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.

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, today's -- 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 Form10-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?

Thanks Keith and good afternoon everyone. Thanks for joining us to review a successful quarter. The company continue to execute on our key long-term focus areas of growth, margin expansion, and meaningful bottom-line improvements. The Aviat team 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 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 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 and distance, have greater ability to overcome weather effects like rain, and use smaller antennas,…

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 entries 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 continue 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…

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 and 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 Instructions] Your first question comes from the line of Theodore O'Neill with Litchfield Hills

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

Thank you.

Yes. So, some questions. First question is about margin. My second question is about SG&A. So, in the Q and in your prepared remarks, you mentioned margins this quarter compared to previous year were impacted by inflationary pressures, supply chain logistic bottlenecks, you just mentioned that that was expedite fees was initially to get around the supply chain logistic bottlenecks. And I know that last quarter, you talked about having -- trying to keep a higher level of inventory on hand to avoid running into some of these issues. So, can you talk a little more specifically about where you're seeing both the inflationary issues and the logistic bottlenecks?

Yes, so -- yes, thanks, Theo. So, the inflationary aspects and the logistic bottlenecks are in the same -- coming from the same place, principally, the semiconductor suppliers, right? So, sometimes, our suppliers decide to increase price and other times they -- to get chips, you need to pay an expedite fee. And what I want to do is talk a little bit about that. So, in the quarter, we had what we call cost inflation of 440 bps. And David Kang asked last quarter about whether or not we were going after price or surcharges or recovery, and we are doing that -- we were able to execute on 110 bps of price recovery. And then we had favorable mix of 240 and that left us net 100 bps. What we would say about the environment is that inflation is moderating. Hopefully, that persists. And our recovery, as we look forward, will improve, right? And I'll talk a little bit about the recovery in a second and how it lines up with our business, right? Some of these expedite charges or these cost increases, they're nearly instantaneous. So, the recovery takes a little bit of time. So, we think with the environment, given no change in inflation, there will be net positive by our Q4 fiscal year 2022. And a little more color on the recovery. Our business cycle -- we kind of have three different business cycles; our short cycle business, which is really tied to our e-commerce and all of our price/surcharge actions are in. Our mid cycle business, which is our international mobile network operators, that takes about a quarter or so to get in progress or in place, or for that backlog to work its way out. And we have that in place and we'll start to get some lift from that going forward. And then our private network business is a long cycle business, and that's -- that'll take a little bit longer to play out. So, that kind of highlights our -- we did have significant cost inflation in the quarter. We have started to execute on our price/surcharge recoveries. We thank our customers for their incredible cooperation in a difficult environment. And we think over the next couple of quarters, we'll be able to fully offset the inflationary pressures, as long as the inflationary environment does not deteriorate. Is that helpful to Theo?

Okay. Yes, that's helpful. That's good. So, the next question I have is about SG&A, which was below year ago and down sequentially. I know you're not -- you don't give up guidance for SG&A but can you -- since you talked about coming down as a result of some restructuring, can you give us an idea, at least, qualitatively about whether this should rise through the rest of the years stay the same or continue to go down?

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.

Okay. Thank you very much.

Thanks. Thanks Theo.

Your next question is from Scott Searle with ROTH Capital.

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

Thank Scott.

Just to dive in quickly and follow-up to the prior questions. Looking at the favorable mix in the quarter, I was wondering if he 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 shells 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 in 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?

Start off with mix and Pete you can take the next one. The mix is driven, primarily private networks as evidenced by the larger increase in North American volume have anywhere else where private networks dominate. So, that was certainly the big driver as well as some software and licensing revenue as well. So, in terms of revenue that we didn't get out to -- I would say would be to $2 million to $3 million, that if we had a better performing supply chain, we would have been able to achieve. And -- so Scott, what did we not answer?

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 progressed directionally from there? Are there anything in particular that you're worried about from a supply standpoint?

Yes. So, we think that we're managing the supply chain, better than a lot of folks in the industry. With that said, thousands of components go into a microwave radio and if one of them doesn't come, then we'll get hurt. But we're starting to feel that we -- so let's -- if you give me the exception that I'm I might get impacted by a single supplier at the end of the quarter, we're feeling neutral to positive on our ability to navigate the supply chain, but I also need the out because of the uncertainty overall. But if we don't have a one-off event, we feel that the supply chain will be the same, if not slightly better in the next quarter.

