Good day, and thank you for standing by. Welcome to the Aviat Networks' Fourth Quarter Fiscal Year 2022 Earnings Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Andrew Fredrickson. Please go ahead.

Thank you, and welcome to Aviat Networks' fourth quarter fiscal 2022 results conference call and webcast. You can find our Form 10-K, 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 2 hours. With me today are Pete Smith, Aviat's President and CEO, who will begin with opening remarks on the company's fiscal fourth quarter, followed by David Gray, our CFO, who will review the financial results of our quarter and fiscal 2022. Pete will then provide closing remarks on Aviat's strategy and outlook, followed by Q&A. As a reminder, during today's call and webcast, management may make forward-looking statements regarding Aviat's business, including, but not limited to, statements relating to financial projections, business drivers, new products and expansions, the impact of COVID-19 and the 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 made on this call can be found in our 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 in the IR section of our website at www.aviatnetworks.com and financial tables therein, which included 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?

Thanks, Andrew, and good afternoon, everyone. Thank you for joining us to review Aviat Networks' results for the fiscal fourth quarter of 2022. The company continued to focus and execute on our key long-term targets of growth, margin expansion and bottom line improvement, despite persistent supply chain headwinds and inflationary challenges. For the fourth quarter fiscal year 2022, the Aviat team's hard work and commitment resulted in revenue of $77.4 million, which represents growth of 8.0% versus Q4 of last year; adjusted EBITDA of $9.1 million, a 31% increase versus the same period prior year; non-GAAP EPS increase of 52%; a strong debt-free balance sheet; continued share buybacks of $0.75 million. For the full year fiscal 2022, Aviat achieved revenue growth of 10.2% to $303.0 million, which also represents our second consecutive fiscal year of double-digit top line growth; adjusted EBITDA of $38.3 million, a 17% increase over last year; non-GAAP EPS growth of 24%; repurchased $5.4 million in Aviat shares. These financial results reflect the continued demand we see for our products in the market. In fiscal year '22, we increased our global share of demand and added 175 new customers. This demonstrates we have the differentiated offering to take accounts from the competition and grow. In North America, in fiscal year '22, we grew market share by 6% and are now #1 overall in the region. On top of this, in North America, Q4 was our best bookings quarter in over a decade. And in the rest of the world, we continue to gain traction and post encouraging results and bookings. We see five main factors for our success in fiscal year 2022, strength in private networks; innovation of our multi-band solutions; further evolution of our software offering; traction and expansion with the Aviat Store; and our ability…

Thank you, Pete, and good afternoon, everyone. During my remarks today, I will review some of the key fiscal 2022 fourth quarter and full year financial highlights. Noting our detailed financials can be found in our press release filed this afternoon. As a reminder, all comparisons discussed today are between fourth quarter and fiscal 2022 and the fourth quarter of fiscal 2021, unless noted otherwise. For the fourth quarter, we reported total revenues of $77.4 million as compared to $71.7 million for the same period last year, an increase of $5.7 million or 8.0%, driven by strong growth in Europe, Asia Pacific and Latin America. North America, which comprised 63% of total revenue for the fourth quarter, was $48.8 million, an increase of $2.4 million or 5.1% from the same period last year, driven primarily by our private networks business. International revenue was $28.6 million for the quarter, an increase of $3.6 million or 13.3% from the same period last year. As Pete mentioned, our backlog grew by 9.0% year-over-year to $245 million, continuing our trend of trailing four-quarter book-to-bill ratios above 1, which started in fiscal 2018. Gross margins for the quarter were 35.5% and 35.7% on a GAAP and non-GAAP basis as compared to 36.1% and 36.2% in the prior year. Gross margins remained under pressure from inflationary headwinds and expedite costs related to supply chain disruptions. We also incurred additional costs to overcome the Asian COVID-related lockdowns, which primarily impacted our freight expense. Our mix this quarter was weighted towards our longstanding projects in backlog. As a result, our previous price actions were less impactful. Fourth quarter GAAP operating expenses were $22.2 million, an increase of $0.1 million from the prior year. Fourth quarter non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation and…

