Good afternoon, and welcome to Aviat Networks' Third Quarter Fiscal 2023 Earnings Conference 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. And now, I'd like to turn the conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. You may begin.

Thank you, and welcome to Aviat Networks' third quarter fiscal 2023 results conference call and webcast. You can find our Form 10-Q, press release, an updated investor presentation in the Investor Relations 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 CEO, who will begin with opening remarks on the company's fiscal third quarter, followed by David Gray, 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 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 the 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 on September 14, 2022. The company undertakes no obligations 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 Investor Relations 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 CEO, Pete Smith. Pete?

Thanks, Andrew, and good afternoon everyone. Thank you for joining us to review Aviat Networks’ results for the third quarter of fiscal year 2023. Aviat executed against its plan this quarter and we continue to position ourselves to grow from our business drivers of 5G, rural broadband and private networks, as well as improving bottom line results. In the third quarter fiscal year 2023, Aviat delivered revenue of $83.5 million, which represents growth of 12.0% versus Q3 of last year. Non-GAAP operating income of 11.0% adjusted EBITDA of $10.8 million of 14% increase versus the same period prior year. Let's discuss some key highlights from the third quarter. 5G, our business sees healthy demand related to 5G opportunities. In the U.S. wireless backhaul spend for network build-outs continues to be strong and we believe that this is poised to continue. Internationally, we are still in the early innings of the 5G upgrade cycle. We see increased planning at Tier 1s and Tier 2s that lead us to believe there will be healthy demands for years to come. To be specific, we are optimistic about several projects on the horizon with MTN Group in addition to our Bharti Airtel business. We're also working request for proposals for several other international Tier 1 and Tier 2 operators. Some of these opportunities are result of the decisions made by operators to replace our largest global competitor. Our share gain funnel against this competitor remained strong with over $36 million in year-to-day bookings and over $14 million in year-to-date revenue. We'll continue to execute on these opportunities to take share of demand. We remain confident in Aviat’s ability to compete and win an attractive set of international Tier 1 and Tier 2 business with our leading solutions and our commitment to providing customers compelling…

Thank you, Pete, and good afternoon, everyone. During my remarks today I'll review some of the key third quarter fiscal 2023 financial highlights. Noting our detailed financials can be found in our press release and 10-Q filed this afternoon. As a reminder, all comparisons discussed today are between third quarter fiscal 2023 and third quarter fiscal 2022, unless noted otherwise. For the third quarter, we reported total revenues of $83.5 million as compared to $74.5 million for the same period last year, an increase of $9 million or 12%, driven by strong growth in APAC, Europe, Latin America as well as the contribution from the Redline acquisition. North America revenue, which comprised 55% of total revenue for the third quarter was $46.1 million, and international revenue was $37.4 million. We continue our trend of trailing four quarter book-to-bill ratio above one started in fiscal 2018. Gross margins for the quarter were 35.7% and 35.9% on a GAAP and non-GAAP basis as compared to prior year margins of 37.0% and 37.1% for GAAP and non-GAAP. Current quarter margins were impacted by regional mix from lower sales in the highest margin region of North America. Third quarter GAAP operating expenses were $22.3 million, an increase of $2.3 million from the prior year, driven by the inclusion of the Redline operating expenses. Third quarter non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation and deal costs were $20.7 million. This is an increase of $1.4 million from the prior year, wholly due to the Redline acquisition. On a like-for-like basis, we continue to manage costs aggressively. Third quarter tax provision was $2.2 million, an increase of $0.9 million to last year. We continue to report our non-GAAP tax expense at $0.3 million per quarter based on a reasonable estimate of…

Thanks, David. Before opening up for Q&A, I'd like to add a few comments and summarize our performance. Thus far, in fiscal year 2023, we have been focused on capitalizing on our long-term growth drivers of 5G, rural broadband and private networks. We are encouraged by the progress the team has made in taking market share and capturing additional share of wallet around the world, which demonstrates the value of Aviat's differentiated products, software and services. This will help to increase profitability and shareholder value over the long term. Based on this strong demand environment and our execution to-date, we are raising the bottom end of our revenue guidance and affirming our profit guidance for fiscal year 2023, which is now as follows: revenue for fiscal year 2023 to be in the range of $341 million to $347 million and adjusted EBITDA for fiscal year 2023 to be in the range of $45 million to $47.5 million. With that, operator, let's open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Scott Searle with ROTH MKM. Your line is now open, Scott.

