Ladies and gentlemen, thank you for standing by and welcome to the Aviat Networks Fiscal 2020 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker today Mr. Glenn Wiener, Investor Relations.

Thank you and welcome to Aviat Networks fiscal 2020 second quarter results conference call. Our Form 10-Q, press release and our updated investor presentation can all be found on the Investor Relations section of our website. As can a replay of today's call, approximately one hour after the call ends. Today's call will begin with the opening remarks by Aviat's President and Chief Executive Officer, Pete Smith, who will be followed by Stan Gallagher, Chief Operating Officer and Principal Financial Officer; and then Eric Chang, Senior Vice President and Principal Accounting Officer. After their prepared remarks we'll open up the call for questions. Shaun McFall, Senior Vice President of Corporate Development is also with us and will be available during the Q&A portion of the call. During today's call and webcast, the management may make forward-looking statements regarding Aviat’s business, including, but not limited to, statements relating to projections of earnings and revenue, business drivers, the timing and capabilities of new products, network expansion by mobile and private network operators and economic activity in different regions. These and other forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. Please note, these forward-looking statements reflect the company's opinions only as of the date of this call and the company undertakes no obligation to revise or publicly release the results of 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 and financial tables therein which include a GAAP to non-GAAP reconciliation and other supplemental financial information. Lastly, we encourage investors and analysts to ask questions. And as always you can reach out to me following the call. We greatly appreciate your continued interest in Aviat and your ongoing support. And I will now turn the call to Pete.

Thank you, Glenn. It's been about five weeks since I took the role of CEO. I've spent the majority of my time traveling to our sites, getting to know our people, some of our customers and reviewing our strategy to drive growth, improve profitability and create value for all stakeholders. I did a lot of research before taking this role. And my initial assessment of Aviat is very much aligned with what I've learned thus far. We have industry-leading technology, a diverse global customer base and strong relationships with both our customers and our partners. Our position in North America is solid and should continue to be a catalyst for us in the future, specifically with private networks, public safety and several vertical markets such as utilities, oil and gas, among others. Additionally, demand for solutions in North America should only intensify, given the increased need for mission-critical networks and the upcoming build-out of networks in support of 5G. While we've done well over the past years building our foundation, expanding our customer footprint and developing new solutions for these customer segments, I believe there is significantly more we can do to drive growth and increase our share of demand. Internationally, we have strengths and weaknesses. On the positive side, our technology and customer footprint. However, while we have added accounts and grown in some regions, it's been inconsistent. And I believe we can do a better job of commercializing products for specific customers and regions, while providing more value-added services that differentiate Aviat from the competition. With that said, we will look at each market we're in, others we can expand into and potentially align with other companies to lower cost of entry while providing customers with the one-stop-shop solution to make the buying cycle easier. Throughout my career, I've been fortunate to have worked with strong leaders and teams and in every position, no matter what industry, I've always focused on two things; commercial excellence and operational excellence. Again, I believe that we have good products that can go head-to-head with any competitor in the industry, how we incorporate customer feedback, assess the market opportunity and specific customer and prospect needs and how we launch market and sell to me, could be significant organic growth drivers within the next few years, and that has nothing to do with future innovation. It's about leveraging what we have to better service the customer, and that's what commercial excellence is all about. Operational excellence is underway and the team has done a great job of driving better efficiencies and collaboration on a global scale. We are continuing with the plans in place looking to lower fixed costs by improving yield, efficiency and getting a better return on our investments in technology. Over the next couple of quarters, I have more to share with respect to our strategy and vision. Better execution is critical both on the commercial end and in operations. The strategy we have in North America has and should continue to drive results for Aviat. And by working more closely with our customers to better understand their views and how we can support them, I see opportunities to grow organically and leverage our technology to expand beyond our installed base. International will be down this year. We knew that coming in and took into account the current spending environment in Africa and the anticipated downturn in the APAC region. With respect to Asia, however, this is timing only, and we had a very strong fiscal year 2019. And our new agreement with Globe should yield an even stronger fiscal year 2021. There are also opportunities to expand in Asia beyond the regions we are now in, and that is also something I and the team will be looking at. Our top line will be down a bit this year to the international markets, but we're growing in North America and I expect that to continue. Margins are trending upwards, costs are being removed and reinvested, and I'm confident that profitability will increase over fiscal year 2019 as noted in our guidance. Next year, my goal is to drive both top and bottom line growth in a meaningful way and deliver the returns I believe we are capable of achieving. I'm excited to take on this role and more excited to deliver results for you. Thank you. And I'll now turn the call over to Stan.

