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.

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. With me today are Pete Smith, Aviat's President and CEO, who will begin with opening remarks on the company's fiscal second quarter, followed by Eric Chang, our CFO, who will review the financial results for the quarter and first half of fiscal 2021. Pete will then provide closing remarks on Aviat's strategy and outlook followed by Q&A. As a reminder, during today's call and webcast management may make forward-looking statements regarding Aviat's business, including but not limited to statements relating to financial projections, business drivers, new products and expansions, the impact of COVID-19 and economic activity in different regions. These and other forward-looking statements reflect the company's opinions only as of the date of this call and webcast and involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. Additional information on the factors that could cause actual results to differ materially from statements made on this call can be found in our Annual Report on Form 10-K filed with the SEC on August 27, 2020. The company undertakes no obligation to revise or make public any revision of these forward-looking statements in light of new information or future events. Additionally, during today's call and webcast, management will reference both GAAP and non-GAAP financial measures. Please refer to our press release which is available in the IR section of our website at www.aviatnetworks.com and the financial tables therein, which include GAAP to non-GAAP reconciliation and other supplemental financial information. At this time, I'd like to turn the call over to Aviat's President and CEO, Pete Smith. Pete?

Thanks, Keith, and good afternoon, everyone. I hope everyone remains 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, 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. Adjusted EBITDA was $10.1 million for the second quarter, representing an improvement of $9.7 million versus the same period last year, an improvement of 20.4% from our first quarter fiscal year 2021. Adjusted EBITDA margins were a record 14.3% for the second quarter. During the quarter, we continued to demonstrate Aviat's differentiation in wireless transport products, software and services and e-commerce. We've demonstrated the viability of these offerings with key wins in 5G, private networks and rural broadband. As I've mentioned on prior calls, our high capacity single box multiband radio platform provides the industry's simplest multiband solution, which lowers a customer's total cost of ownership. Our unique multiband hardware and software solutions recently led to Aviat being selected by a U.S.-based Tier 1 5G operator as a key microwave transport vendor. We couldn't be more pleased to have been selected, and we believe this award further validates our position as a leader in wireless backhaul solutions for 5G networks. We look forward to sharing more on this soon. During the second quarter, Aviat was also awarded a multimillion dollar contract with Nextlink Internet for high speed wireless backhaul to support rural broadband connectivity. Nextlink, a leading U.S. internet service provider, provides high speed connectivity to commercial and residential subscribers in Texas, Oklahoma, Illinois, Kansas and Nebraska. Both the U.S.-based Tier 1 5G operator and Nextlink wins are a result of Aviat having the lowest total cost of ownership offering driven by: the industry's only single box multiband solution for optimum capacity; the highest system gain radios for small antennas and better reliability; design software that simplifies network planning; the Aviat store for simplified purchasing and reduced logistics costs and next day shipping; and Aviat's local North American service and support. We remain excited about the 5G and rural broadband opportunities that lie ahead. 5G builds will drive new backhaul upgrades, and our rural broadband business will benefit from meaningful government funding, including the $9 billion 5G Fund for Rural America and the $20 billion Rural Digital Opportunity Fund. With respect to private networks, our business remains strong and is growing. Aviat has a highly differentiated offering. Our leading RF performance along with our software and services capabilities are keys to Aviat's success here. We continue to receive orders in the private network business for our Frequency Assurance Software, or FAS, a unique software offering for interference monitoring and analysis, providing customers increased network reliability and uptime. Our software and services platform remains a key focus for long-term growth, and we look forward to announcing new innovative software solutions. At the outset, I mentioned the execution of the team. Our commercial and operations teams are on continuous improvement trajectories. I want to recognize them for their results. In addition, we have strengthened the team with the additions of Spencer Stoakley to lead our HR function, and Astrid Elbe to lead our product development organization. These new additions will drive improvements in our talent and in turn differentiation in our products and services. Before turning the call over to Eric, let me provide a couple additional observations and insights. First, this was a very good quarter and first half of our fiscal year. We remain focused and continue to execute. Those collective efforts are reflected in our financial and operational results. We've continued to demonstrate our ability to grow and to take share of demand. In addition, we must continue to lower our expenses to drive greater profitability and shareholder value. We've made significant progress on improving and optimizing our cost structure and remain on track to realize previously announced cost savings. Looking forward, we see three significant drivers: 5G, private networks and rural broadband, and believe we are well positioned to capture significant opportunities with our differentiated products, software and services offering. With that, let me turn the call over to Eric to review our financials before coming back for some final comments. Eric?