Hey good afternoon. Nice job on the quarter, guys. And thanks for taking my questions.

Thanks Scott.

Maybe just to quickly dive in, on the services front, revenues were high this quarter and so were the gross margins. I was wondering if you could address that a little bit in terms of mix issues or otherwise and how sustainable that level is, both from a sales perspective and a gross margin perspective as we’re going into the June quarter.

Yes. Scott, how are you doing? It’s Dave. Yes, so we had a nice bounce back in the quarter for our service margins. They were a little depressed, as we spoke about last quarter due to some -- the vagaries of the ASC 606 revenue recognition standards, but that didn’t hit us this quarter. I think we would like to say that is a sustainable level, but I think a more realistic level over the long-term horizon is really kind of closer to the 35% range. And then as far as the size of the revenue, it was just a function of the mix of projects that we had in the quarter that was driving that.

Got you. And if I could, on the RDOF front, it’s nice to see that it sounds like some of that activity is finally percolating. It sounds like it’s in the design and planning phases now. So, I guess it skews towards the second half of this calendar year when we start to see some revenues. Could you clarify a little bit about and maybe the magnitude as well, you said there were four RDOF customers that you’re working with. Maybe is there some idea to think about the magnitude of that opportunity. And maybe throw on top of that as well, the Defend our Networks Act, which is basically recent legislation that’s been introduced in Congress to try and fund the gap or plug the gap on the rip and replace program. I know that wasn’t a big opportunity necessarily for you guys, but I’m wondering if you’re seeing any derivative opportunities coming out of that for you guys.

Okay. So on the RDOF funding, right, we’ve said once it get started, it will peak three years to four years out, and it will run tail off over the next six years or seven years. So we would see that -- we still believe that to be true. We do think we will have some revenue impact in the back half of the year. But how we space out the design activity that we’ve had through the peak is a little bit difficult. I think we need to see how those projects shake out. At least two of the customers were in the top 10 of the RDOF recipients. So, we’re pretty happy with the prospects of the customers that we’ve engaged. And we think we have 35% to 40% share of rural broadband. So we’re in good shape. And I think to give us another couple of quarters as we go from the design phase into the ramp phase and then we could be more specific with respect to the impact on our overall program. But we’re super excited about this because if you roll back the clock the last couple of years [indiscernible] one is RDOF we respond. We think it’s coming. We think it’s coming. We don’t have it in our guidance. We got a little bit of revenue this quarter. We want to give it another quarter or two, and then we could be more certain with respect to what the investment community should expect. Then pivoting to the legislation, you mentioned. So there is little impact. I believe this is the Huawei Rip and Replace legislation. There is less than 50 -- we stopped tracking this about two years ago when there was 50 remaining microwave Huawei radios. So it’s not material for the U.S. market. But what we can say about that competitive dynamic, we booked $35 million of either share gain in networks that we’re competing with them or Rip and Replace. So we feel that legislation that you highlighted is not so material to the North American market, but the overall trend is favoring us.

Great. And lastly, if I could, Pete, maybe some updated thoughts on India. You got the big order from Airtel going back into late 2022. I’m wondering if there are some Phase 2, Phase 3 opportunities that you’re seeing percolating and any thoughts in terms of inorganic opportunities for you going forward? Thanks.

So with respect to India, it’s -- we’re still in a very good position with that customer as they build out their network. And it’s a project. So sometimes there’s a surge, sometimes there is a lull, and they’ve been digesting our shipments, and we think that, that will pick up again in the back half of this calendar year. And the feedback we’ve gotten on our performance there is favorable. So we think we’ll have a chance for share gain. And what I would also say in the script, we highlighted the multiband vendor-agnostic multi-band. And what’s really critical, we have the only single-box multi-band and now we’ve made that set up to be vendor-agnostic. So when we’re in a network where we’re not sole sourced, it facilitates share gains. So, we’re hopeful there. And then on the M&A front, we would say we closed the Redline transaction on July 5 last year. The integration has gone better than we anticipated, and that’s helped would-be sellers engage us, and we continue to be active in evaluating and I hope in the next six months to 12 months, we’re announcing -- getting another deal across the goal line.

Pete, one last one, if I could. On the private networks front, specifically with Redline, how has that tracked in terms of -- from a revenue perspective? Is that in line with plans, ahead of plans? How is the pipeline on that front? Thanks.

