Earnings Call Transcript - AVNW Q1 2021

Operator, Operator

Good afternoon. Welcome to Aviat Networks First 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'd 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, Global Finance and Investor Relations

Thank you and welcome to Aviat Networks fiscal 2021 first quarter 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. As for today, Pete Smith, Aviat's President and CEO will begin with opening remarks on the company's first quarter, followed by Eric Chang, our CFO, who will review the financial results. Pete will then provide closing remarks on Aviat's strategy, outlook and will be followed by our Q&A. As per the Safe Harbor, 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 involve assumptions, risks and uncertainties that could cause actual results to differ materially from these statements. 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 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 Pete. Pete?

Pete Smith, President and Chief Executive Officer

Thanks, Keith and good afternoon, everyone. I hope everyone is remaining safe and well as we continue to face the challenges of COVID-19. Thanks for joining us to review what was, in many respects, a record quarter for the company and a quarter where our execution across our key long-term focus areas yielded many positive results for the business. During the quarter, we benefited from improving sales, operational execution, progress on our restructuring efforts, as well as increased software sales and improved mix. Adjusted EBITDA more than doubled in the first quarter, coming in at $8.4 million for the quarter, up $4.2 million or 103% versus the same period last year, up over 52% from our fiscal fourth quarter 2020 and equaled 62% of our reported full year 2020 adjusted EBITDA of $13.5 million. Our balance sheet remains strong with our net cash position up $3.6 million from the fourth quarter and up $10.7 million from the same period last year. As I've mentioned on our prior calls, we are striving to demonstrate consistency and improvements in our performance by being laser-focused on four key focal areas: increasing revenue, capturing Aviat's differentiation, driving down costs, and ultimately increasing overall shareholder value. During the first quarter, we made excellent progress on all these fronts. Due to strong focused sales execution, partnership expansion and new customer wins, first quarter revenue increased almost 6% sequentially from our fourth quarter 2020 and 13% from the year ago quarter. North American revenue increased over 14% year-over-year, with international revenue returning to growth, improving 10% year-over-year. During the quarter, we continued to capture Aviat's differentiation with wins for our multi-band transport solution for 5G, demonstrating the viability of our offering. Our 10-gigabit capacity single-box multi-band radio platform provides the industry's simplest multi-band solution, which lowers customers' total cost of ownership by reducing microwave spectrum costs. We recently received initial orders for our Frequency Assurance Software, or FAS, a unique and proprietary software system for interference monitoring and analysis, providing customers increased network reliability and uptime. The Aviat FAS solution provides our customers with necessary data analysis to work with regulators regarding interference issues, and is critical to the reliability of mission-critical microwave links, especially with the emergence of Wi-Fi 6E, which allows unlicensed devices to operate in a key microwave band in the U.S. As I mentioned before, our Software and Services platform is a key focus for long-term growth. While we were pleased with the progress we've made thus far, we look forward to announcing new software solutions that will benefit our customers. Additionally, we also released our extra high-power mission-critical radio into the U.S. federal market, which will allow us to expand our business in this important segment. We continue to make progress on improving and optimizing our cost structure and remain on track to realize annual cost savings of $3.5 million as a result of our announced restructuring plans and other cost savings initiatives. We currently expect approximately $2-plus million of these savings to benefit fiscal year 2021 with significant credit to all of our Aviat team members, our suppliers and partners. Before turning the call over to Eric, let me provide a couple of additional observations and insights. First, during the first quarter, our North American business continued to perform with the team working hard to expand sales and seize upon Aviat's unique products and services differentiation. The North American team continues to drive our core products for 5G applications. Emerging 5G networks require backhaul solutions that have both the capacity to meet the growing data demand and the automation to simplify the ever-growing complexity of networks. Our solutions deliver capacity and reliability, innovations in all parts of the network to meet mobile operators' 5G challenges. Finally, the team continues to leverage the industry's only e-commerce platform, the AviatStore, to provide service and value to our rural broadband customers. With the AviatStore, customers can receive quotes and purchase Aviat's microwave products directly online, removing margin stacks from the business. As such, we are disintermediating the value chain to provide a more economical sales channel with higher customer satisfaction to these rural customers. We believe we are well positioned to capitalize on the significant growth opportunities in rural broadband, driven in part by over $30 billion of current and planned FCC funding to subsidize the cost of building new network infrastructure and upgrading current networks for growing rural broadband needs. We've already seen growth in our rural B2B business recently from the $1.2 billion CAF II auction and believe there could be meaningful upside in that business from the $20 billion Rural Digital Opportunity Fund and the $9 billion fund for rural America each launched earlier this year. Turning to international growth opportunities, our international team began to implement our new commercial sales strategy, which includes defending Tier 1 telecom business, winning new Tier 2 accounts, expanding our reach through partnerships and capturing value where we are differentiated. While early in its execution, we are starting to see the benefits of our international strategy pay off, with international revenues up more than 10% versus the year ago period, reversing the trend of contracting international revenues since fiscal 2018. To further support our international strategy, during the first quarter we strengthened our international sales team with the hiring of a new Vice President of Sales for Europe, Middle East and Africa regions, Steve Toteda, and Vice President of Sales for our Asia Pacific regions, Wen Lien. We welcome Steve and Wen to the Aviat family and look forward to great things from this organization. With that, let me turn the call over to Eric to review our financials before coming back for some final comments. Eric?

