Earnings Call Transcript - AVNW Q3 2025

Operator, Operator

Good afternoon. Welcome to Aviat Networks Third Quarter Fiscal 2025 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. Andrew Fredrickson, Director of Investor Relations. Thank you. You may now begin.

Andrew Fredrickson, Director of Investor Relations

Thank you, and welcome to Aviat Networks' third quarter fiscal 2025 results conference call and webcast. You can find our 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. With me today are Pete Smith, Aviat's President and CEO, who will begin with opening remarks on the company's fiscal quarter, followed by Michael Connaway, 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 fiscal guidance, financial projections, business drivers, new products and expansions, 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 the statements expressed or implied on this call can be found in our most recent annual report on Form 10-K filed with the SEC. The company undertakes no obligations to revise or make public any revisions 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 would like to turn the call over to Aviat's President and CEO, Pete Smith. Pete?

Pete Smith, President and CEO

Thanks, Andrew, and good afternoon, everyone. Let's review the highlights from the third quarter. Total revenue of $112.6 million, non-GAAP gross margin of 35.8%, record adjusted EBITDA of $14.9 million, up 17% versus the year-ago period. Non-GAAP EPS of $0.88, up 13% year-over-year. These results were possible thanks to Aviat's disciplined operating model and the hard work and commitment from the entire Aviat team. With our second consecutive quarter of record quarterly adjusted EBITDA, we see the work of our strategy to grow the scale of Aviat taking hold. Let's briefly discuss our end markets. Looking at our mobile service provider market, we had another good quarter. Products and services related to Pasolink were in line with our long-term expectations for the business. Software volumes were good, assisting with our improved gross margins year-over-year. In a previous earnings call, we announced the launch of our ProVision Plus software for Pasolink. We are happy to report initial sales of ProVision Plus to Pasolink customers during the third quarter. The successful effort to sell ProVision Plus shows the significant progress we have made servicing our Tier 1 and larger mobile service provider customers that joined from the Pasolink acquisition. In private networks, Aviat continues to maintain its share of demand in North America and expand the sales funnel internationally. In public safety, we’ve built and shipped additional phases of our recently won statewide network project. In the utility space, we’re making progress cross selling our offering of Aprisa access radios and routers alongside microwave backhaul and are excited about the sales funnel developing with these customers. Based on investor inquiries, I would like to add that we have not seen any cancellations to date with our US Federal government customers as a result of spending reduction efforts. We attribute this to the mission-critical nature of our deployments. Regarding tariffs and the impact to Aviat, our team has been working diligently to mitigate the impact to our business and customers. We have deployed the playbook we used to successfully navigate the COVID supply chain crisis. In addition, our manufacturing partners have footprints that will permit optimization when the tariff landscape settles. Anticipating the tariffs, we ramped up our inventory purchases. For the vast majority of the hardware we sell in the US, it is assembled in the US. We believe Aviat has the largest operational US footprint in the microwave space. During the quarter, we had strategic discussions with three US headquartered Fortune 500 companies focused on doing more in the US. This may be a positive catalyst in approximately 12 months. Nonetheless, much of the tariff headline is focused on costs, and we do utilize components and contract manufacturing from international sources. We are working alongside our contract manufacturer and suppliers to adjust sourcing locations as available, but we expect exposure over the next couple of quarters. Our goal with the tariff impact to our business will be to be margin neutral through productivity, sourcing, manufacturing footprint, and price. I would now like to turn the call over to Michael to review the financial results of the quarter before coming back for some closing remarks.

