Earnings Call Transcript - AVNW Q1 2022

Operator, Operator

Good afternoon. Welcome to Aviat Networks' First Quarter Fiscal 2022 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 will 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, Vice President of Global Finance and Investor Relations

Thank you and welcome to Aviat Networks' first quarter fiscal 2022 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 first quarter, followed by David Gray, our CFO, who will review the financial results for the first fiscal 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 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 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 25th, 2021. 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 financial tables therein, which include a 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?

Pete Smith, President and CEO

Thanks, Keith, and good afternoon everyone. Thanks for joining us to review a successful quarter. The company continued to execute on our key long-term focus areas of growth, margin expansion, and meaningful bottom-line improvements. The Aviat team's commitment resulted in first quarter revenue of $73.2 million, growth of 10.4% from the first quarter of fiscal year 2021; first quarter adjusted EBITDA margins of 13.0% compared to 12.7% for the first quarter of fiscal year 2021; and a solid balance sheet and liquidity position with net cash at $47.3 million. North American first quarter revenue increased 12.0% or $5.4 million year-over-year. International first quarter revenue increased 6.9% or $1.4 million year-over-year. Adjusted EBITDA was $9.6 million for the first quarter, representing an improvement of $1.2 million versus the same period last year. The improvement in revenue and adjusted EBITDA for the first quarter was primarily due to higher volume of private network business, increased sales through our Aviat store, which serves primarily the rural broadband space, improved international business, driven by multiband wins, and an increase in software and licensed sales. To achieve these results, we must recognize our suppliers and the Aviat supply chain team. The current supply environment is incredibly challenging, and we thank our suppliers and our team for their continued performance. On our last call, I outlined the differentiation in our radio products, specifically the WTM 4000 platform, which has played a significant role in our recent growth in 5G and rural broadband. In today's call, I will reiterate some of the key points and subsequently highlight some of the wins that this platform has delivered this quarter. The Aviat WTM 4000 leads the industry in system gain, enabling radio links to go further in distance, have greater ability to overcome weather effects like rain, and use smaller antennas, which is an important element in Aviat's total cost of ownership value proposition. And our WTM 4000 portfolio includes the industry's only single box multiband radio for 10 gigabits per second capacity. Along with our software and e-commerce differentiation, this product has led to some positive developments in the market this quarter. We have seen strong growth in our North American rural broadband segment. We now supply to 15 of the top 30 Rural Digital Opportunity Fund or RDOF winners and are in advanced discussions with five others of the top 30. This business is based on our WTM 4000 platform and is going strong for us. Internationally, Aviat has had one of the best quarters in our history. With regards to winning new accounts, many are sharing gains impacting revenue in future quarters, including a large Ministry of Defense Network in Northern Africa. Two new tier 2 operator wins in Africa, one in Chad and another in Angola, which included a hosted frequency assurance software, recurring revenue win. Our first fast win in Africa. Two new operator wins in Southeastern Europe and in APAC this quarter, we penetrated one of the largest mobile operators, a Tier 1 operator, achieving first-ever sales for Aviat, based on our multiband solution. We are extremely excited about this development, as well as all the other new accounts mentioned here. On top of all these market successes, in the quarter, Aviat announced a significant new product for operators, high availability routing software running on our CTR 8740 router platform. This new high availability routing software is a compelling choice for operators seeking an affordable routing solution that is reliable, scalable, and secure. Aviat is now one of only a few router vendors on the market to support high availability software. While this software was designed for North American mission-critical private networks, we are starting to see demand in 5G networks worldwide, as they evolve to meet the needs of critical use cases, such as connected cars, industrial IoT, machine-to-machine communications, and public safety applications. As 5G transport networks work to become more reliable, this offering along with our proven portfolio of highly reliable, high system gain radios gives Aviat a strong value proposition. With that, let me introduce David Gray, CFO, and then turn the call over to him to review our financials before coming back for some final comments. David came to Aviat from Superior Essex, where he was CFO of the approximately $2.6 billion multinational company with a significant telecom equipment presence. Prior to his seven plus years with Superior Essex, David held financial leadership positions of increasing responsibility at a number of prominent companies including Cooper Eaton, Newell Brands, and Philips Electronics. We're thrilled to have him on board as we continue to focus on corporate growth and margin expansion.

