Good afternoon, and welcome to Aviat Networks' Second Quarter Fiscal 2023 Earnings Conference 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. And now, I'd like to turn the conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. You may begin.

Thank you, and welcome to Aviat Networks' second quarter fiscal 2023 results conference call and webcast. You can find our Form 10-Q, press release, and an updated investor presentation in the Investor Relations section of our website at www.aviatnetworks.com along with a replay of today's call in approximately 2 hours. With me today are Pete Smith, Aviat's CEO, who will begin with opening remarks on the company's fiscal second quarter, followed by David Gray, our CFO, who will review the financial results for the quarter. 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 the 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 factors that could cause the actual results to differ materially from the statements made on this call can be found in our annual report on Form 10-K filed with the SEC on September 14, 2022. The company undertakes no obligations 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 Investor Relations section of our website at www.aviatnetworks.com and financial tables therein, which include a GAAP to non-GAAP reconciliation and other supplemental financial information. At this time, I would like to turn the call over to Aviat's CEO, Pete Smith. Pete?

Thanks, Andrew, and good afternoon, everyone. Thank you for joining us to review Aviat Networks' results for the second quarter of fiscal year 2023. Aviat executed well against its plan this quarter, and we continue to position ourselves to benefit from growth around the world in 5G, rural broadband, and private networks, as well as drive meaningful bottom line improvement. In the second quarter of fiscal year 2023, Aviat delivered revenue of $90.7 million, which represents growth of 16.5% versus Q2 of last year. Record non-GAAP operating income margin of 12.5%. Adjusted EBITDA of $12.9 million, a 27% increase versus the same period last year. Non-GAAP EPS increased by 32%. These results would not have been possible without the tireless dedication and execution of the Aviat team and our supplier partners. Let's discuss some key highlights from the second quarter. The global 5G upgrade cycle continues to be a driver of Aviat's business and outlook. Our recent 5G win with Bharti Airtel in India is officially underway as we began delivering products in the second quarter. We are excited about this win in India as it represents an entirely new customer and geography for Aviat and demonstrates the value that we can deliver to customers through our products and services. Elsewhere around the globe, we continue to gain 5G business through increased customer focus. Part of this growth has come from execution on replacement opportunities from our largest competitor. Globally, our share gain funnel against this competitor is approximately $60 million. In fiscal year 2023, we have booked over $19 million in such opportunities year-to-date and have recognized over $8 million in year-to-date revenue. We will continue to execute on these opportunities to take share of demand. In terms of capturing new 5G opportunities, we recently announced the release of our better agnostic multi-band solution. This allows customers to leverage Aviat's best-in-class E-band and multi-band solutions to seamlessly migrate their existing networks to 5G with lower incremental investments. This creates a large upgrade opportunity for Aviat as it helps to overcome high switching costs. The Aviat multi-band vendor agnostic solution works with existing third-party microwave radios and is detailed in our investor presentation. Our solution provides extended distance and higher capacity alternatives versus competitive offerings. Regarding our rural broadband business, we continue to execute well, and the Aviat store remains a point of differentiation for the company. We recently refreshed the store to expand the products offered beyond our microwave radios and accessories to include software products like our Health Assurance Software or HAS, and Frequency Assurance Software or FAS, as well as integrating our access products from the Red Line acquisition. Some additional commentary on the government funding programs follows. We continue to anticipate RDOF, Rural Digital Opportunity Fund, to begin flowing in the first half of calendar year 2023 and Aviat to see RDOF-related revenue in the second half of the calendar year. The recent RDOF authorization for an industry leader using fixed wireless access in their deployments is encouraging, and we anticipate more providers to use wireless technologies in the RDPF deployments moving forward. Note that we anticipate a long ramp for RDOF funding. Fortunately, Aviat is still benefiting from customer spend from the CAF, Connect America Fund, and ARMA programs. On the horizon is the BEAD program, Broadband Equity, Access and Deployment, which we are optimistic about. The BEAD program has allocated $42.5 billion to expand high-speed Internet access in all 50 U.S. states. There is much still to be seen about the implementation and allocation of the program, but this should be a large beneficiary of BEAD, which bodes well for Aviat. In private networks, we are maintaining our leadership in North America and see increasing international opportunities. For example, in APAC, we secured a multi-year high-margin win with our ECLIPSE platform for a national public safety network. The integration of the Redline Communications business, which we now refer to as access products, continues to go better than anticipated. We are improving our progress from a cost takeout perspective and we are beginning to see cross-selling opportunities for Aviat backhaul into Redline accounts and vice versa. Moving on to the supply chain environment. We continue to see improvements for approximately 98% of our supply; we have returned to pre-crisis performance, last, we need 100%. Currently, we have 27 components remaining in allocation. Note that it takes approximately 2,000 components to deliver our microwave system. Of the remaining components of allocation, semiconductor chips on the 28-nanometer node remain problematic. We've come a long way but are not done de-risking the supply chain. Fortunately, Aviat has been able to avoid significant supply chain interruptions through the crisis period. Throughout the supply chain crisis, Aviat has held elevated inventory levels. These elevated inventory levels started at the outset of COVID-19 and have persisted and increased through the recent China reopening. We have built resiliency to the third derivative of the supply chain, which is subject to the reopening risk. Based on the past few years of execution and building inventories, we will declare our peak inventory levels at Aviat and anticipate improvements over the next several quarters as lead times and location continue to moderate. This quarter, we saw no missed revenue opportunity due to supply chain shortages. Aviat remains committed to building resiliency in our supply chain by proactively identifying at-risk components and secondary suppliers. Our work in driving Redline's manufacturing base over to Aviat’s is a good demonstration of an opportunity where we believe we will see improved reliability results through a stronger supply chain. I will now turn the call over to David to review our financials before coming back for some final comments.