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 detailed 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 $56.0 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 continued 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. International revenue continued its return to growth for the second straight quarter, coming in at $21.4 million for the quarter, as compared to $19.5 million for the same period last year. Our international team continues to implement our new commercial sales strategy, which as a reminder includes defending Tier 1 telecom business, winning new Tier 2 accounts, expanding our reach through partnerships and capturing value while we are differentiated. While still early in this execution, we continue to see the benefits of our international strategy paying off. Revenue for the first half of fiscal 2021 was $136.8 million compared to $114.6 million for the same period last year. We are again pleased that our backlog continues to remain above $200 million, even after recognizing our highest quarterly revenue since the first fiscal quarter of 2016, all due to our laser-focused domestic and new international sales strategy. Second quarter gross margins remain strong at 38.2% and 38.3% on a GAAP and non-GAAP basis, respectively, as compared to 32.7% and 32.8% for the second quarter of last year. Key drivers to improvements in gross margin include regional mix, product and service mix. Second quarter GAAP operating expenses were favorably impacted by approximately 4% year-over-year, coming in at $19.0 million, compared to $19.8 million for the same period last year. Second quarter non-GAAP operating expenses, which exclude the impact of restructuring charges and stock-based compensation, were favorably impacted by approximately 4.1% at $18.3 million compared to $19.1 million last year. Both GAAP and non-GAAP operating expenses were favorably impacted due to cost saving initiatives implemented in the second half of fiscal 2020, including our previously announced restructuring plans, a slowdown in hiring and reduced travel. Moving on, second quarter non-GAAP net income was $8.4 million, compared to a net loss of $0.9 million for the same period last year, with second quarter non-GAAP EPS coming in at $1.48 per share, compared to a $0.17 net loss per share for the same period last year. First half fiscal 2021 non-GAAP net income was $15.3 million, compared to $2.0 million for the same period last year, while non-GAAP EPS came in at $2.71 per share, compared to $0.36 per share for the same period last year. Adjusted EBITDA for the second quarter was $10.1 million, a $9.7 million improvement from the $0.4 million we reported for the same period last year, with adjusted EBITDA margins coming in at a record 14.3% for the quarter. For the first half of fiscal 2021, our adjusted EBITDA was $18.5 million compared to $4.5 million for the same period last year, and surpassed the $13.5 million for the full year fiscal 2020. First half fiscal 2021 adjusted EBITDA margins were 13.5%. Moving on to the balance sheet, our cash and cash equivalents at the end of the second quarter were $43.0 million with no loan outstanding. Our net cash increased $6.8 million sequentially from the first quarter and $10.4 million year-to-date. So our balance sheet remains very solid, leaving us well positioned to execute our long-term plans, while maintaining flexibility and security in the current COVID-19 environment. With that, I'll turn it back to Pete for some final comments. Pete?

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 to $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.

Please follow the operator instructions for asking questions. Your first question comes from the line of Theodore O'Neill from Litchfield Research.

Thank you. Congratulations on a great quarter.

Thanks, Theo.

Yes. A question for you on 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. I'm wondering, is that where your radios go to and do you get to put something on all thousand towers?

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 neutral to positive.

Okay. In the quarter, you say you've got a 12.5% state government customer. I'm just curious why you can't name the customer? And how many other sort of large government contract type customers are out there for you?

This is Eric here. Yes, so we haven't been given the permission to name the customer. It is a U.S. state government customer. It's about 12.5% for this quarter. But it is for private network, it is for public safety.

Okay. And then are there other states where there's an opportunity of the same kind?

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 bringing in of demand. And we were, through our supply chain excellence, able to satisfy that state government rather quickly. Normally without the urgency on the customer side, that demand would have been spread over a couple of quarters. We were really excited to be able to satisfy their needs and put the revenue on the scoreboard this quarter.

Okay, great. Thanks very much.

Sure.

Your next question comes from the line of Sarkis Sherbetchyan from B. Riley Securities.

