Earnings Call Transcript - AVNW Q4 2025

Operator, Operator

Hello, everyone, and welcome to Aviat Networks' Fourth Quarter Fiscal Year 2025 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Andrew Fredrickson, Vice President of Corporate Finance and Interim CFO. Thank you, and you may begin.

Andrew Fredrickson, Vice President of Corporate Finance and Interim CFO

Thank you, and welcome to Aviat Networks' Fourth 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. 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 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 on the IR section of our website at www.aviatnetworks.com in the 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?

Peter Smith, President and CEO

Thanks, Andrew, and good afternoon. Let's review the highlights from the fourth quarter. Total revenues of $115.3 million, non-GAAP gross margin of 34.7%, and record adjusted EBITDA of $15.1 million, up 26.7% versus the year-ago period. This marks our third consecutive quarter of setting a new record adjusted EBITDA figure, non-GAAP EPS of $0.83, up 15% year-over-year. These quarterly results are a testament to our entire team and reflect the hard work, dedication and commitment we have to our customers and our shareholders. Let's discuss our end markets and key developments. In private networks, Aviat continues to deliver for our public safety and critical infrastructure companies including utilities and oil and gas companies with our reliable secure backhaul, complemented by our access and routing portfolio. In public safety, we remain a leader with sustained share of demand and expect a good environment in the year ahead. Industry research shows that overall city and state budgets for fiscal year 2026 are growing by 4% and 6%, respectively, and even more relevant for Aviat, allocations to city police and fire budgets are growing by 5%, and states are growing public safety budgets by 8%. This backdrop of funding growth aligns with land mobile radio or LMR network upgrades to better support video and data communications which creates growing demand for Aviat's suite of backhaul radios, routers and services. Our backlog in North America remains high, thanks to multiple large statewide public safety networks. Although our federal business is relatively small compared to our state and local government business, there are expanding opportunities as a result of the One Big Beautiful Bill Act, which has allocated $17 billion for the support of state and local law enforcement and border security and $6 billion for border technology. This will create opportunities for Aviat, given our leadership in public safety networks. Moving on to our mobile service provider market. The fourth quarter represented a rebound in spending from U.S. Tier 1 versus earlier in the fiscal year and strong revenues from certain APAC countries, our revenues from Pasolink are in line with our goal of $140 million in annualized revenues. We made a commitment to our shareholders that Pasolink revenues would be at this level exiting fiscal 2025, and we are happy to have delivered. Looking ahead, we believe that fiscal 2026 will have a broader set of opportunities for Aviat to grow versus fiscal 2025 based on mobile service providers' CapEx plans globally. Many emerging market operators are still early in building out their 5G networks, and we believe there will be opportunities for Aviat to participate in these network build-outs. The North American Tier 1 market should also be stronger than in previous years, thanks to efforts to build out fixed wireless access. Regarding our rural broadband business and the Broadband Equity Access and Deployment program, we see increasing utilization of wireless solutions for this segment compared to initial estimates which we think is wise given the speeds and capacity delivered and the cost and speed to deploy wireless versus fiber. For example, New Mexico's final BEAD proposal awards 40% of serviceable locations to fixed wireless access providers and Washington State awarded 39%. Kansas awarded 50% of locations to hybrid and fixed wireless access solutions. This technologically neutral approach will create more opportunities for wireless backhaul, and we look forward to working closely with the states and rural broadband providers to service this program. We continue to believe that we will not see revenue impact from BEAD until calendar year 2026 and will not include it in any financial guidance until we have better visibility. Last quarter, we said that we anticipated an impact to Aviat from tariffs, but we had the goal of offsetting most, if not all, of the impact on our bottom line. Thanks to the tireless work by our operations, finance and sales teams, we have indeed seen minimal impact to Aviat's profitability as a result of tariffs thus far. We have moved nearly $1.5 million worth of supply purchases from China. We continue to execute on our plans to mitigate the impact of tariffs and are pleased with the progress Aviat has made. On the product development side, Aviat Networks recently introduced our new European Telecom Standards Institute Compliant or ETSI radio. This opens up a new market opportunity for us, thanks to industry-leading power which allows customers to build networks over longer distances with fewer towers and smaller end tenants which substantially reduces total cost of ownership. The radio is all-indoor design also simplifies maintenance, enhances safety, providing a reliable and cost-effective solution for mission-critical applications. This radio has been a leading solution in North America, and we are excited to bring it to our international markets. I would now like to turn the call over to Michael and Andrew to review the financial results of the quarter before coming back for closing remarks and our fiscal 2026 guidance.

Michael Connaway, CFO

Thank you very much, Pete. I would like to say a few words before turning it over to Andrew. When I decided to join Aviat, it was because the company was successfully executing its strategy to scale in the wireless communication industry, had a strong technical offering for its customers, and was made up of great team members. All of these things remain true today. Aviat is in very good hands with Pete and Andrew at the helm. Andrew, over to you.

