Aviat Networks, Inc. (AVNW) on Q2 2021 Results - Earnings Call Transcript

Operator: Good afternoon. Welcome to Aviat Networks Second 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. Keith Fanneron: Thank you, and welcome to Aviat Networks second 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. Pete Smith: Thanks, Keith, and good afternoon, everyone. I hope everyone remain safe and well, during this period of working remotely and managing through the COVID-19 pandemic. I hope everyone is off to a great new year. Thanks for joining us to review a 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 our highest reported quarterly revenues in more than five years and expense reduction, record adjusted EBITDA margins, a solid balance sheet and liquidity position and significant customer wins in our mobile 5G and rural broadband businesses. During the quarter we benefited from improved sales, including increased software sales, and overall mix with revenues at $70.5 million. Revenue increased 6.4% sequentially from our first quarter fiscal year 2021, and 26% from the year ago quarter. North American revenue increased over 34.8% year-over-year. International revenue improved 9.5% year-over-year. These strong second quarter revenues were driven primarily by our 5G, private networks and rural broadband businesses. Eric Chang: Thank you, Pete, and good afternoon, everyone. During my remarks today, I will review some of the key second quarter and first half fiscal 2021 financial highlights, noting our detail financials can be found in our Form 10-Q and press release, both of which were filed earlier this afternoon. As a reminder, all comparisons discussed today are between the second quarter of fiscal 2021 and the second quarter of fiscal 2020, and between the first half of fiscal 2021 and first half of fiscal 2020, unless noted otherwise. For the second quarter, we reported total revenues of $70.5 million as compared to $56 million for the same period last year, an increase of $14.5 million or 26%, driven mainly by our U.S. private network business, as well as international sales growth. As Pete mentioned, our total revenue for the second quarter was the highest since the first quarter of fiscal 2016. 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 almost 70% of total revenue for the second quarter was $49.2 million an increase of $12.7 million or 34.8% from the same period last year, driven primarily by our private network business. Pete Smith: Thanks, Eric. Just a few additional comments before opening up for Q&A. I am extremely proud of the entire Aviat team for their significant contributions to our results. We recognize that there is a lot of work in front of us. We are on the right path to achieve our long term objectives. Given our current view, the progress we've made during the first half of the year and the overall environment, we are updating our guidance issued on November 5, 2020. We currently expect revenue for fiscal year 2021 to be in the range of $255 million $265 million, and adjusted EBITDA to be in the range of $28 million to $31 million. With that operator, let's open it up for questions. Operator: Your first question comes from the line of Theodore O'Neill from Litchfield Research. Theodore O'Neill: Thank you. Congratulations on a great quarter. Pete Smith: Thanks, Theo. Theodore O'Neill: Yes. A question for you on the broadband. My first question is on broadband. Last Thursday, Nextlink Internet announced they signed an agreement with American Tower to co-locate their equipment on a thousand American Tower sites to facilitate rapid deployment of fixed broadband. And I'm wondering, is that where your radios go to and do you get to put something on all thousand towers? Pete Smith: So we don't have the details of their deployment, but we think we're an important partner and we haven't worked through that announcement and what it means for us. Net-net is neutral to positive. Theodore O'Neill: Okay. In the quarter -- in the Q, you say you've got a 12.5% state government customer. And I'm just kind of curious why you can't name the customer? And how many other sort of large government contract type customers are out there for you? Eric Chang: This is Eric here. Yes, so we haven't been given the permission to name the customer is the U.S. state government. It's about 12.5% for this quarter. But it is for private network, it is for public safety. Theodore O'Neill: Okay. And then are there other states where there's an opportunity of the same kind? Pete Smith: So there could be future opportunities, and with the way government appropriations are taking place right now, and the concern about the COVID situation, there can be kind of bringing in of demand. And we were through our supply chain excellence, we were able to satisfy that state government rather quickly. And normally without the urgency on the customer side, and our supply chain that demand would have