Michael Connaway, CFO

Thank you very much, Pete, and good afternoon, everyone. I’ll review some of the key fiscal 2025 third quarter results. Please note that our detailed financials can be found in our press release and all comparisons discussed are between the third quarter of fiscal year 2025 and the third quarter of fiscal year 2024 unless otherwise noted. For the third quarter, we reported total revenues of $112.6 million as compared with $110.8 million for the same period last year, an increase of $1.8 million or 1.6% year over year. North America, which comprised 44% of our total revenues for the quarter, was $49.4 million, an increase of $5 million or 11% from the same period last year due to growth in private networks. International revenues were $63.2 million for the quarter, a decrease of $3.2 million or 5% from the same period last year. This was driven by a difficult year-over-year comparable with APAC recording its best quarter on record in the Q3 fiscal 2024 period. Our trailing twelve month book to bill was over one in the quarter. Gross margins in the third quarter were 34.9% on a GAAP basis and 35.8% on a non-GAAP basis. This compares to 32.5% GAAP and 35.1% non-GAAP in the prior year. Gross margins improved thanks to regional mix and software mix in the quarter. Third quarter GAAP operating expenses were $30 million, down versus $30.4 million in the year ago period. Non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation, and deal costs were $27.2 million, a decrease of $0.2 million versus the prior year. This decrease is due to disciplined cost management and increased efficiencies at Aviat. Third quarter operating income was $9.3 million on a GAAP basis and $13 million on a non-GAAP basis. This compares to $5.7 million GAAP and $11.4 million non-GAAP in the year ago period. The third quarter tax provision was $1.1 million, representing an effective tax rate of 24%. As a reminder, the company has approximately $450 million of net operating losses or NOLs that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. Third quarter GAAP net income was $3.5 million and non-GAAP net income, which excludes restructuring charges, share-based compensation, M&A-related, and other non-recurring expenses and the non-cash tax provision was $11.3 million. Third quarter non-GAAP earnings per share came in at $0.88 on a fully diluted basis, up by $0.10 or 12.8% versus the year ago period. Adjusted EBITDA for the third quarter was $14.9 million or 13.2% of revenues, an increase of $2.2 million or 17.3% versus last year. This is another quarterly record of adjusted EBITDA for Aviat and our second consecutive quarter of hitting this milestone. Moving on to the balance sheet. Our cash and marketable securities at the end of the third quarter were $49.4 million. Our outstanding debt was $73.9 million, bringing our net debt position to $24.5 million. With that, I'll turn it back to Pete for some final comments.

Pete Smith, President and CEO

Thanks Michael. We are pleased with the results from this quarter and believe we are on the right track to delivering a good end to fiscal year 2025. In regards to guidance, we believe that Aviat will deliver results for fiscal year 2025 within the range of annual guidance previously provided. We expect to approximate the current full year consensus estimate on revenue and EBITDA. Over the last five years, we have most frequently issued guidance for the fiscal year in August. Given the nature of the macro environment and tariffs, we will maintain this practice. With that, operator, let's open up for questions.

Operator, Operator

Thank you. The first question comes from Jason Schmidt of Lake Street. Jason, please go ahead.

Jason Schmidt, Analyst

Hey guys. Thanks for taking my questions and congrats on the strong results. Pete, I just want to start with guidance. I know you're maintaining that $430 million to $470 million range. Just curious, what the swing factor you think is to sort of that high-end versus the low-end?

Pete Smith, President and CEO

I believe we've confirmed the consensus on our guidance range. I see potential for some pull-ins to avoid tariffs since we have the inventory available. During the quarter, we received inquiries about push-ins and pull-outs. I would estimate that we had one or two instances of both, but there might be more opportunities to mitigate tariffs in this quarter compared to previous ones, which could positively impact us. However, we're most comfortable providing guidance on an annual basis and will stick to that as we aim to enhance our performance to meet market expectations.

Jason Schmidt, Analyst

Okay. No, that makes sense. And I know you're not baking in sort of any significant contribution from the U.S. Tier 1 market. But just curious, what you're currently seeing there and if you think we've reached the bottom?

Pete Smith, President and CEO

I believe that the U.S. Tier 1 capital expenditure cycle has likely reached its lowest point for us. It's important to note that capital spending generally focuses on fiber initially. As you move away from urban areas, you're more inclined to see microwave technology used in suburban and rural settings. Now that capital expenditures have leveled off and stabilized, I estimate there will be a lag of about six months. Therefore, following what we consider the lowest point in capital expenditures, we anticipate an increase in demand over the next few quarters.

Jason Schmidt, Analyst

Got you. That's helpful. And just the last one for me, and I'll jump back into the queue. Michael, looking at gross margin, obviously, really strong in March, can you build upon that here in June? Or just given the mix you had in March, would we expect it to take a step back?

Michael Connaway, CFO

Sure. I'll start by discussing the results, as gross profits were notably strong this quarter, building on the solid performance in Q2, with Q3 showing even better results. There are two main reasons for this, both connected to our M&A activities. First, Pasolink is now included in our Q3 year-on-year comparisons, and we've made significant improvements integrating that business into Aviat, resulting in a positive impact on our gross margins. Secondly, the APRISA business, acquired in Q1 2025, also affects our financials. Looking ahead to Q4, I want to mention that we'll likely address tariffs, so I'll hold off on that discussion until the question comes up. Additionally, macroeconomic uncertainty will play a role in Q4 as well. We had a very strong software performance in Q3, which followed another robust software revenue quarter in Q2; however, we don't expect that high level to continue into Q4. These are the reasons we're not anticipating an increase in gross margins for Q4. As Pete mentioned, we're providing guidance that aligns with consensus but are being somewhat conservative considering the current macro environment.