That's great. I'll take neutral to positive all day long. Pete, digging in a little bit on some of the geographic mix, it sounds like you start to get some wins in Europe. Historically, that just hasn't been a big revenue base for you guys. So, I'm wondering if you can elaborate on that a little bit in terms of what's going on in the pipeline? Is that a bigger opportunity for you? And maybe we've wildly into the conversation there, what do you seeing -- what are they showing up or they not showing up?

So, that European win that's in our shareholder letter that was airwave in the U.K. Our leadership -- we changed leadership about a little over a year ago, in the EMEA region, building the funnel and we think that Europe is on the upswing. So, we feel very good about Europe with respect to private networks and our Tier 2 operators. So, Steve's doing a good job there. And then, with respect to Huawei share gains, we see that those opportunities in Eastern Europe, Africa, and Asia-Pac and a little bit in Latin America. And we think that -- well, we know that our funnel, and we don't know what the conversion rates going to be and how the cycle is going to be. We have $60 million of opportunity in our funnel, this is -- this opportunity is new to us and a bunch of other folks. So, we don't know how the competitive dynamics are going to play out, and what the time is going to be. But there are $60 million of -- Huawei -- formally, Huawei had a lot hold on, and we're stranglehold and now we're getting up to bat. So, we're encouraged about that and we hope over the next couple quarters, we can talk about some share gains there.

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.

We -- yes, I think you've got that right, that would be a positive catalyst in calendar year 2022 as the yard up funding hits.

Great. Thanks so much. Nice quarter.

Thank you.

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

Thank you. Good afternoon. I guess my first question is regarding chips. So last quarter, you thought that the pressure -- inflationary pressure was stabilizing, because you mentioned that lead times were stabilizing or hasn't been stretched out in the last couple of months. Is that still the case? Or has things changed since then?

Yes, I think neutral to positive is same as last quarter, right? And some folks have asked me when do I think this gets better, right? I listen to all the -- the CEOs of semiconductor companies and read all the literature. And my guess and this is a guess and you can take it for whatever it's worth is. I think the environment starts to improve after in April. After we get through the Christmas season and Chinese New Year, but that's my guess. I would say, though, just the environment that Aviat's exposed is neutral and where the positive comes from as we we're not getting worse. Lead times are stable. And we've had a couple of months of stability. So we think that there should be -- it should start to get better. But with that said, if one of our suppliers has an exceptional event, we will get hurt. So I'd like to be more precise, so that we could run our business better, but that's the best information I can give you. Does that help at all?

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, so 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?

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 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.

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?

Yes. So this environment is -- everybody likes to throw around the word unprecedented. It is unprecedented. And so for our short-cycle or e-commerce that was done instantaneously. And then for our bigger customers, it was a negotiation and effective. But we -- I'm pretty familiar with bringing in demand ahead of a price increase. And I would have to say that that was de minimis and it's certainly not material. To be honest, in my past role is, I've seen that, I can't point to a single example where we saw demand pull in ahead of a price increase.

Got it. Thank you.

Your next question comes from Tim Savageaux with Northland.

Good afternoon, and congrats on the quarter. Let's talk a little bit about rural broadband. Pete, I don't think you're going to guess my first question, whether -- what sort of proximity we are to that magic 10% revenue number with regard to rural broadband or any update as to when we might get there, and I guess, I'll couch it with the following promise, which is when you were at our rural broadband forum, I think you had mentioned an additional four out of wins to get you to 13, apparently, you've been busy in the last month and picked up two more. So as you look at that, and considering the addressable market out there I guess, in addition to that, achieving that milestone, you talked about kind of a 40% or so market share in rural broadband. Do you think you're in a position to run above that now? And I'll follow-up in a second here.

So yes, we put in our investor presentation that our estimate is pretty close to 40% share. Look, with these new wins, it's possible that we could trend up as the ARPA funding takes hold. And I think a couple more quarters of performance and the flow of the ARPA funding should balance us over that 10% hurdle. So we're -- right, look, I think I said that, we would be -- we would get there by the end of this fiscal year and more confident in that and if it's not by the end of this fiscal year it might be sooner. Tim? Is that helpful?