Thank you, Pete, and good afternoon, everyone. During my remarks today, I'll review some of the key fiscal 2023 second quarter financial highlights, noting our detailed financials can be found in our press release and 10-Q filed this afternoon. As a reminder, all comparisons discussed today are between second quarter fiscal 2023 and second quarter fiscal 2022 unless noted otherwise. For the second quarter, we reported total revenues of $90.7 million as compared to $77.9 million for the same period last year, an increase of $12.8 million or 16.5%, driven by strong growth in Asia-Pacific, Europe, and Latin America as well as the contribution from the Red Line acquisition. North American revenue, which comprised 57% of the total revenue for the second quarter, was $52.0 million, and international revenue was $38.7 million. We continued our trend of trailing four-quarter book-to-bill ratio above one, started back in fiscal 2018. Gross margins for the quarter were 35.5% and 35.7% on a GAAP and non-GAAP basis as compared to prior year margins of 36.2% and 36.3% for GAAP and non-GAAP. Current quarter margins were weighed down by initial shipment of equipment for a large Asian 5G project. These project margins will improve substantially in subsequent quarters as we recognize revenue on higher-margin services and software. Second quarter GAAP operating expenses were $22.6 million, an increase of $2.7 million from the prior year, driven by the inclusion of Redline operating expenses and a $0.9 million restructuring charge in the quarter. Second quarter non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation, and deal costs, were $21.0 million. This is an increase of $1.8 million from the prior year, primarily due to the Red Line acquisition. On a like-for-like basis, we continue to manage costs aggressively. The second quarter tax provision was $3.1 million, essentially flat to last year. We continue to report our non-GAAP tax expense of $0.3 million per quarter based on a reasonable estimate of cash taxes we expect to incur. The company has over $500 million of NOLs manifested as the almost $90 million deferred tax asset on our balance sheet that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. We recorded second quarter GAAP net income of $6.0 million compared to $5.9 million last year. Second quarter non-GAAP net income, which excludes restructuring charges, FX impacts, share-based compensation, M&A-related costs, and non-cash tax provisions was $11.1 million compared to $8.5 million for the same period last year. Second quarter non-GAAP EPS came in at $0.94 per share on a fully diluted basis compared to $0.71 per share for the same period last year, an increase of 32%. Adjusted EBITDA for the second quarter was $12.9 million, an increase of $2.8 million or 27.4% from the prior year. Adjusted EBITDA margins were 14.2% for the quarter. Moving on to the balance sheet: Our cash and marketable securities at the end of the second quarter were $21.6 million, down from $22.9 million in the prior quarter. Accounts receivable continue to be impacted by limitations on Forex availability in certain emerging markets, extending the collection cycle. We continue to leverage our balance sheet to mitigate supply chain risks via buffer stock and supplier deposits. Given the recent improvements in our supply chain, however, we will begin to unwind these investments in future quarters. We continue to have a strong, debt-free balance sheet, leaving us well positioned to execute our long-term plans. With that, I will turn it back to Pete for some final comments.