Eric Chang, Chief Financial Officer

Thank you, Pete and good afternoon, everyone. During my remarks today, I will review some of our first quarter financial highlights rather than reading through all line items, as they can be found in both our Form 10-Q and press release. All comparisons are between the first quarter of fiscal 2021 and the first quarter of fiscal 2020, unless noted otherwise. We reported total revenue of $66.3 million in the first quarter as compared to $58.6 million for the same period last year, an increase of $7.7 million or 13.1%. North America, which comprised almost 69% of total revenue for the first quarter was $45.5 million, an increase of $5.7 million or 14.4% from the same period last year, driven primarily by our private network business. International revenue returned to growth, coming in at $20.8 million for the first quarter, as compared to $18.8 million for the same period last year. We also exited the first quarter with a backlog over $200 million. First quarter gross margin remained strong, 36.6% and 36.7% on a GAAP and non-GAAP basis, respectively, compared to 38.5% and 38.6% for Q1 of fiscal 2020. First quarter GAAP operating expenses were down approximately 16% year-over-year, coming in at $17.7 million for the first quarter of 2021, compared to $21 million for the same period last year. Non-GAAP operating expenses, which exclude the impact of restructuring charges and share-based compensation, were down approximately 12%, $17.2 million compared to $19.5 million last year. Both GAAP and non-GAAP operating expenses decreased primarily due to cost savings initiatives implemented in the second half of fiscal 2020, including our announced restructuring plans, a slowdown in hiring and reduced travel. First quarter non-GAAP net income was $6.9 million, up nearly 138%, compared to $2.9 million for the same period last year, with first quarter non-GAAP EPS coming in at $1.24 per share, compared to $0.52 per share for the same period last year. Adjusted EBITDA for the first quarter was $8.4 million, a 103% improvement from the $4.1 million we reported for the same period last year. Moving onto the balance sheet, our cash and cash equivalents at the end of Q1 2021 was $36.2 million with no loan or debt outstanding. On a net cash basis, our cash increased $3.6 million from Q4 fiscal 2020. As I mentioned on our last earnings call, we have a credit facility, which is based on eligible AR borrowing base. At the end of the fourth quarter, our loan balance was $9 million, which we fully repaid during the first quarter of fiscal 2021. Given our strong net cash position, and as we anticipate our net cash position to improve throughout the remainder of fiscal 2021, subject to customer timing delays which may occur from time to time based on historical trends, we would naturally draw against the credit facility in the first quarter if necessary. So we continue to have access to that line, if necessary. With that, I'll turn it back to Pete for some final comments. Pete?