David Gray, CFO

Thank you, Pete, and good afternoon everyone. During my remarks today, I'll review some of the key first quarter financial highlights. Please note that our detailed financials can be found in our Form 10-Q and earnings release, both of which were filed this afternoon. For the first quarter, we reported total revenues of $73.2 million as compared to $71.7 million for the prior fiscal quarter, sequential increase of $1.5 million or 2.1%. And as compared to $66.3 million for the first quarter of fiscal 2021, a year-on-year increase of $6.9 million or 10.4%. The North American team continues to focus on expanding sales and seizing upon Aviat's unique product and service differentiation. North American revenue, which comprised approximately 70% of total revenue for the first quarter was $15.9 million, an increase of $5.4 million or 12% from the first quarter of fiscal 2021. The increase was driven primarily by our private networks business, rural broadband, and software. International revenue for the first quarter came in at $22.2 million compared to $20.8 million for the first quarter of fiscal 2021, an increase of $1.4 million or 6.9%. Our book-to-bill ratio for the last 12 months was above one and our backlog remains above $200 million. First quarter gross margin was 35.7% on both GAAP and non-GAAP basis as compared to 36.1% GAAP and 36.2% non-GAAP for fourth quarter and 36.6% GAAP, 36.7% non-GAAP for the first quarter of fiscal 2021. Our margins in the third quarter were negatively impacted by inflationary pressures and significant expedite fees incurred to overcome supply chain and logistical bottlenecks. These were partially offset by price increases, surcharges, and favorable mix. The net impact of these factors was approximately 100 basis points. First quarter GAAP operating expenses, which include restructuring charges and share-based compensation were $19.3 million compared to $22.1 million for the fourth quarter of fiscal 2021 and $17.7 million for the first quarter of fiscal 2021. First quarter non-GAAP operating expenses, which exclude the impact of restructuring charges and share-based compensation were $17.9 million compared to $20.4 million for the prior fiscal quarter and $17.2 million for the first quarter of fiscal 2021. We continue to make R&D investments with savings from previously announced G&A restructuring. First quarter GAAP net income, which includes restructuring charges and share-based compensation was $4.7 million compared to $2.8 million for the prior fiscal quarter and $5.9 million for the first fiscal quarter of 2021. The year-over-year decline was due to $0.7 million of restructuring charges in the current quarter and $1.5 million higher tax expense resulting from the release of the U.S. deferred tax asset valuation allowance as reported in our fiscal Q3 2021 results. As a reminder, the company has over $500 million of NOLs that will continue to generate shareholder value for the foreseeable future. First quarter non-GAAP net income was $8.0 million compared to $5.3 million for the prior fiscal quarter and $6.9 million for the first quarter of fiscal 2021. First quarter non-GAAP EPS came in at $0.67 per share compared to $0.45 per share for the prior quarter and $0.62 per share for the first fiscal quarter of 2021. Adjusted EBITDA for the first quarter was $9.6 million compared to $7.0 million for the prior fiscal quarter, an increase of $2.5 million or 38%. Compared to Q1 of fiscal 2021, adjusted EBITDA increased by $1.2 million or 14%. Our adjusted EBITDA margins came in at 13% for the quarter compared to 9.7% for the prior fiscal quarter and 12.7% for the first fiscal quarter of 2021. In terms of profitability, this was the second highest adjusted EBITDA percentage in the history of the company; impressive accomplishments given the inflationary environment we're all operating in. Moving on to the balance sheet. Our cash and cash equivalents at the end of the fourth quarter were $47.3 million compared to $47.9 million at the end of the fourth quarter of fiscal 2021 and $36.2 million at the end of the first quarter of 2021. We have no debt. During Q1, we repurchased 0.7 million of our common stock. Our balance sheet remains very solid, leaving us well-positioned to execute our long-term plans. With that, I turn it back to Pete for some final comments.

Pete Smith, President and CEO

Thanks, David. Just a few additional comments before opening up for Q&A. I'm extremely proud of the entire Aviat team for their significant contributions to our results for the first quarter of fiscal year 2022. We are executing well given the constrained supply situation and the inflationary environment. Despite the environmental challenges, we affirm our previously announced annual guidance of $283 million to $293 million in revenue and $35 million to $38 million in adjusted EBITDA. We anticipate achieving the high end of the range. Providing our customers with the most advanced, reliable, and best total cost of ownership systems for mission-critical work, and our shareholders with profitable growth remains our goal. With that operator, let's open it up for questions.