Thanks, David. Before opening up for Q&A, I'd like to add a few comments and summarize our performance. Year-to-date, we have executed on our long-term growth drivers of 5G, rural broadband, and private networks. In North America and around the world, we continue to grow and capture additional share of wallet through our differentiated product, software, and services offerings. We also remain focused on increasing profitability and generating meaningful shareholder value over the long term. Based on our results, the hard work and dedication of the Aviat team, and the demand environment, we are raising our revenue and profit guidance for fiscal year 2023. We now anticipate revenue for fiscal year 2023 to be in the range of $340 million to $347 million, and adjusted EBITDA for the fiscal year 2023 to be in the range of $45 million to $47.5 million. This is an increase on both the lower end and the higher end of guidance for both figures. With that, operator, let's open the call for questions.

Certainly. And our first question comes from Scott Searle from ROTH. Your question, please.

Good afternoon. Thank you for taking my questions. Great job on the quarter. Pete, let's dive into gross margins. None of you were down sequentially this quarter. Product revenue and product gross margins have increased. Could you provide more insight on that, especially considering the initial contribution from a lower gross margin area? Where do you anticipate this heading over the next few quarters as component normalization occurs? Additionally, it seems that the service gross margin has declined. Are there any one-time factors or considerations we should keep in mind for that segment of the business moving forward?

Hey, Scott. This is David. I'll take that. So actually, I'll start in reverse on the service margins. Service margins tend to be a bit volatile to begin with, but they're subject to kind of some of the intricacies of the revenue recognition standard. We have to go through a process of repricing every quarter, which impacts the allocation of revenue across services and equipment. This quarter, we had what I’ll call a carve-out from services that ended up in equipment. It was kind of bucket to bucket. So that did impact our service margins this quarter and also positively impacted equipment and kind of masked the dilutive impact of that large Tier 1 project that we talked about that, again, should be a temporary impact to this quarter and improve sequentially as we start mixing in higher-margin services and software into that project. So it's a bit on idiosyncratic, but fundamentally, I think we're in good shape, and things are looking more positive going forward.

Scott, to add to that, when we secured the Bharti Airtel business, we mentioned our intention to enhance our cost reduction efforts, which takes some time, and we will benefit from increased volume. Therefore, we anticipate improvements in our margins and believe that taking on the Bharti business and enhancing it over the appropriate timeframe was the right decision.

Got you. Very helpful. And maybe just to follow up on that, Dave. I mean, how should we be thinking about gross margins, though, over the next couple of quarters in aggregate? Should they be starting to tick up then as we start to see some alleviated pressure on the component and cost and expedite front offset a little bit by India? Is that the best way to be thinking about it?

I think that's a good perspective. It should definitely be improving from where we were this quarter. The second half looks relatively strong. Of course, there may be some fluctuations. However, we expect it to be at least 100 basis points higher than what we had this quarter. For the full year, we will likely still finish higher than our total for fiscal '22.

Great. And if I could just lastly follow up. In terms of the guidance, very strong December quarter. Looks like you're guiding kind of in line with where the first half is. You guys have tended to be a little bit conservative on that front historically. And it sounds like RDOF starts to kick in, in the second half of calendar '23. So I'm wondering what kind of visibility do you have in the near term, given that your book-to-bill has been running over one? And what are some of the key elements and swing factors as we're looking in the first half year? And should we basically have been kind of very early, but be expecting a little bit of pickup as we get into the back half of calendar '23? Thanks.