Thanks, David. Just a few additional comments before opening up for Q&A. Fiscal year 2022 represented a significant year for Aviat Networks. The company continues to grow. We announced our first acquisition in greater than 10 years and are well on track to realizing the planned synergies. We announced our partnership with MaxLinear to develop the next-generation, System on Chip, which will ensure our differentiation for years to come. This will be a more capable commercial alternative based on a newer generation of technology than competitor chips. The new generation will enable us to deliver ultra-high capacity payloads over longer distances with the lowest possible total cost of ownership. Additionally, this chip will consume less power and create advantages in cost, system design and supply chain. Our strategy from a few years back was to work with MaxLinear as a strategic chip development partner and innovate in systems. This strategy has yielded significant product differentiation, as you can see from our market success and current product offering. With the latest partnership agreement with MaxLinear, we feel confident we have the right strategy for the future as well. Based on the company's outlook, we are establishing our 2023 guidance, inclusive of the Redline Communications business: Revenue for fiscal year 2023 to be in the range of $330 million to $340 million and adjusted EBITDA to be in the range of $43 million to $45 million. With that, operator, let's turn the call back for a few live comments and then open up for questions.

Certainly. Thank you. Pete Smith, your line is now open. Please go ahead.

Yes. We just wanted to give a quick update on the Ceragon Extraordinary Shareholder Meeting. We are disappointed in the results. We remain interested in the transaction. However, for there to be a transaction, there needs to be engagement. And to date, there has been very little. And since this has been a public offer, the information is in the public domain, and we don't believe that there is very much else to say. So with that said, we'd like to turn it back to the operator and start the question-and-answer period.

[Operator Instructions] And our first question comes from the line of Scott Searle from ROTH Capital.

Pete, Dave, nice job on the quarter. Maybe just to dive in on the gross margin front. Certainly, headwinds on that front as it relates to inflationary cost component availability, the lockdowns in China and the freight costs. Could you quantify the impact that you saw in the June quarter? And we've had some, I'll call it, a thawing on that front. What are you seeing in the immediate future as we're looking into the September quarter and into the back half of the calendar year here?

Yes. I want to shy away from specific quantification, but it was a fairly large impact on our margins in the quarter, probably in the tune of 60 basis points, 70 basis points. What we see, looking forward, is actually an absence of those headwinds, and we expect pretty good margin progression as we head into fiscal '23. So it's a little bit of a onetime event that we expect to continue the improving trend that we had seen in previous quarters starting up in 2023.

Great. And maybe looking at the services side of the equation, very good quarter, I think, both from a top line perspective and a gross margin perspective. I wonder if you could give us an idea, was there anything unusual in there in terms of onetime benefits And particularly now going forward, is that a normalized level to be thinking about the gross margin performance, particularly as we start to see contribution from Redline coming in? And Pete, maybe from a high level as well, I know you gave the $20 million guidance for Redline for the current fiscal year. But how are you expecting that to flow into the P&L over the next couple of quarters? How is your early integration on that front going?

Maybe you go first.

Yes, I'll start off on the services margin question. Yes, we had a very good quarter in services margin. That was driven by North America. We had some very, very good projects. But we've also been very focused on execution and taking cost out of our service offering. So we've made some good headway there. Do we expect to maintain those that level of service margin? Probably not at that level, but we don't see a reversion to where we had been historically. We expect improved service margins overall.

Okay. And then on the Redline part of your question, we've been aggressive in the way we've managed our supply chain. And Redline, we're starting to run that standard operating process on Redline. So we think that if you want to calendarize that $20 million, it will ramp through the year. And we'll also be able to get our operating system in there and start to reduce cost. With respect to how -- in the prepared remarks, we said that we're ahead of our planned synergies and that's really on the SG&A front that we are -- our thesis when we bought it, we thought that we could take cost out. And that thesis has proven out to be true over the first seven weeks or so of ownership.