So we did not justify that transaction with any revenue synergies. And we had our first win this quarter. So, we think that there is upside. And the funnel for the -- let’s call it the revenue synergy funnel is now over $10 million. So we need to see how we’re converting that. And until the quarter, I wouldn’t have talked about that because we didn’t get anything across the goal line, now we have. And I think going forward, we’d like to see a few more get across the goal line and then factor that into our guidance.

Great. Thank you.

Thank you. Our next question comes to the line of Erik Suppiger with JMP. Your line is now open Erik.

Yes, thanks for taking the question. On the Huawei front, I think you said $36 million is backlog and $14 million in revenue. I want to just to be clear, those are separate amounts. Those are incremental to each other. And then do you have any update on -- I think you had talked last quarter about there being a funnel of about $60 million. Have you -- and I think that was deals that you had identified. Is there any update on deals that you’ve identified in the market that could be replacement of Huawei?

Yes. I would say our deal funnel rate is about $65 million. So it’s grown a little bit. And the -- yes, I did say that it’s about $36 million that has now entered backlog. And you cited another number, Erik that I didn’t pick up. So if you could ask it again. So funnel of $65 million, backlog $36 million is about right. Did you want color on it?

Did you say you had $14 million in revenue from those? Did I hear that wrong?

I did.

Is the $14 million incremental or separate from the $36 million?

It’s not in the backlog because we’ve already shifted.

Okay. I just want to be clear. In terms of the Redline, are you seeing competitors, players like Ubiquiti or Cambium -- or who are you competing with in some of that business?

So Redline is significantly engineered mission-critical access point. So, we don’t compete at all with Ubiquiti or not at all to my knowledge. So let’s say that -- maybe 1% of the opportunities compete with Ubiquiti. I think that they’re in a different segment. And on occasion, we do compete with Cambium. But yes, that’s what I would say.

Who are you seeing? Is it the likes of Ericsson that you would see more frequently?

Yes. A little bit of Ericsson, a little bit of Nokia.

Okay. And did you say -- you had mentioned the deal earlier, you had talked about a deal with Redline. Was that selling Redline into an existing customer? Or was that new deal a completely new customer to Aviat?

Redline into a historical Aviat customer.

Okay, very good. Okay, thank you.

Thank you. Our next question comes from the line of Tim Savageaux of Northland Capital Markets. Your line is now open, Tim.

Okay. Good afternoon. [Technical Difficulty]

Excuse me, Tim. We’re unable to hear you. It’s muffled.

What about?

That’s great. Great.

Can you hear me now?

Yes.

Yes.

All right. Sorry about that. New headphones. Well, I’ll dispense with my cheek reintroduction and go straight to the question. So it sounds like for the Huawei replacement, that’s $50 million in bookings, $14 million shipped and $36 million in backlog, is that right?

So we said, we have about a $65 million funnel, $36 million in backlog and about $14 million shipped.

So yes, adding the revenue plus the backlog.

Okay.

Get you 50 million, yes.

Yes. Okay.

All right.

David’s better at that.

Well, I only go through that just to say that’s a pretty good book-to-bill, generally speaking. And so you mentioned your – I think in your discussion on the private networks business that that backlog continues to build and the book-to-bill remains above one. On the carrier side, I think you seem to kind of address some of these high level CapEx concerns and note that they really didn’t apply to you on the one hand. But on the other, with that type of booking dynamic and Huawei replacement, is it safe to assume that the bookings on the carrier side, which you described as one third, are that book-to-bill is much higher than what you’re seeing on the private network side and any color or order of magnitude there would be appreciated?

Yes, I think with what you said, that is probably reasonably accurate, although we don’t typically disaggregate our book-to-bill between carriers and private networks.

Yes. So, I think if we did the work, your estimate is directionally correct, Tim.

Great. And well, let’s dig into some of the tier one commentary that you made. Obviously MTN was a 10% customer in the quarter. Does that reflect some of the wins that you talked about or are those still in front of us or can you discuss kind of the overall kind of profile with at MTN there, given there’s current customer, but there seems like there’s some new business opportunities there?

I think I would say we – it’s both. We have wins and we have more wins in front of us. We had a great meeting with them at Mobile World Congress, and I think part of it is the Huawei issue, and it’s part of it’s our multi-band offering has got their attention and so some of the share gains that we have been in Africa, and we think that there’s more to come.