Yeah. So I mean, as far as visibility is concerned, roughly 80% of our coming quarters revenues are coming out of backlog. However, it's not quite as simple as it sounds because there are some big projects in there, and the timing of the revenue recognition associated with those projects can be somewhat dynamic. So there's always a give and take there. But I think we feel good about the rest of the year, and I think that's reflected in our guidance adjustment.

Great. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Erik Suppiger from JMP Securities. Your question, please.

Yeah. Thanks for taking the questions. Congrats on a good quarter. Can you talk a little bit about some of the competitive dynamics with Huawei? Was that part of the factor of why your international was particularly strong this quarter?

Well, we would like to name specific competitors, but that's the large competitor in the script that we alluded to. In part, the share gain in India, I would say, Huawei contributed to that. We put together the script and our story on Monday, and then on the 30th, the Huawei restrictions came out from the Department of Commerce. So we haven't fully digested the implications, but they will likely be more favorable for us. We think we mentioned we have a $60 million funnel, and we're starting to execute on that. So we believe that's a favorable trend, and the restrictions announced on January 30 will give us some time to determine their impact over the next 90 to 180 days.

Okay. Very helpful. Just talk a little bit about the interplay between fiber and microwave; any updates there in terms of general adoption trends, one versus the other?

I believe the market share is fairly stable between fiber and microwave. To strengthen Aviat's position against fiber competition, we are leveraging our multiband extended distance technology and vendor-agnostic innovations that enable compatibility with third-party microwave solutions. The extended distance technology is specifically designed to enhance our competitiveness against fiber. Overall, our investor presentation includes a chart, and I can confidently say there isn't a noticeable shift in market share between fiber and microwave at this time.

Okay. Last question. North America grew, I think, a couple of percent. Are you seeing an impact from macro-economic factors? Is that playing much of a factor there, or how are you thinking of the North American business from an economic perspective?

Yeah. We think North America, right, our business is project-based. North America's growth was a little muted this quarter. But we see that the backlog has almost double-digits versus the same period last year. We have a backlog that's increasing. I would say longer projects. Our North America business has dominated by private networks, which we haven't seen any slowdown. So we read the headlines like everyone else. We're hard-pressed to say that there is a macroeconomic impact on North America or the overall Aviat business. The growth in Q2 is really a project timing impact rather than driven by something macro.

Very good. Thank you very much.

Thank you. One moment for our next question. And our next question comes from the line of Tim Savageaux from Northland Capital. Your question, please.

Hi. Good afternoon and congrats on the results. When I stay with North America, I think another feature of the quarter is Verizon making the 10% customer list, which I think the last time that happened was, but feel free to let me know. Is that indicative? And I guess I asked this question from both a North American and global perspective. I mean, do you see 5G backhaul here? Obviously, you've got the Bharti deal ramping, taking a greater role in terms of driving the company's growth throughout the balance of the year or short term than your other growth drivers, and we know that Bharti is a Huawei replacement win. What's driving the strength at Verizon? And I have a follow-up.

Yes. We looked a little bit at Verizon. They've been a long-term customer of Aviat, and they've typically been right under the 10% threshold. We see overall connectivity driving up at Verizon. It's a combination of LTE, LTE Advanced, and 5G. So that drives the need for more mobile backhaul to fixed wireless access transport. We see all those trends, and we like all of our growth drivers: 5G, private networks, and rural broadband. But right for the next couple of quarters, I think our growth is going to be driven by 5G. We have ongoing discussions about when RDOF will impact, and we believe the recent developments will do so in the back half of calendar year 2023. Our guidance likely factors in 5G over the next couple of quarters, and as we look to the guide for fiscal year '24, we will see the impact of rural broadband and funding, which is perhaps more definitive than I have to.