Thank you, Pete. And good afternoon, everyone. When Aviat first initiated its turnaround strategy in fiscal year 2016, our annual OpEx stood at approximately $85 million on $268 million of revenue and non-GAAP gross margins were a little less than 25%. Over the course of three years, even on revenue that is lower by approximately 10% compared to the end of fiscal year 2019, we have improved margins by over 760 points and reduced OpEx by approximately 12%. Over a three-year period, we have demonstrated substantial enhancement to bottom line profitability while strengthening our balance sheet, yet there is still a lot more that can and will be done to improve. In fiscal year 2020, we believe our financial results will continue to demonstrate our ability to deliver, and the following year should be stronger, with more compelling market dynamics working in our favor, and a much stronger product and service offering than in past years. Our objective is to grow our market-leading position in North America, and we will accomplish this by continuing to invest in R&D to differentiate our offering versus the competition. We believe we can increase our share in MPLS for public safety networks, grow share with ISPs domestically and internationally with operators focused on developing new networks and help them lower their cost of ownership. As 5G is fast approaching, we have products that have been commercialized over the past year, which puts us in a great position to support both our installed base and capture new accounts. For example, our WTM 4800 EBAND and Multi-band platform is a perfect example, and interest in this solution is building. 5G should be a growth driver for us over the next two to three years, and potentially sooner as operators are starting to invest now. We also have several R&D initiatives underway, and believe the new products introduced and those under development combined with more value-added services could enhance our gross margins even further. We have increased the intensity of our operational excellence programs this fiscal year, and as a result, investors should expect to see SG&N as a percentage of revenue decline in future years. We have identified programs that will lower G&A specifically as we move through the second half of fiscal 2020. We have, however, incurred more sales related expenses due to our strong bookings, and expect this to continue given our bookings performance and outlook. Lowering fixed costs is a priority to enable investments in our products, services, and sales related initiatives with a focus on driving growth. We are not thinking about the status quo or modest growth; we want to capture the market. In the interim, we are challenging every cost in our business, every region, department, and transaction. This is not a restructuring program; rather, it's a mindset to challenge and change what our core cost structure should be, as we believe that there are probably a few million dollars of expenses that can be removed over time, even with growth anticipated. This ties back to my past comments on investing in automation tools in AI, which has also contributed to some of our expense increases in FY 2020. We have already achieved rapid deployment of a number of AI tools, which we expect will generate savings in the early part of fiscal 2021. As previously communicated, our results were adversely affected due to bad actors launching a cyber attack at one of our contract manufacturers. Although there was a short term impact on our business, we got through it. Going forward to limit risk in this area, we have invested in state-of-the-art solutions to protect our assets. For example, investments in the latest cybersecurity tools to withstand the continuous cyber intrusion attempts that every enterprise, both small and large, are exposed to every day. Our contract manufacturer has made similar investments to protect itself moving forward. So to summarize, we have in place a team with the knowledge, skills, drive, and experience to take Aviat to the next level. I'm confident in that. Our operational excellence culture is continuing to mature, and while costs will be modestly impacted this year, again, much has to do with expenses we are making now to improve our foundation and drive growth. There were also expenses in FY 2020 that are not anticipated to repeat next fiscal year. Commercial excellence is on deck. And with Pete's experience in guidance, we expect meaningful payback in the quarters and years to come. While revenue is expected to be down after a period of modest growth, remember, Africa is one of the drivers, and orders are anticipated to increase in the second half of the year. The APAC region is down, but that is solely timing related and is expected to increase next year and in the years that follow due to our new agreement to support Globe's 5G launch, which we expect to have a release on shortly. We may also look to expand into new APAC regions. We are winning new accounts both domestically and abroad, and our pipeline is building because of our new products. As Pete mentioned earlier, beyond just public safety and private networks, the opportunities across multiple vertical segments in North America are growing. And this is where we believe we have the best offering in the industry to increase our share.