Pete Smith, President and Chief Executive Officer

Thanks, Eric. Just a few additional comments before opening up for Q&A. This was a very good quarter for Aviat. We demonstrated that we can execute on our key initiatives and new long-term strategy. We also demonstrated that those efforts are leading to improved financial and operational performance. To put this quarter in context, our results for the first fiscal quarter of 2021 adjusted EBITDA margin was 12.7%, higher than any other quarter on record since the company's inception. While we still have a lot of work to do, it is clear that the team is executing and I'm very proud of our collective efforts thus far. Looking ahead, we feel good about the overall business with obviously the principal concern being the potential impact of COVID-19. Fortunately, during the first quarter, we saw a significant uptick in field service activities as lockdowns had been lifted in many of our customers' sites. While we do anticipate some disconnects and challenges given the COVID environment, we do expect to continue to successfully navigate these situations as they arise, as we have done to date. Given our current view of the business, the progress we've made so far on our strategic plans, and the overall market environment, we continue to expect fiscal 2021 adjusted EBITDA and revenue to grow as compared to fiscal 2020. Specifically, we currently anticipate revenue for fiscal 2021 to be in the range of $245 million to $255 million and adjusted EBITDA to be in the range of $18 million to $22 million. Our key takeaway messages for investors remain focus and execution. We have demonstrated the ability to grow; we plan on maintaining this momentum and path. We must continue to capitalize on the opportunities where we can deliver value. And we must continue to lower our expenses to drive greater profitability and shareholder value. Aviat's long-term goals remain the same: growth, margin expansion, expense reductions, and meaningful bottom-line improvements for all shareholders. Operator, we're now ready for questions.

Operator, Operator

Your first question comes from Theodore O'Neill with Litchfield Hills Research. Priorities for investors remain focus and execution. We have demonstrated the ability to grow, and we plan on maintaining this momentum and path. We must continue to capitalize on opportunities where we can deliver value, and we must continue to lower our expenses to drive greater profitability and shareholder value. Aviat's long-term goals remain the same: growth, margin expansion, expense reductions, and meaningful bottom-line improvements for all shareholders. Operator, we are now ready for questions.

Theodore O'Neill, Analyst

Thank you. Congratulations on an incredible quarter.

Pete Smith, President and Chief Executive Officer

Thanks, Theo.

Theodore O'Neill, Analyst

You haven't dropped that much to the bottom line. Last time you did add twice as much revenue. So a question for Eric: it looks like you're headed for year-over-year reduction in operating expenses. I was wondering if you could give us, sir, what are the highlights there that are making that plausible for you?

Eric Chang, Chief Financial Officer

So you remember, we announced across fiscal 2020 that we implemented two restructuring plans. The goal was to cut both operating costs and actually some of the cost of sales as well. Our target was annualized about $3.5 million and for this year, fiscal 2021, we expected to have at least more than $3 million of that realized in the bottom line. Those initiatives, combined with reduced hiring, reduced travel, and other cost control measures, are the primary drivers of the year-over-year reduction in operating expenses.

Pete Smith, President and Chief Executive Officer

And to add to that a little bit, COVID was catalytic for us to tighten our expense control. We're being more prudent with all the dollars that we spend.

Theodore O'Neill, Analyst

Okay. And, Pete, we do have a win in 5G with the multi-band solution; what are the key drivers for customers there?

Pete Smith, President and Chief Executive Officer

The key drivers for 5G are total cost of ownership and flexibility. Where mobile network operators face high spectrum costs, we deliver value by allowing them to switch between bands at a low cost rather than deploying multiple radios and using more high-priced spectrum. If you think about it like an airliner analogy, we allow the operator to run economy as much as possible, but then when needed, we inexpensively bump them up into business class or first class with our multi-band solution. That capability is very difficult for our competition to match at the price point we've laid out.

Theodore O'Neill, Analyst

Okay, thanks very much.

Pete Smith, President and Chief Executive Officer

That's helpful.

Theodore O'Neill, Analyst

Yeah.

Pete Smith, President and Chief Executive Officer

Thank you.

Operator, Operator

And there are no further questions at this time.

Pete Smith, President and Chief Executive Officer

All right. Well, I'll go to closing. Everyone enjoy and thanks. Thanks to the Aviat team, our suppliers and our customers. It was a great quarter. We're feeling more confident in the business and that's why we gave guidance this quarter as opposed to last, and we're going to stay focused on 5G, on mission-critical networks and our role in the broadband business. We look forward to talking to you in about 90 days. Thanks, everyone.

Operator, Operator

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation. You may now disconnect.