Duly noted. And you mentioned a bunch of numbers there that I want to go back through because I think they're probably pretty interesting. Was the $60 million, is that the estimate of the opportunity for share gain over a certain period of time? I think you mentioned with regard to your big competitor, and then you went through some bookings and revenues recognized $19 million and $8 million, respectively. I'd just love to get a sense of how significant a piece of that the India business is versus what you're seeing globally?

So I would say that's a really good way for us to back out the India business. I would say the India business of that revenue is over half. To kind of put it in the ballpark, it's over half, but it's not over; let's say maybe 25% of the funnel. The reason I make that statement is that the funnel is a mosaic of opportunities, and we're not just dependent on taking share from one or two accounts. We see that these restrictions are having a broader impact, and we're getting opportunities at customers that historically we've not encountered.

Got it. So the funnel was the $60 million, correct?

Yes. The funnel is the $60 million.

Great. And then, my last question is about your record non-GAAP operating margins of 12.5%. You had significant revenue growth in the quarter, but looking ahead, have you thought about where these margins might go in the long term, considering they are influenced by gross margins and revenue growth? Do you have an idea of what operating margins could look like as you build on this recent achievement?

Well, I would say that our stated milestone is for EBITDA margins to reach 15%. We're in striking distance, but we're not quite there yet. I'll tell you this; we're heading into our strategic planning season here, so we'll probably kind of dust off the playbook there and figure out where we want to be from that standpoint. We'll respond to your question as well to pay specific attention to our operating margins.

Got it. Thanks very much.

Thanks, Tim.

Thank you. Our next question comes from Theodore O'Neil from Hill's Research. Your question, please.

Thanks very much and congratulations on the good quarter. I appreciate you discussing the inventory turns and the DSOs in the prepared remarks. I was wondering if you could talk about if you're seeing anything on the inflation side, either improving or not improving?

It's been fairly stable. We are still encountering some situations with certain components where we need to pay expedite fees. However, in terms of general price increases, they have been rare. In fact, we are currently working to reverse some of the costs we have incurred over the past year to year and a half. More will be revealed on that front, but for now, we find the situation to be stable.

And can you give us an update on the new chip you're building with MaxLinear? Some timing on that? And if that chip is going to help with some of the semiconductor allocation issues you've got?

We have not yet provided a timeline for when we expect the project to be completed, but it is progressing well. We believe our investment has improved our priority in accessing the modem supply chain. In a couple of quarters, we will share a clear timeline regarding when the chip will start affecting our financial performance.

And will those chips be part of a new product line, or will they go into existing products or both?

Both.

Okay. All right. Thanks very much.

Thank you.

Thank you. And we have a follow-up question, just one moment. The follow-up comes from the line of Scott Searle from ROTH. Your question, please.

Hey, Pete. Maybe just a follow-up on Redline; you're a couple of quarters in now. I'm wondering if you could give us a little bit of an update about how that's tracking from a revenue standpoint? It sounds like you're starting to get some cross-synergies from a sales perspective in terms of backhaul capabilities, but I'm wondering what that line of opportunity is looking like on the private networks front. How should we think about that going forward over the next 12-plus months?

Yeah. The private network funnel is starting to grow. We haven't had a win. When we prepared for the call, we thought about talking about that more and we said we wanted to have a win before we started to kind of put that in the earnings deck. But we see when we made the acquisition of Redline, we thought that our channels and our access to private networks and the product portfolio was going to work. It's not working yet, but we think we're one to two quarters away from saying the investment thesis is proven. With respect to revenue, it contributed less than 10%. It was accretive to our gross margins, and we are ahead of the EBITDA guidance we gave for the year. On Redline, we said it was 1% to 1.4%, and we factored that into our increased EBITDA guidance that we mentioned at the end of the recorded call.

Great. Thanks.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Pete Smith for any further remarks.

Well, thanks, everyone, for attending the call and your support. Fortunately, the line stayed open during the Austin Ice Storm. We are looking forward to updating our progress in 90 days, and let's stay in touch. Thanks, everyone.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.