Thank you, Stan. And good afternoon, everyone. All comparisons related to our fiscal 2020 and fiscal 2019 second quarter and six-month financial results are for the periods ended December 27, 2019 and December 28, 2018, respectively, unless otherwise noted. Fiscal 2020 second quarter revenue declined by $9.1 million, with North America revenue down approximately $800,000. International revenue was down $8.2 million and within this Africa and the Middle East declined by $5 million and Latin America and Asia Pacific region down by $2.5 million. As noted in our January 22nd release, and in today's announcement, the cyber security attack at one of our manufacturing vendors led to lower than anticipated revenue for the quarter. For the fiscal 2020 six-month period, total revenue was down $11 million, with North America revenue up approximately $11 million, while international revenue was down approximately $22 million. With respect to North America, strong bookings in the second half of last fiscal year contributed to our strong fiscal 2020 first half performance. Additionally, our North America bookings performance in the first half of fiscal 2020 was exceptionally strong, which bodes well for our future. While international revenue was down in the first half, and is expected to be down for the full fiscal year, it is important to note that our book-to-bill ratio for international was above one in the first half, and is also expected to be above one in the second half of the fiscal year. GAAP gross margin came in at 32.7% and non-GAAP gross margin at 32.8% for the fiscal 2020 second quarter, a decline of 190 and 180 basis points, respectively. The decline in gross margin was primarily due to a lower mix of product revenue and increased supply chain cost. For the six-month period, GAAP and non-GAAP gross margin was 35.7%, an improvement of 350 basis points on both a GAAP and non-GAAP basis. Looking ahead, based on the mix of business anticipated, we anticipate gross margin for the second half of the year to be roughly in line with the first half, representing an increase for the full fiscal year over fiscal 2019. On the expense side, we report GAAP operating expenses of $19.8 million for the fiscal 2020 second quarter compared to $19.6 million for the comparable year ago period. The net increase consisted primarily of an increase in restructuring charges of $400,000 and SG&A expenses of $200,000 offset in part by decrease in R&D expenses of $300,000. On a non-GAAP basis, excluding the impact of restructuring charges and share-based compensation, total operating expenses were $19.1 million relatively flat as compared to $19.2 million for the comparable year ago period. For the six-month period, we report GAAP operating expenses of $40.9 million in fiscal 2020 compared to $39 million for the comparable year ago period. The net increase consisted primarily of an increase in SG&A expenses of $1.1 million and restructuring charges of $800,000. The increase in SG&A expenses was primarily due to other employee-related expenses, while R&D expenses were essentially flat for the comparable periods. On a non-GAAP basis, excluding the impact of restructuring charges and share-based compensation, total operating expenses for the fiscal 2020 six-month period were $38.6 million as compared to $37.4 million for the comparable year ago period. We've reported a GAAP operating loss of $1.5 million compared to GAAP operating income of $2.9 million for the comparable year ago period. For the six-month periods, we were essentially breakeven in fiscal 2020 and reported GAAP operating income of $1.4 million for the comparable year ago period. On a non-GAAP basis, we reported an operating loss of $700,000 for the fiscal 2020 second quarter, compared to operating income of $3.4 million in a comparable year ago period. For the six months of fiscal 2020, we reported non-GAAP operating income of $2.4 million as compared to $3 million for a comparable year ago period. Adjusted EBITDA for the fiscal 2020 second quarter was approximately $400,000 and for the fiscal 2020 six-month period was $4.5 million. This compares to adjusted EBITDA of $4.5 million for the fiscal 2019 second quarter and $5.4 million for the six-month period in fiscal 2019. To reiterate, capacity constraints for the cyber attack at one of our contract manufacturing vendors, along with higher sales commissions, based on stronger than anticipated bookings, among others, had the biggest direct impact on non-GAAP operating income and adjusted EBITDA. As Stan noted earlier, for the full fiscal year we are anticipating revenues to be down overall, but profitability to improve year over year. Gross Margin is also anticipated to increase year-over-year, but spending may increase slightly, though we are continuing to look to reduce fixed costs and optimize our business further. Moving on to the balance sheet, our cash and cash equivalents stood at $38.1 million at the end of the second quarter, compared to $31.9 million at year end, an improvement of $6.1 million. This also represents a sequential increase of $3.6 million compared to the end of the first quarter. Our free cash was $29.1 million at the end of the fiscal 2020 second quarter compared to $22.9 million at year end. Our cash flow from operations was $10.8 million in the fiscal 2020 six-month period, compared to cash used in operations of $600,000 in the fiscal 2019 six-month period, which was an improvement of $11.4 million. As we noted in our last earnings call, we are expecting to finish a fiscal year with a higher cash balance year-over-year. Please note, during the second quarter, we spent $653,000 in share repurchases, bringing the total to $1.4 million for the first six months of fiscal 2020. Under our $7.5 million repurchase program, $3.8 million remains available at the end of the second quarter. Inventory increased by $4.7 million from year end and $2.2 million sequentially. But again, this was directly related to the capacity constraints as discussed earlier, which impacted production and shipments, as well as a result of the NEC channel partnership we announced last quarter. With the capacity constraint issue now behind us, inventory is expected to decline. Lastly, capital expenditures in the second quarter and year to date totaled $1.1 million and $2.4 million respectively. We expect to spend approximately $4 million in the second half of the year with a full fiscal year in line with what we communicated last quarter. This concludes my remarks. And operator, at this time, we are ready to open up the call for questions.