Andrew Fredrickson, Vice President of Corporate Finance and Interim CFO

Thanks, Michael. I'll review some of the key fiscal 2025 fourth quarter results. Please note that our detailed financials can be found in our press release and all comparisons discussed are between the fourth quarter of fiscal year 2025 and the fourth quarter of fiscal year 2024, unless otherwise noted. For the fourth quarter, we reported total revenues of $115.3 million as compared to $116.7 million for the same period last year, a decrease of $1.3 million or 1.1% year-over-year. North America, which comprised 50% of our total revenues for the quarter was $58.0 million, an increase of $1.8 million or 3.2% from the same period last year due to growth in private networks. International revenues were $57.3 million for the quarter, a decrease of $3.1 million or 5.2% from the same period last year. This was driven by timing of certain international mobile network projects. Our trailing 12-month book-to-bill was over 1x, in the quarter. Backlog as of the end of fiscal 2025 was $323 million versus $292 million a year ago, up 11%. This growth signals continued demand for Aviat's products and services and sets the company up to execute on our growth plans in fiscal 2026 and beyond. Gross margins in Q4 were 34.2% on a GAAP basis and 34.7% on a non-GAAP basis. This compares to 35.3% GAAP and 35.9% non-GAAP in the prior year. The change in gross margin is primarily due to regional and customer mix in the quarter. Fourth quarter GAAP operating expenses were $30.6 million versus $35.7 million in the year-ago period. Non-GAAP operating expenses which exclude the impact of restructuring charges, share-based compensation and deal costs were $27.1 million, a decrease of $4.1 million versus the prior year. This decrease is due to disciplined cost management and increased efficiencies at Aviat. Fourth quarter operating income was $8.9 million on a GAAP basis and $12.9 million on a non-GAAP basis. This compares to $5.5 million GAAP and $10.6 million non-GAAP in the year-ago period. GAAP income before taxes in the fourth quarter was $10.2 million versus $4.6 million in the year-ago period. This is an increase of $5.6 million or 121% and represents a quarterly record for Aviat. The fourth quarter tax provision was $5.0 million. As a reminder, the company has over $450 million of net operating losses or NOLs that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. Fourth quarter GAAP net income was $5.2 million and non-GAAP net income which excludes restructuring charges, share-based compensation, M&A related and other nonrecurring expenses and the noncash tax provision was $10.7 million. Fourth quarter non-GAAP earnings per share came in at $0.83 on a fully diluted basis, up by $0.11 or 15.3% versus the year-ago period. Adjusted EBITDA for the fourth quarter was $15.1 million or 13.0% of revenues, an increase of $3.2 million or 26.7% versus last year. This is our third consecutive quarter of setting a new record on quarterly adjusted EBITDA for Aviat. This achievement is thanks to the execution of the entire Aviat team. Moving on to the balance sheet. Our cash and marketable securities at the end of the fourth quarter were $59.7 million. Our outstanding debt was $87.6 million, bringing our net debt position to $27.9 million. With that, I'll turn the call back to Pete for some final comments.

Peter Smith, President and CEO

Thanks, Andrew. We are happy that we were able to deliver another set of strong results for shareholders and close out fiscal 2025 with momentum heading into fiscal 2026. As part of our year-end audit, we did identify material weaknesses in our control environment. While we made progress in improving our control environment over the last year and remediating two material weaknesses identified last year, we still have more work to do in the year ahead. We will continue to invest further to improve our resources, processes, and testing to remediate our material weaknesses. Moving on to our fiscal 2026 guidance. Based on our current outlook, we see full year revenues to be in the range of $440 million to $460 million, full year adjusted EBITDA to be in the range of $45 million to $55 million. We expect that our business will build throughout the year with the first quarter being the lowest revenue quarter and the fourth quarter being the strongest revenue quarter. With that, operator, let's open up for questions.

Operator, Operator

One moment for our first question from Theodore O'Neill with Litchfield Hills Research.

Theodore O'Neill, Analyst

Great. I wanted to go back and ask about fixed wireless access for business and multi-dwelling unit opportunities. It seems like every telco is promoting this right now. And I'm wondering, do you have any sense if that's because they're discontinuing DSL over copper or it's BEAD funding or there's no fiber access? What's driving that? And what's making that work right now?

Peter Smith, President and CEO

Well, I think one, the buildings in the U.S. our single-family housing is not being emphasized, but multi-dwelling units or, when I was a kid, known as apartment buildings are being preferred and they achieve price points. So with that, that's what's driving the kind of the residential units. And then beyond that, with respect to access, in dense cities, fiber makes sense. But as you get away from the urban center, wireless applications become more interesting or more prevalent. Is that helpful, Theo?

Theodore O'Neill, Analyst

Yes. And on the BEAD program, are you seeing any delays in there that are coming out by the government trying to delay certain funding of different programs? Or is that just moving along as you expect?