Great. And last question for me, I guess you mentioned kind of a push on the weather related issue which I’ve certainly seen a lot of here in Southern California. But in addition, and probably some plain old fashioned positive seasonality into June. But I want to kind of circle back to India. And obviously you saw APAC come down pretty substantially sequentially in the quarter, and that has the – can be very lumpy, but is sort of resumed high level of activity in India. Is that part of your kind of implicit fiscal Q4 guide for a pretty significant bounce up in revenue? Or are there any other drivers to note there?

I actually think our next lump in APAC is probably in the back half of the calendar year. So not our Q4. We think North America is poised to have a great end of the year and then continued growth across the international regions. I don’t anticipate at the end of the year that it’ll be driven by India just given the cycle or the sequence of the – of that network buildup.

Okay. And let me just follow up on something you just said there, real last question here. But given that expectation for strength in North America, should we assume gross margins pick up sequentially from a mixed perspective on that?

Yes. So you squeezed a little more good news out to me, Tim.

Thank you very much.

Thank you. One moment for our next question comes from the line of Dave Kang with B. Riley. Dave, your line is now open.

Thank you. Good afternoon. First question is, Pete, backlog, I think I missed it. What was the number? I think you said last quarter was over $245 million. What was this quarter?

It remains over $245 million. great. So, we only – the backlog number once a year end. But here, just to give qualitative perspective on this, we started at $245 million every quarter through the year. We have – our book to bill has been greater than one. So we think when we – at the end – at next quarter, we’ll report our backlog and expect it to be over $245 million.

Got it. And then just wondering about your lead times. I mean, your products are lead times. Has it gone up or down or any color on that?

Our lead times are stable. So, our – and we had our operating review last week and our on-time deliveries have never been better. So I actually don’t have our lead times handy, but I think, so I can’t rattle them off, but we – in our operating review, we look at our on-time delivery, they haven’t been as good as they are in over three years. And what we do our competitive benchmarking on lead times, we think we have an advantage over our competition.

So some of your peers have reported that they’re lead times are shrinking. So that’s one of the reasons why backlogs are starting to go down. I mean, will be – will that be kind of a similar with your situation if your lead time start to shrink your backlogs starts to go down?

So our lead times, right? So we did some, let me go back to the beginning of the supply chain crisis. So we bought a lot of inventory that we need to work down, but we bought it starting in the February, March of 2020. And the reason we did that was because we were worried about our suppliers getting sick and missing shipments. Well, that actually didn’t happen, but then shortly thereafter ensued the supply chain crisis. So through the last three years, we’ve carried more inventory. We’ve largely kept our pre supply chain crisis lead times the same. So we’re not – we didn’t have extended lead times. So we – if you look at our lead times, and I can get back to you on what our lead times were pre-crisis and now, but they’re the same. So, we’re not going to have a demand gap, which is what a lot of the supply chain questions are about. We’re not going to have a demand gap because we can shrink our lead times. We – our comments in the script about the demand environment, we think the demand environment is good at first – good. And we do not see any change in the demand profile due to lead times our ability to supply or any of that. And let me go one step further. If you roll back the last 12 quarters of earnings announcements, the most revenue we missed in any one quarter was $2 million. And typically, it’s gone between zero and $2 million. So we do not have very much historically over the crisis we didn’t have very much pent up demand due – missing supply, and this quarter we didn’t have any. So, we don’t have any catch up demand. Our ability over the last three years to serve demand has been steady. And it’s largely been because we were worried about COVID and the COVID didn’t make our suppliers get sick and miss shipments. But then it positioned us well to go into the supply chain crisis.

Got it.

And I think that one other point, our backlog is largely premised on the timing of projects and our ability to execute and install out in the field more so than any kind of supply constraint.

Yes.

Okay.

Got it. And my last question is on the Redline revenues. Still on track for $20 million this fiscal year. And then how should we think about – where does that $20 million go to – for next fiscal year?

Yes, we're on track for $20 million. We're on track to deliver a little bit more on the EBITDA line. And I'd like to just get a little bit more traction in the synergy sales before we put that number out, but it's trending in the right direction, Dave. So wait one quarter and we'll give you an update.

Got it. Thank you.

Thank you. One moment. Our next question comes from the line of Theodore O'Neill of Litchfield Hills Research. Your line is open, Theodore.

Thank you very much. Two questions. First is, so the North American revenue was down year-over-year with strength in service partially offsetting product sales. And service strength was strong overall for the quarter. Is there a dynamic there between the service and products or does that just reflect your – the project nature of building out systems?