been spread over a couple of quarters. And we were really excited to be able to satisfy their needs and put the revenue on the scoreboard this quarter. Theodore O'Neill: Okay, great. Thanks very much. Pete Smith: Sure. Operator: Your next question comes from the line of Sarkis Sherbetchyan from B. Riley Securities. Sarkis Sherbetchyan: Hey, good afternoon. Thanks for taking my question Pete, Eric, and Keith. So first question, wondering if you can provide color on the run rate for software sales in the quarter. Pete Smith: So -- go ahead, Eric. Eric Chang: So let me comment on that. So we generally don't disclose our software revenue. We rollout a software back in Q4, and then we're ramping up that revenue. But we're not in a position right now to actually disclose that amount. It's definitely a lower percentage right now. But eventually, when that margin, the percentage get larger, then we will at that point disclose that number. Pete Smith: Right. So let me jump in. I've been at the company a little over a year. And for the first couple quarters, we said that we were going to invest more in software. We are starting to build our software business, when it reaches a materiality then we'll break it out. It's still small, but when we get our software wins, it is margin accretive and it's really exciting for us. Sarkis Sherbetchyan: Okay, thanks for that. I guess, given the trends of the software investment relative to what you're expecting to garner from a sales trajectory. I guess when do you think you'd reach a point of materiality to be able to break it out? Would it be within the next 12 months? Would it be within 18 months, just kind of want to get a better handle on that? Pete Smith: So my hope is in the next two years to make it to have a material level that we would report on. But I think it's two years away and as we make that two year journey, it will as we have success it'll show up in our gross margin and our EBITDA margin. So I would say two years. Sarkis Sherbetchyan: Okay, that's fair and helpful. Thanks for that. I guess want to go towards the guide. So for fiscal '21, sales guidance was increased, and we have a range of $255 million to $265 million. And for adjusted EBITDA, I think you said a range of $28 million to $31 million. I suppose on the low end and top end, from a margin perspective, that works out to 11% to 12%. Year-to-date you're close to 14% from an EBITDA margin perspective. So I guess if I look at the back half of this fiscal year, and break down what you've done year-to-date versus what's remaining. Is it correct to think that your sales are going to drop off inclusively your EBITDA margins for the back half of the year? Just help me reconcile the guidance versus kind of the performance we've seen so far in the first half of the fiscal year. Pete Smith: Eric, do you want to start on that? Eric Chang: So right now based on even at the high end of the range for revenue and also for $265 million, and then the high end of the let's just say about 31, the second half it is lower than the first half. But we need to get to Q3 and then at that point, if we need to up our guidance, at that point, we might. Pete Smith: So at least the way I would look at this, we did have some really good demand in Q2, and we were able to deliver on that. We've raised our guidance. We want to be conservative, and we want to build a track record of delivering on our commitments. And if you roll the clock back, five, six, seven, eight quarters, the company has had a history of one good quarter or one bad quarter, and we feel like we're on a really good path. We do not want to get ahead of ourselves, and we want to be conservative with our approach, and that's why we want to be conservative, both in the revenue range and the adjusted EBITDA range. Sarkis Sherbetchyan: I appreciate the comment on the conservatism, I guess, maybe it's just a little bit -- trying to parse out here, why, logically, right, if you're excited about the business, why the second half would be worse than what we have seen so far? I'm just trying to pencil those two thoughts together and try and get a reason for that. And it seems like conservatism is one thing and being reasonable as another, just trying to get more color on what the second half looks like? Pete Smith: Yes. Well, I would also say, I'll take those comments, we also see that the second half of the year will be better than the prior year, second and a half, we're on a growth trajectory and right. If do you want to be critical for our conservatism? We'll take that. We're going to put out guidance that we're comfortable with. Sarkis Sherbetchyan: Sounds great. That's all for me. Thank you. Pete Smith: Thanks. Operator: Your next question comes from the line of Orin Hirschman from AIGH Investment Partners. Orin Hirschman: Hi. Congratulations on the progress, both of you. In terms of rural broadband, I don't know if you're breaking out yet the percent