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.

So go ahead, Eric.

So let me comment on that. We generally don't disclose our software revenue. We rolled out software back in Q4, and then we're ramping up that revenue. We're not in a position right now to disclose that amount. It's definitely a lower percentage right now, but eventually, when that margin percentage gets larger, then we will disclose that number.

Right. So let me jump in. I've been at the company a little over a year. 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 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.

Okay, thanks for that. Given the trends of the software investment relative to what you're expecting to garner from a sales trajectory, 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? Within 18 months? Just trying to get a better handle on that.

My hope is in the next two years to reach a material level that we would report on. I think it's about two years away and as we make that two-year journey, it will show up in our gross margin and our EBITDA margin. So I would say two years.

Okay, that's fair and helpful. Thanks for that. I want to go toward the guide. For fiscal '21, sales guidance was increased, and we have a range of $255 million to $265 million. For adjusted EBITDA, you said a range of $28 million to $31 million. On the low end to the top end, that works out to 11% to 12%. Year-to-date you're close to 14% EBITDA margin. If I look at the back half of this fiscal year, is it correct to think that your sales and EBITDA margins are going to drop off for the back half? Just help me reconcile the guidance versus the performance we've seen so far in the first half of the fiscal year.

So right now, based on even the high end of the range for revenue at $265 million and the high end for adjusted EBITDA at $31 million, the second half is lower than the first half. But we need to get to Q3 and then at that point, if we need to raise our guidance, we might.

So the way I would look at this is we did have really good demand in Q2 and we were able to deliver on that. We've raised our guidance. We want to be conservative and build a track record of delivering on our commitments. If you roll the clock back several 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 are conservative both in the revenue range and the adjusted EBITDA range.

I appreciate the comment on conservatism. I'm trying to parse out why, if you're excited about the business, the second half would be worse than what we've seen so far. Trying to get more color on what the second half looks like.

I'll take that. We also see the second half of the year being better than the prior year second half; we're on a growth trajectory. If you want to be critical of our conservatism, we'll take that. We're going to put out guidance that we're comfortable with.

Sounds great. That's all for me. Thank you.

Thanks.

Your next question comes from the line of Orin Hirschman from AIGH Investment Partners.

Hi. Congratulations on the progress. In terms of rural broadband, are you breaking out the percent of revenues? If not, I have a question on rural broadband.

So in our investor presentation, we show that we're about two-thirds private network and one-third mobile network operators, and rural broadband is in the mobile network operator segment. That's the level we break that out.

Eric, can you refresh everybody where in the rural broadband network do you play? When do you use a microwave link versus a physical link such as fiber versus other types of links?

Let's make the most common comparison: fiber versus microwave. Microwave is faster to deploy. When a rural broadband provider has new capacity requirements, due to work from home or COVID, setting up a microwave link goes much, much faster than digging a trench and laying fiber. Our supply chain is well positioned to deliver on that. Some industry analysts have said that our supply chain is outperforming our peers. Microwave also wins in situations with water, mountains or difficult terrain. In the U.S. market, the split between fiber and microwave is roughly three parts fiber to one part microwave. Internationally or in emerging economies, that breakdown is more favorable to microwave.

One other follow-up on rural broadband. Is the formula for you to take existing customers and enable them to design and procure the topology themselves, or is the goal to penetrate existing customers more and also find new customers? Which is more important?

Both are very important. We continue to add new customers — the Nextlink win was a new customer. For existing and new customers, we provide what we call the Aviat cloud on our website. The customer can design their links, service them, and procure them. Some of our internal metrics measure how often we have to engage with a live person. As we improve that environment, we're satisfying customers better with more no-touch interactions. That's an improvement to the customer's experience and the customer's economics. The Aviat cloud platform goes from design through warranty, repair, procurement and delivery. It's really working and provides the lowest cost to serve for rural broadband customers in the industry. We expect to drive more growth going forward with both existing and new customers.

Okay. My final question on a different topic: having a mega deal like that 12% customer — delivering it in one quarter and not spread out — does that create lumpiness and does that factor into the guidance for the second half?