Got you. And if I could, just two last ones. Just on the guidance you gave, guidance for the year. I'm wondering if you could calibrate sequentially, how you're thinking about things on the front? Sounds like the gross margins start to come back. But if you were to net out Redline, how are you seeing September shape up? And then that macro view for fiscal '23, Pete, what's the thought in terms of the contribution of RDOF in there and any sort of the other government funding initiatives? And lastly, and I apologize in advance, but the obligatory Ceragon question in terms of, are there next steps for you? And that stated, are there other things and opportunities in the pipeline that you're starting to see that are piquing your interest?

Okay. So those are three questions. So in our guidance, we do not have RDOF in our guidance. So we would say that that's a positive catalyst when that materializes. With respect to the progression, we are a project-based business. In our prepared remarks, we said that we had record public safety. So that would mean that we're in the July to June calendar that you'd see the ramp through the year. But I would expect that there will be some project cutoffs and a little bit of lumpiness from quarter to quarter. But the way our backlog is, you would expect the progression to kind of go up as we move through the year. And then with respect to Ceragon next steps, I would submit that there are -- if there is engagement, there's next steps. If there's no engagement, there's no next steps. The positive outcome for us are raised our visibility, and there's more opportunities for us to grow by acquisition than there had been previously. So while we didn't get the results we wanted in the extraordinary shareholder meeting, it's been net-net positive for Aviat.

And our next question comes from the line of Tim Savageaux from Northland Capital Markets.

I wanted to talk about the booking strength in the quarter, which you called out in sort of multiyear or nearly decade terms. Maybe let's focus on North America and what the drivers were there for Q4. In particular, you did mention some initial spending activity on the RDOF side. And to what extent was rural broadband in general, a factor in that order strength? Or can we attribute most of that to private networks? And I've a follow up.

Yes. Tim, I would attribute most of it to private networks, and that's why we gave the color of six state networks.

Is that in the quarter or for the year?

That was for the year.

And also to follow up on some of the carrier wins. Well, I wanted to see if you could maybe toss out a book-to-bill for Q4, either overall or North America, just given the superlatives you put on the numbers in terms of the year. And I was also interested in the Tier 1 win in Huawei's backyard, I guess. And how significant you view that to be? And what that means both from a revenue perspective and also for future potential wins?

Okay. So I think we -- because we have a lumpy project-based business, we don't like the book-to-bill, and that's why on a quarterly basis, and that's why we said our backlog year-over-year is up 9%. The win in China, that's a demonstration of our ability to deliver our multi-band, which is highly differentiated, and we're using that we're in -- where the spectrum costs are highest in China or the cost of linking towers together is the most expensive. And I wouldn't say we want to raise guidance on that. We brought that up because it demonstrates our ability to compete in Tier 1s and in Huawei's backyard.

Great. Maybe one more follow-up for me, if I may. You're coming off a couple of years organically of double-digit growth here. And looking at a more conservative start to that year organically this year and mentioned that you don't really have much in the way of government or RDOF supported revenue or nothing actually in your forecast. Can that really by itself, I guess, if that were to come through in some reasonable way, puts you back into double digits for '23? And that's it for me.

Yes. I mean that's fair. I mean, Tim, you're probably doing the math on what it would need to be. And if it comes, it could certainly put the core business into that level of growth, yes. And that would be kicking in of the -- either the RDOF funding or the Building Infrastructure Fund, or BIF, H.R.3684. So just -- so we watch those items pretty closely. And if we get the kick in, then that will be a positive catalyst for us.

And our next question comes from the line of Erik Suppiger from JMP Securities.

Can you talk a little bit about kind of some of the demand that you're seeing in Europe? And how much of this is related to the war in Ukraine?