of revenues. If you're not in the same kind of question, like the software question, and then I have a follow-up on rural broadband? Pete Smith: So the way, in our investor presentation, we show that we're about two-thirds private network, one-third, mobile network operators and that the rural broadband would be in the mobile network operator segment. So that's the level we break that out. Orin Hirschman: Eric, can you just refresh everybody if I may ask the question just where in the rural broadband network do you play? When do you go with a microwave link versus a physical link versus some other types of links that exist? Pete Smith: Yes. So let's make the most common comparison fiber versus microwave. And microwave it is faster to deploy. So when a rural broadband provider has new capacity requirements, let's say due to work from home, due to COVID to set up a microwave link, it goes much, much faster than digging a trench and laying fiber. And our supply chain is well positioned to deliver on that. I think some industry analysts have said that our supply giant chain is outperforming our peers. So that's overall broadband. And then also microwave wins in situations where there's water or mountainous or difficult terrain. So, those are situations where microwave typically wins. And in the U.S. market, the split between fiber and microwave is three parts fiber, one part microwave. And internationally or in an emerging economies that breakdown is more favorable to microwave. So I thought, I'd give you as much flavor as possible on the microwave, fiber and our link competition, if you will. Orin Hirschman: And one other follow-up on rural broadband. Is the formula for you right now to take the existing customers view handheld and recruited and gotten to the point where they have the topology and they could put in their own orders. Is the goal to just penetrate those customers more? Or are you continuing to find new customers or both, or which is so important? Pete Smith: Both are very important. So we are continuing to add new customers. The Nextlink win was a new customer or again dementia. And with our existing customers as well as our new customers, what we provide is on our website, we'll call the Aviat cloud. The customer will be in the design environment designing their links, and they can design their own links, they can service their own links and procure their own links. And some of our internal metrics are how often we have to engage with a real live person. And as we improve that environment, we're satisfying our customers better and better with more and more no touch, no interaction engagement. And that's an improvement to the customer's experience as well as the customer's economics. And we're really excited about our Aviat cloud platform that goes from design through warranty and repair and procurement and delivery. It's really working. And we think that that provides the lowest cost to serve for rural broadband customers in the industry. And we expect to drive more growth going forward and that will be with existing customers as well as new customers. Orin Hirschman: Okay. And my final question just on a different topic, just, in terms of having a mega deal like that 12% deal augment deal. I mean, obviously, it's a big deal to deliver it in one quarter and not spread it. But does that create lumpiness or potential lumpiness and does that factor into the guidance for the second half? Pete Smith: Yes. So one of the things we a lot of our business is project based and that does create some lumpiness. And, one of the reasons our guidance is on an annual basis is because some quarters can be better than others because of our project getting pulled into a quarter or getting pushed out. And certainly we haven't had a greater than 10% customer in a while. And we were really thankful for this customer to be in Q2. And we do have a good funnel for the back half. But certainly a big project like this would factor into this quarter. And look, we're hopeful to get more of these big projects, but we also want to be conservative with respect to the guidance. Orin Hirschman: Okay, great. Thanks so much. Operator: Your next question comes from from Royce Investment Partners. Unidentified Analyst: Just a quickie, do you have any problem with the chip availability? Pete Smith: No. So we have not had any issues with chip availability. We're watching the Taiwan, China supply chain. We maybe a little heavy on inventory to add do that, but so far we have not seen any supply chain interruptions or chip issues. Unidentified Analyst: Okay. And in the cost savings category over the last year has that impacted marketing at all? Pete Smith: No. So we continue to invest our dollars in lead generation marketing. And one of the processes that we have in the company is our strategic marketing effort, focused on value and that's helped us grow top line and make sure that on our new products we price