Got it. It sure is. And just to follow-up on the ARPA front and I'll have one more after that. But -- so you talked about 15 of the top 30 overall award recipients, I guess, and then I'd ask two questions on that, which is, can you estimate the total funding received by those 15 that you've won from ARPA? Question number one. And question number two, are those only wireless guys? I mean, to the extent you've got 15 and you're working on 5 more, it seems like there could be some fiber guys in there, too? Or is this all fixed wireless in terms of access to the opportunities?

No. While we can't get the -- so we should tell you, let me go back and figure out how many of you guys that we can never get because they're fiber, but there are some of other in the top 30. And your question about estimate the funding received. We haven't done that, but we'll take that as an action. So those are both fair questions.

Yes, I think that's worth doing, and shifting over internationally. You mentioned a pretty strong order quarter. I don't know, if you want to throw out any kind of international book-to-bill metrics, but if you did, that would be great. But the interesting thing is that based on some of the locations that you've called out these are not locations that are legendary for booting out Huawei. And so when you talk about -- not all of them talked about a very large Tier 1 maybe that's it. So when you -- I want to dig into that dynamic a bit more when you talk about share gain. Can you be more granular about that given that, again, it's not like we're talking about the U.K., or the Western Europe, or Japan, or areas that have been explicitly kind of moving Huawei out, put some of the locales are that probably the areas that they're hanging on the best. So are those competitive wins and not political wins? I guess, I'd say on the one hand, and on the other, if there's another share game dynamic outside of Huawei, we'd love to hear more about that?

So, you ask a hard question. So the dynamics, it's difficult for us to decipher. And in our voice of the customer process, we asked whether the engagements are due to politics or supply chain? And the answers are both or mixed. Sometimes it's supply chain, sometimes it's politics. And we want to know, so that we understand the dynamics that we can try and replicate it. But we are getting both answers. And at the end of the day, we're kind of indifferent as long as we get up to that. And then a little more color on where they're coming for -- from. Our value proposition internationally is strongest with our multi-band and with are in regions that have high spectrum cost, because our total cost of ownership is strongest. So we're seeing operators that are having difficulty with either Huawei supply chain or the political environment -- the geopolitical environment is changing. And the high spectrum costs, that's where we are seeing the biggest opportunities. So have I been fully responsive to your question or…? Q – Unidentified Analyst: Absolutely. Thanks very much.

Sure.

[Operator Instructions] Your next question comes from Aaron Martin with AIGH Investment Partners.

Hi. It's Aaron Martin with AIGH. A lot of the questions been asked already, particularly by Scott. But congratulations on a nice, preceding breaking out your revenue buckets in those three pieces of e-commerce in the market and guards retained to passing through the price increases. If I were to look at those three buckets and sort of how much of your revenue can you cut -- how much of your revenue is in each one of those buckets?

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.

Got it. As -- but it's going to be more gradual as we get in over the next nine to 12 months, because of the long lead on the vast majority of the business?

That's fair. Yes.

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?

Yes, we typically only talk about 12 months trailing due to the project nature, the project nature and the fluctuations. So we look at our book-to-bill over 12 months. And that's what we are comfortable disclosing, here. But I'll -- let me give a little more color. Whenever we’re writing the script, I was going to talk more about supply chain and the difficulties and how comfortable we are with the demand environment. So we're pretty comfortable with demand. And a lot of our team -- management team’s focus is going towards delivery. So we feel good about the demand environment.

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.

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

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

Very good.

Thank you.

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

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

Thanks.

Well, it was accretive that was -- that's my personal opinion. But just in terms of the overall business, if there would not have been constraints on the supply, do you have any clue how much more you could have shipped in the corner?

I think we said 2 million to 3 million.

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?

I'd say it's the same. Yes, I think the momentum is the same. The private network teams are doing a great job. The opportunities are the same. If -- and there's potential positive catalysts around RDOF funding, and we build that better. So I'd say, it's the same with some possibility for improving.

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

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.

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.

Yes. So the additional applications we expect in the next 12 months to launch a follow on offering to FAS that would, we're not ready to talk about or detail but would be additive to FAS and would solve more network operator problems. And we would say our software business is still small. It's going well, and it was a positive contributor the mix that we cited as the mix which was we had favorable mix and part of that was due to software. And the last thing I would say, while this is not standalone software, but our high availability routing software was released in the quarter and what we are -- we think that's going to help with private networks. But we're also starting to find internationally that there could be attraction and that's a positive surprise for us.

Great. And thanks so much.

Thank you.

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

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.

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

Thank you, Stephanie.

Thank you, sir.