Operator, Operator

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

Theodore O'Neill, Analyst

Thanks very much. Congratulations on the good quarter and welcome aboard David.

David Gray, CFO

Thank you.

Theodore O'Neill, Analyst

Yes. I have a couple of questions. First, I want to ask about margin. My second question concerns SG&A. In the quarterly report and your prepared remarks, you noted that this quarter's margins compared to last year were affected by inflationary pressures and supply chain logistical challenges. You mentioned that expedited fees were initially used to address these logistical issues. I recall that last quarter, you noted efforts to maintain a higher inventory level to prevent such problems. Can you provide more specific details about where you're encountering both the inflationary challenges and the logistical bottlenecks?

David Gray, CFO

Yes, thank you, Theo. The inflationary pressures and logistical challenges are primarily originating from the semiconductor suppliers. There are times when these suppliers decide to raise prices, and at other times, we need to pay extra fees to expedite chip delivery. In the last quarter, we experienced a cost inflation of 440 basis points. Last quarter, David Kang inquired if we were pursuing price increases or surcharges, and we have been able to achieve 110 basis points in price recovery. Additionally, we had a favorable mix contributing 240 basis points, which resulted in a net 100 basis points. Currently, we observe that inflation is easing, and we hope this trend continues. We anticipate that our recovery will improve moving forward. The recovery process takes time since many of the expedite charges or cost increases are immediate. If inflation remains stable, we expect a net positive outcome by the fourth quarter of fiscal year 2022. In terms of our business cycles, we have three distinct ones. The first is our short cycle business, linked to e-commerce where our price and surcharge actions are already in effect. The second is our mid-cycle business with international mobile network operators, which typically takes about a quarter to adjust as the backlog gets resolved, and we expect to see some benefits from that soon. Finally, our private network business operates on a longer cycle, which will take more time to materialize. To summarize, we faced considerable cost inflation this quarter, but we are actively pursuing price and surcharge recoveries. We appreciate our customers' cooperation in these challenging times, and we believe that over the next few quarters, we can fully counter the inflationary impacts, provided the inflationary environment does not worsen. I hope that clarifies your question, Theo.

Theodore O'Neill, Analyst

Okay, that's helpful. So, my next question is about SG&A, which was lower than a year ago and decreased sequentially. I understand that you don't provide guidance for SG&A, but since you mentioned it may decrease due to restructuring, could you give us a qualitative insight on whether it is expected to increase, remain the same, or continue to decrease for the rest of the year?

David Gray, CFO

We expect there to be a little bit of seasonality as there has been historically in our overall OpEx. So, Q1 should be the low point for the year. And having said that, we continue to invest the savings from much of the restructuring into R&D projects that get greenlit. So, there should be a reasonable lift from what we currently have, but it shouldn't be anything out of the ordinary that you haven't seen before.

Theodore O'Neill, Analyst

Okay. Thank you very much.

David Gray, CFO

Thanks. Thanks, Theo.

Operator, Operator

Your next question is from Scott Searle with ROTH Capital.

Scott Searle, Analyst

Hey good afternoon. Thanks for taking my questions. Nice quarter. And David welcome aboard, congratulations.

David Gray, CFO

Thank you, Scott.

Scott Searle, Analyst

Just to dive in quickly and follow-up to the prior questions. Looking at the favorable mix in the quarter, I was wondering if you could provide a little bit more color, I'm assuming that's more private networks. But wondering if there was something else that was going on, on that front. Also, given the supply constraints, I'm wondering if there are any sales that were left on the table in the September quarter, and kind of how you're feeling sequentially as we go into the December quarter, given the backlog and the book-to-bill over one, but also those supply constraints, you have pretty good visibility in terms of your ability to deliver in the near-term? And kind of what are the concerns are? And also directionally, how you're thinking about gross margin? Sounds like there are a lot of moving parts here that get you higher by the June quarter, but kind of wondering what you're seeing in the near-term?