Your first question comes from the line of Theodore O'Neill with Litchfield Hills.

Hi. First question I have is about the contract manufacturer with the issue. Did they wait three weeks before they told you? Or did it take them three weeks before they get things back online? Could you give us more color on that?

Hey, Theodore, it's Stan. I'll be more than happy to. So I was actually called over the weekend when they actually identified the attack. It took them three weeks to actually do the recovery process. We offered all of our assistance from our entire IT team because of their experience. But that was primarily the remediation period to get back online and resume the production and shipments for us.

Now, what's going on in China right now. If people don't get back to work on Monday and it doesn't look like they're going to from what I've seen. Does that interrupt any of your supply chain if this goes on for another through February or into March?

So we have six of our supply chain people in China and our Head of Operations is in the region working on that, right? So our guidance reflects our best knowledge today. If you go out and look at a variety of other companies' guidance, some things, they'll be hurt badly, some things they won't be hurt very much. And what we have is our guidance reflects our knowledge right now. Some of that guidance does anticipate a delay in folks getting back to work if it's worse, or there's more cases and they're less available workers than we won't do as well. And if it's not as bad as we modeled, we can do better. So the big problem with us and everybody else is giving guidance on the coronavirus is the uncertainty. So what we are doing everything that we can to control our operations and our suppliers the best of our ability, but it does come down to the uncertainty of how many and how fast the China employee base is going to come back.

And do you have direct manufacturing there? Or a contract manufacturing and other parts coming from there?

So, components are coming from China. We don't have our contract manufacturer nor are we present in China for manufacturing. So our risks around the uncertainty of the coronavirus are based on our component suppliers that we buy from or our contract manufacturer buys from us.

Okay. Thanks very much. Thanks. That clears that up for me. Thank you.

Your next question comes from the line of Tim Savageaux with Northland Capital Markets.

Hi, good afternoon. A couple of questions. And then more logistically around the shortfall on fiscal Q2. Do we expect to recover all of that in Q3, which I know, historically, seasonally is kind of a weaker period for you, and maybe expect perhaps to offset that. Or you expect that through the second half? And is there any regional bias that you can discern to the shipments that were unable to be made, whether they were headed North American or internationally or impacted that breakout at all? Thanks.

Yes. Sure, Tim. It's Stan. Glad to hear you on the call. So, for what we had identified in the recovery process for the second quarter, we actually ended up having finished goods that got stranded before they could get the proof of delivery. So, a lot of that miss and shortfall was just timing. A few days after that, we recovered what we had planned for the second quarter. That was biased towards North America, which is where the margin impact came from. And I believe that we don't have any other remaining items that were associated with that, that carried over to Q3 or the second half.

Got it? And you'd mentioned, I think, called out some extraordinary booking strength in North America. And I wonder if you could provide any more color on that on the nature of that, right? I mean, you obviously, also discussed international book-to-bills being above one. So I assume extraordinary means way above one? But if there's any anecdotal color you might be able to provide on North America booking strength and maybe identify what the source of that might be?

So, yes, Tim, I think the best way for me to answer that is to use some of the variable compensation expenses as a proxy. You can see from an OpEx perspective that we did have some upward pressure on that, but that was associated primarily to a lot of the orders performance that we had. What I'd say generally without getting into too many specifics, is it is an order flow that is substantially higher than what we have seen in the past. And it has been consistent over the past three quarters. With regards to specifics on those, when we get our press release that's approved and comes out that you'll see it. Otherwise, there's significant strength in North America and we also have some additional strength that's occurring in the International regions specific to Asia Pacific.

Got it. And question for Pete. And I thought your initial commentary, and I know your strategic view is still evolving here. But I thought the commentary around partnerships with others to kind of develop a one-stop shop approach in what I gather would be new international markets, was interesting. I wonder if you might be able to provide any more commentary on that in terms of what state those partnerships might be? Or what sort of players you might be looking to partner with? Are we talking about distributors here or other kind of end-to-end equipment suppliers or any more color on that would be welcome?