It's definitely the project nature of building out systems. And if we link back to Tim's question about our last quarter of the year, right, the project nature, it puts some lumpiness in the business, and we see a lot of the projects in North America hitting. And that's why when I was asked if we expect margins to go up in our fourth quarter, the answer is yes. So it's really the lumpy nature of a project-based business deal.

Okay. And so unbilled receivables are up $10 million in the quarter. Does that have any implication for the upcoming quarter sales?

No. I mean the – what is an unbilled has been recognized as sales, but it's based on the dynamics of the contract. It is sales recognized but do not have the ability to invoice the customer for yet because of the contract structure of milestone payments or one invoice at the end of the project or things of that nature.

Okay, thanks very much.

Thank you. One moment please. Our next question comes from the line of Paul Essi with William K. Woodruff. Your line is now open Paul.

Thank you for taking my questions. First question, if you could maybe share a little bit of information on this new agnostic frequency assurance product. What do you think the total addressable market is right now? And where would you see that – best guess maybe a year or two out? And how much can you guys reasonably capture of that market? And along the same lines, what's the timing of that agnostic HAS product, if you can share that?

That was a long [ph] question. So we are in trials with a North America Tier 1. We're hopeful that, that translates where we will – on the FAS, we will release that – on the FAS we have a private network trial underway. And I think what this does is – I'd rather not comment on the software TAM. But what it does, similar to the multiband vendor agnostic, it helps us compete in multivendor networks. And we think the microwave market is $3 billion in size, and we're less than 10% share of the microwave piece. What we think is it's going to help us win more radio business at higher margins because our software will work on competitive radios. And then the other part of your question, in June, we will release the HAS piece. And so we think the back half of the calendar year that we should start to have revenue there.

Okay, great. One last question. Labor issues. Are you or your customers are you seeing any labor constraints trying to get these technicians to deploy the product? And also along those lines, do you expect maybe in the next six to 12 months as this – some of the stimulus starts to roll out that the market tightens and there'll be some shortages of labor?

We have great relationships. We have some of our own install folks, and we have great relationships with third parties. We have not run into any labor install issues. This quarter, we have labor that couldn't apply mountains due to the snow pack, but we have not seen any labor issues, and we are not factoring in any labor issues going forward. I think a lot of our installers were their preferred vendor, and there's no capacity issues on that front.

Okay, great. Thank you. That’s all I had.

Thank you. One moment. Our next question comes from Erik Suppiger with JMP. Your line is now open.

Yes. Just a quick follow-up. What is the timing of the backlog of orders for the Huawei replacement? Are those orders where they extend out where Huawei contracts are expiring or is that something that's going to get replaced relatively near term?

I would – the backlog will play out over the next six to 12 months. With respect to the contract situation with Huawei, that's difficult to answer. And because it's not been – typically, that's not disclosed to us, right? So what we think there's two things that are driving it is the network security and the interruption in Huawei's supply chain. But look, I don't think our customer or anyone who is dependent on Huawei is going to share their contractual situation, probably give us a little bit too much leverage in the negotiation.

Very good. Okay, thank you.

Thank you. Our next question comes to the line of Aaron Martin with AIGH Capital Management. Your line is open, Aaron.

Hi, thank you very much. Pete and David, great quarter. On the RDOF wins that you got and you said that you haven't really incorporated into the guide because you have to get a sense of the schedule. Should I imply from that, that these were multi-year booking wins that you're not sure where you're going to on the schedule the roll out?

They're basically network design and planning at this stage. And we think the funding is multiyear, but the initial POs are to get going and they're not a multiyear PO. But we think that there's – we think that there's multiyear demand behind it.

Okay. And on the software side, I think you said that you expect to see recognizing revenue into the existing – you mentioned 200,000 radios that could benefit from this. I think you said expect to recognizing revenue in Q4. Was that calendar Q4 or fiscal Q4 next year?

So let me be clear, the FAS is in trials. So the vendor-agnostic FAS is in trials. So I don't think we'll see say, the back half of this year, we'll see revenue for that as those trials mature into orders. And then on the HAS where we – the HAS that we have on the Redline products, that will be released for sale in June. Maybe we get an order on that, but we would certainly see in the back half of the calendar year, we will expect pass on Redline's products sales.

Okay. Great, thank you. Congratulations on the progress.

Thanks.

Thank you. I would now like to turn it back to Pete Smith for closing remarks.

Great. Thanks, everyone, for joining and your continued interest in Aviat. We look forward to our next update and keeping you informed of the progress. Thanks for the support. Have a good evening.

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