Jason Schmidt, Analyst

Okay. It’s perfect. Appreciate the color. Thanks guys.

Operator, Operator

One moment for your next question. The next question comes from the line of Scott Searle of Roth Capital Partners. Scott, please go ahead.

Scott Searle, Analyst

Hey, good afternoon. Thanks for taking the questions. Great job on the quarter. Pete, maybe just to jump in on North America, down a little bit sequentially, yet gross margins stayed pretty good there. I guess Mike answered that a little bit, but wondering if there's anything in particular going on there, kind of, what the outlook you're seeing for North America. And maybe fold that into Mike's comments about gross margins and tariffs, can you quantify what you think the impact is? What we should be thinking about, whether it's June or as we start to get into fiscal 2026, the impact of the headwinds?

Pete Smith, President and CEO

I believe Michael can discuss the tariffs. In North America this quarter, we had a strong private network business. Looking back, we are currently in between projects with a US Tier 1 customer, which affected our revenue. I often tell investors that a good way to gauge the US private network business is by looking at MSI's report, which indicates that the demand for public safety is robust. We agree with that assessment. Additionally, our second largest application in private networks, utilities, has historically seen underinvestment, but demand is increasing due to factors like video and grid security. We are optimistic about these areas. While we are in a transitional phase with US Tier 1 projects, we hope the next one will commence soon. Regarding the earlier question about the demand patterns in Tier 1s, we believe the capital expenditure has reached its lowest point, and we expect a few more quarters before seeing that reflected in microwave demand.

Michael Connaway, CFO

In relation to tariffs, I've noticed that some of our current actions reflect the strategies Aviat employed during COVID. One of the steps we took was to increase our inventory in anticipation of potential changes in tariffs. Regarding the impact, we estimate that in the short term, this could represent about 2% to 2.5% of our cost of goods sold. Currently, we are putting effort into working with our suppliers to reduce these effects, and we are committed to passing on only what we cannot mitigate to our customers. Concerning gross margins, this may create some pressure on the gross margin rate for owners, but we do not expect any impact on per share earnings. Looking ahead, we believe that treating all our stakeholders fairly will yield long-term benefits for owners. This summarizes our approach to tariffs and its potential impact on our profit and loss statement.

Scott Searle, Analyst

If I could sneak in just a go ahead Pete.

Pete Smith, President and CEO

Go ahead, Scott.

Scott Searle, Analyst

No, I was just going to ask, Pete, in terms of just a follow-up on pull-ins, right? It sounds like you haven't seen them yet, but I just want to clarify that, that you haven't seen them, particularly looking at the North American numbers, that's where I think it would show up. And if I could just throw in the last one. There had been some talk about potential opportunities with a large Tier 1 in MDUs. I'm wondering if you could give us any updates or thoughts on progress on that front. Thanks.

Pete Smith, President and CEO

Pull-ins and push-outs were typical this quarter, with two of each recorded, which is below average for project movements. It’s reasonable to anticipate that there may be more this quarter to counter the tariffs. Regarding tariffs, we've navigated well through COVID, applying the necessary strategies. We recently exited Fukushima and integrated the Pasolink business into our CM, establishing the right processes. As the tariff situation stabilizes, we believe we have the capability to shift our product manufacturing from one location to another, likely finding a cost-effective tariff solution in a couple of quarters. As for MDUs, this trend aligns with the increasing demand for fixed wireless access in apartment buildings, driven by data needs that push capacity requirements to the network edge. This presents opportunities for Aviat technology to be applied beyond traditional backhaul, particularly in high-growth areas of fixed wireless access. The trend could originate in apartment buildings or other categories. Despite some technological constraints with existing architectures favoring our technology, a specific Tier 1 customer recently announced the launch of an MD solution in more than 15 markets, which we recognize. More MDU connections, especially with wireless access, bode well for future backhaul requirements. We won’t comment on others' announcements, but we appreciate that some of our investors have seen Aviat equipment in the field. Lastly, in partnership with Intercom, we've introduced the 28 gigahertz and 39 gigahertz hardware platform for fixed wireless access, along with our Aviat software and services. We are enthusiastic about fixed wireless access, but due to disclosure limitations, I believe this is the appropriate point to conclude. Thank you for your question, Scott.