Yes. A lot of our business is project-based and that creates lumpiness. One reason our guidance is on an annual basis is because some quarters can be better or worse because projects get pulled into or pushed out of a quarter. We haven't had a greater than 10% customer in a while and we were thankful for this customer to be in Q2. We do have a good funnel for the back half, but a big project like this factors into the quarter. We're hopeful to get more of these big projects, but we want to be conservative with respect to guidance.

Okay, great. Thanks so much.

Your next question comes from an analyst from Royce Investment Partners.

Just a quick one: do you have any problem with chip availability?

No. We have not had any issues with chip availability. We're watching the Taiwan-China supply chain. We may be a little heavy on inventory to address that, but so far we have not seen any supply chain interruptions or chip issues.

Okay. And in the cost savings category over the last year has that impacted marketing at all?

No. We continue to invest our dollars in lead generation and marketing. One of our processes is strategic marketing focused on value, and that's helped us grow top line and make sure that on our new products we price to value.

And how much of the business is direct?

I'd say at least 80% plus are direct.

Yes. A small part of our business goes through distribution or resellers.

Thank you very much.

Your next question comes from Richard Greulich from REG Capital Advisors.

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. Obviously much smaller. Does it offer any upside at this point or what is the outlook there?

Richard, I don't want to comment on any specific customer with history to 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 previous wins with Safaricom. We're hopeful overall for Africa. MTN is an important player in Africa and we hope to grow in Africa going forward.

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?

Yes, I think that's fair to conclude.

My other two questions regarding taxes. Your tax rate in the quarter was about 13%–14%. How does that come about, given you have large net operating loss carryforwards? Where are you paying taxes?

Let me explain. We don't pay tax in the U.S. because we have those NOLs, it's almost $400 million. Where we do pay tax is at the international locations where we have transfer pricing arrangements with each legal entity. If that legal entity is doing services for our customers or is involved in marketing or R&D, that transfer pricing guarantees a profit for those legal entities, and that's where we pay taxes.

So in the U.S. on the net operating loss carryforward, you fully reserved against the value for that, because it doesn't appear on the balance sheet. Is that correct?

That's correct. We did a partial release a couple years ago of about $7.5 million. We haven't done a partial release recently, just because with COVID there are uncertainties. So that's where we stand.

But going forward, given that you're on a much better trajectory, at what point would you likely release some of that reserve back into the balance sheet?

We're looking at it right now.

Have you been able to fully protect against not being able to use much of it? You've had a couple different programs over the last two years to protect it. Are you still confident you can protect most of that?

You mean protect the NOL? Yes, we have an NOL preservation plan. For any investor that would go above the 4.9% threshold, it would require us to issue an exemption. That's how we protect our NOLs.

Okay, great. Thank you very much.

Thank you.

Your next question comes again from Orin Hirschman from AIGH Investment Partners.

Hi, just one quick follow-up on the last question. If you do a non-GAAP tax assumption, assuming you are a tax payer but not obviously a cash tax payer in the U.S., what would the fictitious rate look like? Do you have any idea what the company would look like at 20% or 25%?

If you look at our non-GAAP financials in the press release, we estimate our total cash tax on an annual basis to be about $1.2 million, roughly $3,000 per quarter. If we exhaust all the U.S. NOLs, then we'd consider what the rate would be, but for the time being the cash taxes we pay are international and the run rate is about $1.2 million a year.

No, I'm with you on that. I'm asking for non-GAAP purposes, if you decide to start applying a full tax rate. Have you done that analysis?

We haven't done that.

We have a large magnitude of NOLs, so that analysis is probably beyond most investors' modeling horizons.

Okay. Thanks very much.

Your next question comes from Richard Greulich from REG Capital Advisors.

Not to beat a dead horse, but have you thought about how you can utilize more of your NOL going forward, either via acquisitions or other strategies?

We are looking at acquisitions. We want to be careful and make sure acquisitions fit our core, and that we can extract synergies and make them accretive. Tax is not a reason to do a deal. If we were to do a deal, we would certainly structure it in a way to be most favorable to get leverage out of the NOLs. It's a consideration, but not a primary driver.

Under a potential change in corporate tax rates, if rates go up from 21% to 28%, your NOLs become more valuable.

I agree.

Thank you very much.

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 and work on Q3. Everyone should please stay safe and stay healthy, and we'll talk to you in about 90 days. Thanks, everyone.

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