Peter Smith, President and CEO

It's hard to say that the BEAD program is moving along as anyone would expect. But in our script, we noted several states that are taking advantage of the technological neutrality and changing the mix from fiber to wireless. So we're extraordinarily encouraged by that. With that said, we would also say the BEAD funding will be impactful in calendar year 2026. So one of the problems with BEAD is it's always been a tomorrow story. We've never put it in our guidance; it's still not in. But we're seeing the most positive signs around BEAD funding flowing that we've seen since the program was announced.

Operator, Operator

One moment for our next question from Tim Savageaux with Northland Capital Markets.

Timothy Savageaux, Analyst

Congrats on another strong quarter. My question was relative to your outlook for fiscal '26. And in the middle of that range, I think you're at sort of 4%-ish type growth. And I want to try and relate that to some of the commentary earlier in the call. I think I can't remember the exact metrics, but you talked about funding increases, 5% to 8% in state and local; 11% backlog growth where it looks like you got basically three quarters in backlog. So I guess, is there anything out there that's going the other way that might meet that growth outlook, especially given the weakness you had in September a year ago that you would point us to relative to what appears to be a stronger environment?

Peter Smith, President and CEO

Tim, it's a fair question. A year ago, Q1, we underperformed. And until we put that year-over-year quarter in the rearview mirror, we want to be conservative. I think you properly noted the environmental drivers, and we want to acknowledge that. And we also want to prove ourselves one more quarter, another quarter before we would get ahead of ourselves.

Timothy Savageaux, Analyst

Okay. Understood. And then with regard to the Tier 1 carrier environment, and you could take this both North America and globally, do you see any kind of differing trends if you look at North American Tier 1s versus your global 5G customers from Pasolink? And then maybe any comments about the carrier versus private network market; do you see any meaningful difference in growth rates there in '26?

Peter Smith, President and CEO

Let me start with the last point first. We expect better growth from the private network sector compared to the carrier market. Unfortunately, we ended the year with over 55% in private networks and 45% in carrier market. Thankfully, our portfolio is aligned with the higher growth segment. The decline in the North American wireless sector is expected to continue into 2024, but we anticipate slight growth in the latter half of this year and into next year. It's more challenging to assess the international segment, but we are focused on emerging markets that currently lack connectivity compared to more developed economies, which is a positive outlook. Our operations are project-based, so we expect some quarters will perform well while in others, demand will be absorbed. We mentioned in the earnings script that our setup for this year looks better than last year, largely driven by public safety and utilities within our private network segment and the connectivity needs in emerging economies from the network operator perspective.

Operator, Operator

Our next question is from Scott Searle with ROTH Capital.

Scott Searle, Analyst

Congrats on record EBITDA quarter. And Mike, I just want to say it's been a pleasure working with you, and congrats and best of luck in your future endeavors. Guys, maybe to just dive in on the quarter, the revenue mix was heavily skewed towards services and higher gross margins on that front. I'm wondering if you could talk us through some of the dynamics in the June quarter that got us to that point. And then as we look out immediately into the September quarter, how are you seeing the product revenue correct and gross margins on that front? And then I had a follow-up.

Andrew Fredrickson, Vice President of Corporate Finance and Interim CFO

Okay. Yes, Scott, this is Andrew. For the quarter, services performed well, and the margins were strong across all regions, showing improvement from the previous quarter. This was partly due to the mix of projects we had, which contributed more significantly to overall revenue. I want to emphasize that margins on our services improved across all regions.

Scott Searle, Analyst

Got you. Andrew, as we look ahead to the September quarter, how does that align? Following up on Tim's earlier question, it seems like there is a lot of positivity in what you're observing. The demand environment appears to be quite robust, and private networks seem to be developing both from federal and local government perspectives, as well as from the private sector. Additionally, it looks like the carrier environment is recovering, at least from the Tier 1 North American perspective. Is your cautious outlook for fiscal '26 based on conservatism, or are there specific issues related to services and project-based revenues that are prompting some immediate caution for the September and December quarters?

Peter Smith, President and CEO

Our business operates in a lumpy, episodic, or project-based manner, and we observe a progressive build-up quarter-over-quarter. We anticipate that Q1 will be the lowest point, with Q2 and Q3 likely being on par with each other, while Q4 should see the highest performance. This indicates a pattern where Q1 is low, Q2 is high, Q3 sees a slight dip, and Q4 reaches the peak again. As we reflect on our portfolio year-over-year, we are becoming more accustomed to core operations, including Aviat, the Pasolink portfolio, and the 4RF Aprisa. Consequently, understanding the revenue cycles for each customer base has posed some challenges due to seasonality and timing issues. However, we feel confident about this approach based on our historical data across the entire portfolio.

Scott Searle, Analyst

Congrats on the quarter.

Operator, Operator

As I see no further questions in the queue, I will conclude the Q&A session and pass it back to Mr. Smith for concluding comments.

Peter Smith, President and CEO

Okay. Thanks, everyone for jumping on the call on short notice. We look forward to updating you after our September quarter gets done, and we get ready to publish our next set of results again. Thanks, everyone.

Operator, Operator

And with that, we thank you for participating in today's conference, and you may now disconnect.