David Gray, CFO

We are seeing a mix influenced mainly by private networks, particularly noted by the significant increase in North American volume where private networks are prevalent. This was a major factor, along with some revenue from software and licensing. In terms of revenue we missed out on, I'd estimate it to be between $2 million and $3 million, which we could have achieved if our supply chain had performed better. Scott, what haven't we addressed?

Scott Searle, Analyst

And looking forward to the December quarter, how are you feeling directionally then, given the supply chain, your inventory levels seem like they're okay. I think they're flattish with the June quarter. So, are there any concerns? How do you think things progress directionally from there? Are there anything in particular that you're worried about from a supply standpoint?

David Gray, CFO

Yes. We believe we are managing the supply chain better than many in the industry. However, with thousands of components needed for a microwave radio, if any one of them fails to arrive, it could negatively affect us. That said, we are starting to feel that, aside from the risk of being impacted by a single supplier at the end of the quarter, we have a neutral to positive outlook on our ability to navigate the supply chain. I need to remain cautious due to the overall uncertainty. If we avoid any isolated incidents, we expect the supply chain situation to remain the same or even improve slightly next quarter.

Scott Searle, Analyst

That's great. I'll take neutral to positive all day long. Pete, could you provide some more details on the geographic mix? It sounds like you're beginning to see some success in Europe, which historically hasn't been a significant revenue source for your company. Can you elaborate on what's happening in the pipeline? Is there a larger opportunity there? Additionally, what are you observing regarding their presence or lack thereof?

Pete Smith, President and CEO

Our recent success in Europe, highlighted in our shareholder letter, particularly in the U.K., follows a leadership change we implemented over a year ago in the EMEA region. We're building our pipeline and are optimistic about the growth in Europe, especially regarding private networks and our Tier 2 operators. Steve is performing well in this area. Regarding our market share against Huawei, we are identifying opportunities in Eastern Europe, Africa, Asia-Pacific, and a bit in Latin America. We currently have $60 million worth of opportunities in our pipeline, which is new territory for us and others. While we are uncertain about the conversion rates and how the competitive landscape will evolve, we are encouraged by the potential for capturing market share where Huawei previously held strong. We hope to share positive developments in the coming quarters.

Scott Searle, Analyst

Great. Very helpful. And lastly, if I could, just to dig in on your commentary related to ARPA funding you've got 15 of the top 30. I believe a lot of that funding has not really been released yet. So I'm wondering, if you're actually seeing the benefit of that or we should expect all the benefit of that to start to come in calendar 2022 timeframe? Thanks.

Pete Smith, President and CEO

Yes, I think you've got that right, that would be a positive catalyst in calendar year 2022 as the ARPA funding hits.

Operator, Operator

Your next question comes from Dave Kang with B. Riley.

Dave Kang, Analyst

Thank you. Good afternoon. My first question is about chips. Last quarter, you mentioned that the inflationary pressure was stabilizing because lead times had not been extended in the last couple of months. Is that still accurate, or has the situation changed since then?

Pete Smith, President and CEO

Yes, I believe that a neutral to positive outlook is consistent with last quarter. Some people have been asking when I expect the situation to improve. I keep an eye on what the CEOs of semiconductor companies are saying and review the available information. My estimation, which is just that, is that conditions might start to get better after April, once we get past the holiday season and Chinese New Year. However, I want to emphasize that the market environment Aviat faces is neutral, and any positivity comes from the fact that conditions are not deteriorating. Lead times are stable, and we've enjoyed a few months of consistency. We anticipate that things should start to improve. That said, if any of our suppliers experience a significant issue, it could impact us negatively. I'd love to provide more precise information to help us manage our business better, but that's the best insight I can offer. I hope that clarifies things.

Dave Kang, Analyst

Yes, very helpful. Just on the gross margin, regarding your outlook for the year, I know you didn't talk about next quarter. But assuming sort of neutral as far as the supply chain situation is concerned, should we expect gross margin, it was down a little bit sequentially in the first quarter. What about second quarter, should we be thinking kind of flattish or maybe even further step down? How should we think about December quarter gross margin in terms of a trend or trajectory?

