, and rural broadband [10] - The company anticipates significant opportunities from government funding sources such as the $20 billion RDOF and the $65 billion bipartisan infrastructure fund [11] Company Strategy and Development Direction - The company is focused on growth, margin expansion, and improving the bottom line despite supply chain challenges [6] - Continued commitment to gaining market share in private networks and rural broadband segments [10][11] - The company is raising its full-year revenue guidance to a range of $296 million to $300 million [25] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the improving supply chain environment, although risks remain [9] - The company is well-positioned to capture opportunities in 5G, private networks, and rural broadband with differentiated products and services [14] - Management noted that inflationary pressures are expected to continue, but price actions taken are anticipated to offset these pressures [18][46] Other Important Information - The company executed $2 million in stock repurchases during the quarter [22] - The tornado that impacted the Austin facility did not have lasting effects on production [8] Q&A Session Summary Question: Outlook on gross margins - Management expects continued modest improvement in gross margins as the year progresses, despite ongoing inflationary pressures [26][27] Question: Timeline for government funding contributions - RDOF funding is expected to start contributing by late 2022 or early 2023, while the bipartisan infrastructure fund will take longer due to state approvals [29][30] Question: Update on the relationship with DISH Networks - The company has successfully delivered to DISH and views this as a significant validation of its technology [32] Question: Seasonal strength in Q4 guidance - The guidance reflects caution due to supply chain risks, with the low end serving as a hedge against potential supplier de-commitments [36][37] Question: Growth in service side of the business - The mix between product and service sales fluctuates, with long-term expectations of a two-thirds to one-third split [38] Question: Update on testing with a large U.S. state - The test was successful, leading to additional pipeline opportunities for the company's routing products [42] Question: Allocation between Aviat and CERAGON for DISH - Management refrained from speculating on the allocation split but emphasized their proven technology [44] Question: Impact of direct sourcing on gross margins - Direct sourcing is part of the margin improvement plan, helping to secure supply and satisfy customer needs [48] Question: Magnitude of RDOF pipeline - The company has a significant market share and is prepared for demand once RDOF funding flows, although timing remains uncertain [51][52] Question: Trends in rural broadband growth - The company is below the 10% revenue mark from rural broadband but expects steady growth tied to ongoing funding [54]