to value. Unidentified Analyst: And how much of the business is direct? Pete Smith: Eric, do you want to answer that? Eric Chang: I'd say at least 80% plus are direct. Pete Smith: Yes. So a small part of our business goes through distribution or resellers. Unidentified Analyst: Thank you very much. Operator: Your next question comes from Richard Greulich from REG Capital Advisors. Richard Greulich: Good evening. Thank you for your work. I appreciate it as a shareholder. I have three questions. The first one is MTN as a customer. Now, obviously much smaller. Does it offer any upside at this point or what is the outlook there? Pete Smith: So, Richard, I don't want to comment on any specific customer that has history with MTN. They were a bigger customer and contracted. What I can say is, Africa is an important region, our funnel in Africa is growing. We had the previous wins with safari.com. So we're hopeful overall for Africa, and what I would say about with MTN is an important player in Africa. And we hope to grow Africa going forward. I think that's about as far as I'd like to go on that question. Richard Greulich: Okay. Is it fair to conclude that Africa is probably no longer going to be a decrement in any major way in terms of the revenues? Pete Smith: Yes, I think that's fair to conclude. Yes. Richard Greulich: And my other two questions regarding taxes. So your tax rate in the quarter was about -- I don't know 13%-14%. How does that come about, given you have large net operating carry forwards? Where are you paying taxes? Eric Chang: Yes, so let me explain. So we don't pay tax in the U.S. because we have those NOLs, it's almost $400 million. Where we do pay tax are at the International locations where we have a transfer pricing arrangements with each of the legal entities. What is that legal entity is doing service for our customers or is it marketing or is it R&D. That's when this transfer pricing would basically have to guarantee a profit for those legal entities. And that's where we pay taxes. Richard Greulich: As I figured, yes. So in the U.S. on the net operating loss carry forward, you fully reserved against the value for that, because it doesn't appear on the balance sheet. Is that correct? Eric Chang: That's correct. We did a partial -- so let me explain. We did a single partial release, probably a couple years ago was about $7.5 million. We haven't done a partial release recently, just because with COVID, this all uncertainties. So that's where we stand. Richard Greulich: But going forward, given that you're really on a much better trajectory than you've been for a while. At what point would you likely release some of that reserve back into the balance sheet? Eric Chang: We're looking at it right now. Richard Greulich: Okay. No, that's fair. I mean, I think you should. And again, have you been able to fully protect against the not being able to use much of it? You've had a couple different programs over the last two years, I think, to be able to do that. Are you still confident that you can protect most of that? Eric Chang: You mean protect NOL? Yes, we have this NOL preservation plan for any investor that want to go above on the 4.9% threshold, it will require us to issue us an exemption. So that's how we protect our NOL. Richard Greulich: Okay, great. Thank you very much. Pete Smith: Thank you. Operator: Your next question comes from Orin Hirschman from AIGH Investment Partners. Orin Hirschman: Hi, just one quick follow up on the last question. If you do a non-GAAP, assuming you are a tax payer, but not obviously a cash tax payer in the U.S. What would the fictitious rate look like so to speak as a rate that you would apply for non-GAAP purposes? Do you have any idea either on U.S. or the company as a whole some guesstimate? Eric Chang: Yes. So if you look at our non-GAAP financials in the press release, we estimate our total cash tax on an annual basis about $1.2 million. So basically we do $3,000 per quarter. Orin Hirschman: But if you did it, let's assume that you look like you’re going to maintain profitability and you got to apply on a non-GAAP basis real tax rate. What would the company look like 20% and 25% any idea what the company will look like at that point? Eric Chang: Well, that’s only after we exhaust all the NOLs in U.S. first. At that point we have to worry about what that rate is going to be. But for the time being, the only cash tax that we pay are for international and then the run rate is about $1.2 million a year. Orin Hirschman: No, I'm with you on that. I'm saying for non-GAAP purposes, the accountants for non-GAAP purposes, if you're on non-GAAP purposes, if you decide that you want to start applying a full tax rate. So, knowing full well you're not paying the cash tax. But what would that full tax rate look like? Have you not even done that analysis? Eric Chang: Yes, we haven't done that. Orin Hirschman: Okay. Pete Smith: Yes, because we have