Scott Searle, Analyst

Thanks. I'll get back in the queue.

Operator, Operator

One moment for your next question. The next question comes from the line of Theodore O'Neill of Litchfield Fields Research. Theodore, please go ahead.

Theodore O'Neill, Analyst

Thanks very much and congratulations on the strong quarter. My first question is about OpEx being able to hold it flat year-over-year. And I mean, looking at the numbers here, it looks like R&D is the reason for it. Could you give us a little background on what's happening there and whether you expect to continue holding OpEx?

Michael Connaway, CFO

Yes. No. our OpEx performance was certainly a bright spot for us in the quarter, and it's something that we've really worked hard on since I joined in particular. We messaged that the second half of 2025 would be lower versus the first half in OpEx because we were rolling off of the transitional service agreement with NEC. And Theo, to your point, in particular, even on a year-over-year basis, it's in our R&D spending bucket. And so that's what you see specifically going on there. It's the TSA and then the DSA, the developmental services agreement with NEC. But kind of moving on and zooming out a little bit, the other important thing that we did in the first part of 2025 was we took the opportunity to prune some additional costs out of the business, and we're also seeing that bear fruit now in an even better OpEx performance in Q3 than we thought we could achieve in the back half of 2025 when we planned our year. So you kind of hit it. It's down on a year-over-year basis a little bit. But as a percentage of revenues, if you look at it in that context, OpEx was just a shade over 24% of sales, which is the lowest it's been in over two years. So I mean, look, you hear a lot of businesses talk about being disciplined, operational executors and whatnot. But where that actually starts at the root is spousing the low-cost mindset in everything the company does. And the good thing is that's something Pete and I share as a common leadership characteristic. So good to see that playing through. You asked, if that's going to continue. And the one word answer is yes.

Theodore O'Neill, Analyst

Okay. And Pete, in your prepared remarks, you mentioned you're having strategic communication with U.S. customers about doing more business with US suppliers. Is that something that would be incremental to sales driven by the tariffs?

Pete Smith, President and CEO

I wouldn't suggest including it in our model just yet, but it's a potential opportunity that wasn't available before the tariffs were in place. That's why I mentioned that it might take around 12 months to fully develop. Some of our larger customers are considering this, and we believe we have the largest operational presence in US microwave assets. If the tariff situation continues, this could be advantageous for Aviat. While we're finding it challenging to predict the costs associated with the tariffs in this evolving landscape, I wanted to acknowledge that if tariffs remain, our footprint could create opportunities for US-focused business as well.

Theodore O'Neill, Analyst

That makes sense. Thanks very much.

Operator, Operator

One moment for your next question. The next question comes from the line of Dave Kang of B. Riley. Dave, please go ahead.

Dave Kang, Analyst

Yes. Thank you. Good afternoon. Pete, regarding your outlook, if you strip out the first three quarters, the midpoint looks to be around $130 million, $131 million. So that's about $18 million, $19 million sequential increase. Just wondering if you can go over some of your assumptions, I mean, what will drive that $18 million, $19 million sequential uptick?

Pete Smith, President and CEO

Yes. No, Dave, I wouldn't approach it that way by removing Q1 or using the math you just described. What we're aiming for is aligning with the consensus for the year, which we believe is the correct target for us. If you calculate revenues based on the current consensus, it would indicate that we expect to generate between $116 million and $120 million in revenue. In light of the quarter, that's our perspective. Therefore, the sequential growth of $20 million that might result from averaging or excluding Q1 is not what we're projecting for the fourth quarter.

Dave Kang, Analyst

Got it. And then just a couple on the geography. First, so North America Tier 1s didn't sound like they really picked up, but they were muted in Q2 and Q3. Just wondering if you're seeing any activities out of those guys going into this quarter?

Pete Smith, President and CEO

It's normal activity at the level between projects. We're working on securing a few more projects. The Tier 1 CapEx spending was structured with the expectation that it will increase in probably two quarters. That's our perspective.

Dave Kang, Analyst

Got it. And then similarly, Africa, that was kind of muted last quarter or Q2. Just wondering what you saw out of those customers?