Pete Smith, President and CEO

Yes. So we think it should be incrementally up, provided we don't have any additional inflation excursions, right? So we're not ready for inflation starting last January to start to put our processes in to figure out, and how we were going to pass on price and surcharges. But the problem with that is, we didn't know how much was going to come and how it was going to be delivered. So we're working through that. So we think we should get more price recovery in the next quarter, and if the mix was flattish then our margins should tick up. And I don't want to be specific on that because I can't tell you what mix is going to be. Yes, I can't tell you the full uptake of our price actions. But what I'd like our investors to know is we recognize inflation. We think we have enough differentiation in our products and our customers are cooperating as we work to offset this difficulty.

Dave Kang, Analyst

Got it. My last question is, you said you raised prices on your products. When was that done? And when was that communicated to your customers? And did that cause sort of a surge in orders as they try to take advantage of prices before they go up?

Pete Smith, President and CEO

Yes, this environment is truly unprecedented. For our short-cycle or e-commerce, actions were taken quickly. For larger customers, it involved negotiations. I have experience in generating demand ahead of a price increase, but I found that it was minimal and not significant. In my previous role, I don't recall a clear instance where we saw demand increase before a price hike.

Operator, Operator

Your next question comes from Tim Savageaux with Northland.

Tim Savageaux, Analyst

Good afternoon, and congratulations on the quarter. Let's discuss rural broadband. Pete, my first question is about our progress toward that critical 10% revenue target related to rural broadband and any updates on when we might reach it. When you were at our rural broadband forum, you mentioned needing four more wins to reach 13, and it seems you have achieved two additional wins in the last month. Considering the addressable market and your goal of reaching around a 40% market share in rural broadband, do you believe you are on track to exceed that? I will have a follow-up question shortly.

Pete Smith, President and CEO

We indicated in our investor presentation that our estimate is close to a 40% market share. With the recent wins, it's possible that we could increase our share as the ARPA funding takes effect. I believe that with a couple more quarters of performance and the inflow of ARPA funding, we should surpass that 10% threshold. I mentioned that we would reach this by the end of this fiscal year, and I feel more confident about that now; if not by then, it could happen even sooner. Tim, does that answer your question?

Tim Savageaux, Analyst

Got it. It sure is. Just to follow up on the ARPA front, I have one more question. You mentioned 15 of the top 30 overall award recipients. Can you estimate the total funding received by those 15 that you've won from ARPA? My first question. And my second question is, are those only wireless companies? Given you have 15 and are working on 5 more, it seems like there could be some fiber companies in there as well. Is this all fixed wireless in terms of access to the opportunities?

Pete Smith, President and CEO

No. While we can't provide specifics now, I will look into how many of those we cannot reach because they are fiber. However, there are others among the top 30. Regarding your question about estimating the funding received, we haven't done that yet, but we will address it as an action item. Both of those questions are valid.

Tim Savageaux, Analyst

I believe it's important to explore this and consider the international aspect. You mentioned a strong quarter for orders. If you have any international book-to-bill metrics to share, that would be appreciated. Interestingly, the locations you referenced aren't typically known for pushing out Huawei. When discussing share gains, could you provide more details, especially since we aren't focusing on regions like the U.K., Western Europe, or Japan, which have been actively removing Huawei? Instead, some of these locales seem to retain their presence. Are these gains competitive rather than political? Additionally, if there are other factors contributing to share gains aside from Huawei, we would be eager to learn more about those.

Pete Smith, President and CEO

You have raised a challenging question. The dynamics are hard for us to interpret. In our process of gathering customer feedback, we inquire whether the engagements are related to politics or supply chain issues, and we often receive a mix of both responses. Sometimes it's a supply chain concern, other times it's political. Understanding these factors is important to us as we want to capture the dynamics we can replicate. Ultimately, we are open to both scenarios as long as we gain insights from them. Additionally, our value proposition on an international scale is strongest with our multi-band offering and in regions where spectrum costs are high, as we provide the best total cost of ownership. We are noticing that operators struggling with Huawei's supply chain or dealing with the evolving geopolitical landscape, particularly in areas with high spectrum costs, present the greatest opportunities for us. Have I adequately addressed your question?

Q – Unidentified Analyst, Analyst

Absolutely. Thanks very much.

Pete Smith, President and CEO

Thank you.

Operator, Operator

Your next question comes from Aaron Martin with AIGH Investment Partners.

Aaron Martin, Analyst

Hi, it's Aaron Martin with AIGH. Many of the questions have already been addressed, especially by Scott. Congratulations on a strong quarter and for breaking down your revenue into three segments of e-commerce while managing to maintain your margins despite the price increases. If I analyze those three segments, how much of your overall revenue does each segment represent?