Yes. Our biggest demand is in the UK, and that's a private networks project similar to the bulk of our business in North America. And we previously disclosed that we only had 1 contractor in Russia, and we only had one potential commercial opportunity in Ukraine. So Ukraine-Russian war has had a de minimis impact on us. the bulk of the growth has been driven by private networks in the UK, but we have picked up some Tier 2s in Europe and some ISPs specifically in Germany.

Can you discuss -- obviously, you had some pretty robust growth in Europe. Why is -- why are private networks coming a lot so much for you?

So if we roll back the clock about five quarters ago, we refreshed our commercial leadership because we were not doing very well in the EMEA team. And we've upgraded the team, the teams running our voice customer and our sales funnel process. And now I would say, with that leadership, we understand our value proposition. We chase opportunities that we can win, and our conversion rate is better than it was five quarters ago.

Okay. And Africa was down year-over-year. Was there anything notable that caused that?

Yes. I think that's -- we think Africa is well positioned for growth, and it's really just a low on the CapEx cycle. And I think watch that space in the coming quarters, and you'll see a bounce up there.

And our next question comes from the line of Theodore O'Neill from Litchfield Hills Research.

Backlog, can you give us any information about the mix between products and services? And whether or not you're seeing stronger growth in either one of those?

So yes, we definitely had a mix skewed towards services this quarter. It's typically -- it's probably about 6 percentage points or 7 percentage points higher than it normally is from a mix standpoint. And we also had -- we already talked about the strong execution that increased the margins there. We don't think there's a fundamental shift in the mix between product and services. As Pete said, a project-based business that is going to be a little lumpy, and we're going to have this kind of variability quarter-to-quarter, this just happened to be a strong quarter for services, coupled with positive margins on those services that was good for us.

Okay. And in terms of your North America revenue and market share here being so strong. Is that a particular product area that's creating that for you? Or is that across the board?

So I would say our WTM high-capacity radio is a key product. But one of the reasons we win in private networks across the globe and in particularly in North America is our end-to-end offering. So we do the network design, the network plan, provide the hardware, software and services, sometimes do the install. And sometimes we do the ongoing network monitoring. And that core competency along that those elements of value, is what are the components of the winning value proposition.

And our next question comes from the line of Orin Hirschman from AIGH.

Congratulations on the result. I just wanted to drill down again on Redline. How much of Redline revenue was in the past fiscal year?

Past fiscal year is about just over $19 million.

Yes. So yes, so $19 million…

…[applies to that Redline specific number?]

We are in about $19 million. So we're signing up for nominal growth while we restructure the business and get our voice of the customer and sales funnel process in place. So that's -- we want to make sure we get the cost out, get the business off of the Canadian exchange and get it the resources deployed and run our voice of the customer and sales model process. So we're -- so that's what we're doing with Redline in the first 12 months.

Okay. Where I'm going with the question is just to understand the organic growth rate, even without Redline considering how the backlog has risen and the book-to-bills have been positive. It would seem like -- again, I don't know the timing of the orders on the book-to-bill, but it would seem like it gives you running room, especially not counting anything from RDOF or the infrastructure buildout.

Yes. So we want to make sure that we give guidance that can hit. You're right that we have RDOF upside if we can pull in the backlog, we can -- and as we execute that, we'll revisit our guidance as we go through the year.

Okay. And my final question is on the software side. I know you mentioned there are additional software offerings coming you alluded to. Can you say anything more about that or even just the timing?

So we launched our about 1.5 years or two years ago, the FAS, Frequency Assurance Software. Then we -- in the last quarter, we launched our Health Assurance Software. And we're contemplating a couple of other assurance softwares to build out our software suite and help network operators run their networks at a lower total cost of ownership. And we would say within the fiscal year, we will launch our next Assurance Software and build our advantage there.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Pete Smith for any further remarks.

I'd like to thank everyone for your continued interest and your call -- your attendance on the call. We'd like to thank our suppliers, customers, employees and shareholders, and we look forward to speaking with you at the end of Q1 and giving you an update on our progress.

This concludes today's conference call. Thank you for participating. You may now disconnect. Good day.