Pete Smith, President and CEO

Yes, nothing new or out of the ordinary, but you alluded to it, and it's kind of a roughly flat environment.

Michael Connaway, CFO

I think Africa is limited by currency constraints. The availability of dollars and euros in Africa is restricting that. In a lower interest rate environment, I believe that would improve, but I don't expect it to improve significantly until interest rates stabilize.

Dave Kang, Analyst

Got it. Thank you.

Operator, Operator

One moment for your next question. The next question comes from the line of Tim Savageaux of Northland Capital Markets. Tim, please go ahead.

Tim Savageaux, Analyst

Thanks and good afternoon, and congrats on the results. My first question is about seasonality, especially, in the US. And you seem to have followed that pattern here down in March. We've seen that the last couple of years, we've also seen a 20% plus. I don't know if that's seasonal or just coincidental, but I think it's seasonal. Increase in the June quarter. I guess this year, is there anything that would lead you to conclude you might see something different? Are there some potential offsets on the international side to work against that? Or how do you see your outlook for US revenues in the context of that seasonality?

Michael Connaway, CFO

No. The guidance we are affirming at this point aligns with the consensus. If you consider what Q4 might look like in terms of revenue, there will be some growth compared to Q3, but not a 20% increase. As you mentioned, there have been years when Q4 significantly outperformed Q3. However, for us, the uncertainty in the market regarding tariffs and the broader economic situation made us cautious. I wouldn't say there is a specific factor dampening our outlook that we need to highlight. That's my perspective on the situation.

Pete Smith, President and CEO

Yes. We are cautious about raising our expectations. Michael mentioned that our book-to-bill ratio was over one. The bookings for this quarter are looking strong as we are five weeks in. We believe the demand environment is positive. However, we recognize that demand in Africa is subdued, likely due to interest rates, and we are currently transitioning between projects with our U.S. Tier 1 clients. We agree with the published comments regarding Motorola's demand situation. Overall, I think this provides a solid overview of the demand landscape.

Tim Savageaux, Analyst

Okay. Great. And Pete, you mentioned several times now being between projects from a Tier 1 standpoint and just looking to get a little more color on that. I think at least maybe pre-Pasolink, you had Verizon threatening 10% of revenue here and again. I assume they're much lower now. What I'm trying to get a sense of is to the extent you're no longer between projects, what sort of impact that could have in the business from a revenue perspective of going back, whether it's more 5G or fixed wireless access? What could that look like from a business perspective?

Pete Smith, President and CEO

Yes. So just to comment on the customer concentration, we don't have any single customer over 6.5% of revenue. And let's say the U.S. Tier 1 kicked in, it could be a top-line lift anywhere from 2.5% to 5% of revenue.

Operator, Operator

One moment for your last question. The last question comes from the line of Rustam Kanga of Citizens. Rustam, please go ahead.

Rustam Kanga, Analyst

Great. Thanks guys. Thanks for taking the question. And nice adjusted EBITDA outperformance. Just one on the tariffs. Michael, I appreciate you providing the upper bound of 2% to 2.5% on COGS. Just sort of thinking about your comment about only passing on surcharges to customers that you couldn't mitigate yourselves. It sounds kind of like if the COVID playbook stakes out, then you wouldn't need to do that and the upper bound on the surcharge would be that 2% to 2.5% to get you to margin neutral. Am I thinking about that correctly?

Michael Connaway, CFO

Yes, the approach we're taking involves initially working closely with our supply chain to find offsets. Pete and I are also focusing on longer-term manufacturing alterations. We're somewhat supported by a strong supply base in the U.S., which we believe is top-notch in our industry. We already have some advantages in this area. After addressing these mitigation strategies, we'll consider passing on any remaining costs. Given the current level of uncertainty, it's crucial to treat all our partners with respect and collaboration. I want to be clear in my communication regarding tariffs, emphasizing that the impact on earnings per share should be neutral, though there may be a slight negative effect on gross profit margins in the short term. However, I believe this approach is best for our long-term objectives. This provides insight into our strategy as a company and details on our efforts to manage costs.

Rustam Kanga, Analyst

Super helpful color. Thanks, Michael.

Operator, Operator

This now concludes the question-and-answer session. I would now like to turn it back to Pete Smith for closing remarks.

Pete Smith, President and CEO

We'd like to thank everyone for joining and your interest in Aviat. We will talk to you again in another quarter, and thanks again. Bye.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.