the magnitude of our NOLs are pretty big. So that's probably beyond any investors modeling horizon. Orin Hirschman: Okay. Thanks very much. Operator: Your next question comes from Richard Greulich from REG Capital Advisors. Richard Greulich: Not to beat a dead horse, but have you thought outside the box at all about how you can utilize more of your NOL going forward, either acquisitions or something like that? Pete Smith: So, we are looking at acquisitions. We want to be pretty careful and make sure that the acquisitions fit our core and we're going to be able to extract synergies and make it accretive to the overall business. And, long time ago I learned that tax is not a reason to do a deal. But if we were to do a deal, we would certainly structure it in a way that would be most favorable so that we could get the leverage out of the NOLs. So it's certainly a consideration, I wouldn't go so far as to say it's a driver. Richard Greulich: Sure. Yes, I appreciate that. Well, in a lighter note, the fact is, if under the Biden administration, corporate tax rates do go up from 21% to 28%, your NOLs become much more valuable. Pete Smith: I agree. Richard Greulich: Thank you very much. Pete Smith: Thank you. Operator: That was our last question. At this time, I will turn the call back over to the presenters. Pete Smith: Thanks, everyone, for attending. It was a very, very good quarter for Aviat. I don’t want to take any more time from anyone. We're going to go back to work, work on Q3. Everyone should please stay safe and stay healthy, and we'll talk to you in about 90 days. Thanks, everyone. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
AVNW Ratings Summary
AVNW Quant Ranking
Related Analysis

Aviat Networks, Inc. (NASDAQ:AVNW) Quarterly Earnings Preview

  • Aviat Networks is set to announce its quarterly earnings with an expected EPS of $0.66 and projected revenue of $112.92 million.
  • The company has faced a significant stock price drop due to delays in filing its financial statements, prompting legal actions and investor concerns.
  • Despite challenges, Aviat Networks displays a solid financial structure with a low debt-to-equity ratio and strong liquidity indicators.

Aviat Networks, Inc. (NASDAQ:AVNW) is gearing up to unveil its quarterly earnings on Wednesday, October 2, 2024, before the market opens. Analysts on Wall Street are anticipating an earnings per share (EPS) of $0.66, with projected revenue for the quarter rounding up to approximately $112.92 million. This announcement comes at a critical time for Aviat Networks, a key player in the telecommunications equipment sector, as it navigates through recent challenges that have significantly impacted its stock price and investor confidence.

Recently, AVNW experienced a sharp decline in its stock price, dropping by $6.36 or 26% during intraday trading on September 12, 2024. This drop was a direct consequence of the company's announcement regarding its inability to file its financial statements for the fiscal year ending June 28, 2024, on time. This news has raised concerns among investors and prompted legal action from Hagens Berman, a law firm urging investors who have suffered substantial losses to step forward. The firm is also seeking individuals with insider knowledge to assist in their investigation of Aviat Networks, focusing on the accuracy of the company's financial statements and the adequacy of its internal controls over financial reporting.

Despite these challenges, Aviat Networks' financial metrics provide a mixed picture of its valuation and financial health. The company's price-to-earnings (P/E) ratio stands at approximately 20.76, indicating the price investors are willing to pay for a dollar of earnings, which is a critical metric for assessing a company's market valuation. Additionally, the price-to-sales (P/S) ratio of about 0.74 and an enterprise value-to-sales (EV/Sales) ratio close to 0.72 suggest a moderate valuation of the company's sales and overall value. These ratios, along with an enterprise value-to-operating cash flow (EV/OCF) ratio of around 9.38, offer insights into the company's valuation from different financial perspectives.

Moreover, Aviat Networks boasts an earnings yield of approximately 4.82%, reflecting the earnings generated per dollar of investment, which is a positive indicator of its profitability. The company's debt-to-equity (D/E) ratio of around 0.19 signals a low level of debt relative to equity, showcasing a solid financial structure. Furthermore, with a current ratio of over 2.12, Aviat Networks demonstrates a strong ability to cover its short-term liabilities with its short-term assets, highlighting its financial health and liquidity. These financial health indicators are crucial for investors, especially in light of the recent challenges, as they provide a glimpse into the company's ability to navigate through its current issues and maintain its operational stability.