All right. So I'll give a little color, but maybe not as much color as you would like, right? So, if you think about the international business, it's the rest of the world, and the rest of the world is a big place and difficult for us to cover. And we are in some active discussions for partnerships so we can extend our reach and drive more volume through indirect channels. So, that would be one. We're always evaluating technology, I wouldn't say that we're close on any of those types of partnerships, but we're close on some distribution deals that hopefully, we can land and announce and use to drive growth internationally. Is that helpful?

You're right, not quite as I said, just kidding. Well, that's one for one. Last question for me. Speaking of forecast, I might be jumping the gun here. You made several comments about fiscal 2021, or at least extending into that period, that suggested an expectation of at least revenue growth and expense decline, both of which sound reasonably good. Am I understanding that correctly? What can you say about fiscal 2021 now that we're halfway through fiscal 2020?

So, look, we want to do a bottom-up plan on 2021. But we see, Stan mentioned the bookings, the book-to-bill ratio improving. And we see that in North America, we have that engine going. We also see an opportunity to lower our costs. So, I think you've got it right for 2021, directionally and we need to do more work before we can be more specific.

Your next question comes from the line of Mark Spiegel with Stanphyl Capital.

Yes, hi. Two questions. First one is just the Huawei ban mean anything for you guys in rural infrastructure? I think I read somewhere that they're being banned there?

That came out in the last two days.

No, no, this was a couple of months ago.

All right. Well, there was actually in the Wall Street Journal article again, I guess, in the last couple of days, and there was a lawsuit, yes. Look, I think that that can only be good for us, right?

Yes. Well, part of it is a Pentagon saying, but I thought there was a separate directive for rural Telecom. So I was wondering if that's anything you've had any effect from yet? No, is what you're saying?

Not significant. So far, we haven't really had a large installed base in our category to approach them. I wouldn’t say it’s non-existent. I believe there are some opportunities, and we will benefit to some degree, but I don't consider it a major opportunity.

Okay. Fair enough. The second question is quite straightforward. Trump mentioned in his State of the Union address the intention to invest $20 billion in rural broadband infrastructure. This was one of the few topics that garnered applause from the Democrats, which leads me to believe it could potentially be approved. Are you all planning to benefit from that?

Yes. That's an area where we've been active in. We've had some new products there, and we've been achieving some success with rural Internet and broadband customers over the last year or so. And it's another area where we are actively looking to expand our reach a little bit with some other activities there as well. So generally, whatever trickles down from that into our area, we see that as a positive.

Okay, great. My other questions were answered. So thank you very much.

Thank you.

Your next question comes from the line of Steve Busch with Everglades Resources.

Hi, guys. Thanks for taking my call.

Hi, Steve.

Good to see we're progressing on the fronts we can control. Does that make any sense to just jettison some of these African businesses and just focus on North America given our growth rates here? Or is that not really something you want to go towards?

Well, I think really, the Africa business is a bit volatile and what we've talked about over the last month has been how do we modulate our cost structure to match the demand. And that's when we do have businesses, it's a positive contribution margin, and we need to manage it better. And, long term Africa probably has the least amount of infrastructure in the world. So we think having a presence in Africa and simultaneously managing our cost structure with the current period demand is the way to go. We have more work to do in that regard, but that's the perspective that we have currently.

Okay. That's fair enough. I mean, I know MTN is selling or looking to sell off some Nigerian assets, I don't know how that affects you. Are they still a 10% customer or where they stand now?

No, they're not a 10% customer anymore. And as we mentioned before, this is Stan, we had de-risked our plan as far as our annual operating plan and budget for Africa this year, it's actually performing a little bit better than the de-risk right now. And the activities that we have in place are, as Pete said, we're modulating that business and matching the cost structure, so that we have the most favorable outcome. But no, they're not that large and I don't anticipate them to grow into a 10% customer in the foreseeable near future.

Okay. And how many 10% customers do we have this quarter?

So we didn't have any in the second quarter of our fiscal year. Motorola still was a 10% customer for the first time.

All right. Okay. And so how's the Motorola rollout going in Florida?

Well, as you know, Motorola stepped back a little bit towards the end of the year and did not sign. So we are now waiting for how the state of Florida is going to go and address that. We still believe our prospects are intact and very strong. But we're going to have to let the state play that one out.

All right. Okay. And how many shares did you buy back this quarter by the way? I know you gave a $1 number. How many shares was that?

It's almost $100K. And $1.4 million for the year to date.

Right. Okay. Thank you. Good luck.

All right, thanks.

And there are no further questions at this time. I'd like to turn it back over for any closing remarks.

Very good. Well, thanks, everybody for joining the call. We'll see you in 90 days.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.