David Gray, CFO

So it kind of goes, the smallest is the shortest cycle, and the biggest is the longest cycle. Aaron, so look for passing on price, our longest cycle business is our biggest, so that's why mix is flat and there's no additional upticks in inflation. We feel good about expanding our gross margins going forward.

Aaron Martin, Analyst

Got it. It's going to be more gradual as we move into the next nine to 12 months because of the long lead time for the majority of the business.

David Gray, CFO

That's fair. Yes.

Aaron Martin, Analyst

Got it. And just a clarification on the book-to-bill, was it the book-to-bill above one for the past 12 months or for the quarter result?

David Gray, CFO

Yes, we usually discuss the trailing 12 months due to the nature of our projects and their fluctuations. We assess our book-to-bill ratio over a 12-month period, which is what we are comfortable sharing. To provide further detail, I wanted to address the supply chain challenges and our confidence in the demand environment. We are quite optimistic about demand, and much of our management team's focus is directed towards delivery. Overall, we feel positive about the demand environment.

Aaron Martin, Analyst

Okay. Thanks. Congratulations on that nice quarter. And wishing continued progress. Oh, one more thing. I want to congratulate you on actually buying back stock this quarter.

Pete Smith, President and CEO

Well, thank you. Right. That's all I'll say. I wish, as we should was trading at a higher than our triggers.

Aaron Martin, Analyst

No, well, it is depressed to get to keep buying back more.

Pete Smith, President and CEO

Very good.

Operator, Operator

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

Orin Hirschman, Analyst

Hi. How are you? You have to increase the trigger you know.

Pete Smith, President and CEO

Thanks.

Orin Hirschman, Analyst

Well, I personally believe it was beneficial. In terms of the overall business, do you have any idea how much more you could have shipped in the quarter if there hadn't been supply constraints?

Pete Smith, President and CEO

I think we said 2 million to 3 million.

Orin Hirschman, Analyst

Okay. And in terms of the overall momentum on the private network side, keeping in mind, keeping aside the competition aspect of it. How would you characterize that momentum compared to six months ago or a year ago?

Pete Smith, President and CEO

I would say it's the same. Yes, I believe the momentum is consistent. The private network teams are performing well. The opportunities remain unchanged, and there are potential positive catalysts related to RDOF funding that could enhance our situation. Overall, I would say it's the same with some potential for improvement.

Orin Hirschman, Analyst

Is the drivers for the customers the same being led by security? Or anything changed there in terms of the dry run?

Pete Smith, President and CEO

No. So, our private network company customers are principally 911 First Responder networks. Secondly, would be utilities. I think long-term the utility market is improving with further focus on security, more sensors and utility yards, water, wastewater would be third. Fourth would be oil and gas. And I would say that which is a really small part of our business, but I think the demand drivers are about the same as they were six months to 12 months ago, with the one caveat that utilities, the macro trend would be favorable for private network demand.

Orin Hirschman, Analyst

Okay. And last but not least, on the software side, I know it's a tiny piece of whoever the sales today, but can you just kind of update how that's going, particularly on the FAS side. And I know you're developing additional applications. How's that going? That's for me for now.

Pete Smith, President and CEO

We expect to launch additional applications related to FAS in the next 12 months, though we are not ready to provide details yet. These applications will enhance FAS and address more network operator issues. Our software business remains small, but it's performing well and has contributed positively to our overall mix. Additionally, our high availability routing software was released this quarter, and we believe it will benefit private networks. We're also seeing potential international interest, which has been a pleasant surprise for us.

Orin Hirschman, Analyst

Great. And thanks so much.

Pete Smith, President and CEO

Thank you.

Operator, Operator

There are no additional questions in queue. I would like to turn it back over to management for closing remarks.

Pete Smith, President and CEO

Thanks. Thanks, everyone for your support and your participation in the call. During the quarter, we executed well. We're building a foundation for our future. We're really excited about the business. And we can't wait to talk to you again in 90 days. Thanks, everyone.

Operator, Operator

Thank you. This concludes today's conference call. You may now disconnect.

David Gray, CFO

Thank you, Stephanie.

Operator, Operator

Thank you, sir.