Good afternoon, and welcome to Aviat Networks' First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow with formal presentation. Please note, this conference is being recorded. I'd now turn the conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. You may begin.

Thank you, and welcome to Aviat Networks' first quarter fiscal 2024 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. 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 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, 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 statements made on this call, can be found in our most recent annual report on Form 10-K, filed with the SEC. The company undertakes no obligations to revise or make public any revisions 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 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 Network's results for the fiscal first quarter of 2024. I'm pleased to report that Aviat continued its strong execution and achieved revenue and profitability expansion in the quarter. Highlights from the first quarter includes revenue of $87.6 million, which represents growth of 7.8% versus Q1 of last year. Adjusted EBITDA of $12.1 million, a 13.1% increase versus Q1 of last year. Non-GAAP EPS increase of 16.0%. Strong cash generation in the quarter. Aviat generated operating cash flows of $14 million and ended the quarter with $35.5 million of cash and marketable securities and a debt free balance sheet. These financial and operational results are driven by the continued implementation of Aviat's operating system and made possible thanks to the effort and execution of the Aviat team and our partners throughout the quarter. Let's discuss key highlights of the first quarter. Aviat's exposure across different verticals, geographies, and customers has made our business strong and diverse. We continue to see healthy demand in private networks, mobile networks, and rural broadband networks. In private networks, we continue to innovate in North America. Aviat sales in this region grew 14% in the quarter versus the same period prior year. Thanks in part to the strong private network demand environment. We have executed well and have grown a robust project backlog. We had a record Q1 private network bookings that remain excited about the outlook of this segment. Increasingly, states are turning directly to Aviat for our expertise. Recently, we announced wins of two large state public safety networks, which are examples of this trend. These projects are made possible by the full breadth of products and services that Aviat offers. High power microwave radios, high availability routers, and management…

Thank you, Pete, and good afternoon, everyone. During my remarks today, I'll review some of the key fiscal 2024 first quarter 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 the first quarter of fiscal 2024 and the first quarter of fiscal 2023 unless noted otherwise. For the first quarter, we reported total revenues of $87.6 million as compared to $81.3 million for the same period last year, an increase of $6.3 million or 7.8% driven by strong growth in the Americas and Europe. North America, which comprised 63% of our total revenue for the quarter, was $55.5 million, an increase of $6.7 million or 13.6% from the same period last year, driven by our private networks and Tier 1 business. International revenue was $32.1 million for the quarter, a decrease of $0.3 million or 1.1% from the same period last year. Strong growth in Latin America, the Middle East and Europe was offset by cyclical weakness in African mobile operators CapEx spending. Our trailing 12-months book-to-bill ratio remained above one as it has since fiscal 2018. Gross margins for the quarter were 36.4% and 36.6% on a GAAP and non-GAAP basis as compared to 36.3% and 36.5% in the prior year. The improvement was driven by strong growth in higher margin North American business. First quarter GAAP operating expenses were $26.3 million, an increase of $0.8 million from the prior year. First quarter non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation and deal costs were $21.3 million, an increase of $0.9 million. The increase in both GAAP and non-GAAP operating expenses were driven by higher investment in R&D. Our disciplined cost management continues to deliver operating leverage…

Thanks, David. Before opening up for Q&A, I'll provide a few updates and closing commentary. First, I would like to thank Jim Stoffel for his years of service as an Aviat Board Member. Jim served on our Board of Directors for over 16 years. During that time, he helped navigate Aviat from the merger that created the company, through to the exciting position we were in today as the leading wireless transport company. His leadership and knowledge have been a tremendous asset, and we thank him for all those contributions to the company. Second, we currently expect the NEC transaction to close in December 2023. We continue to progress on regulatory approvals, and the exact date remains subject to customary closing conditions. We can add some qualitative updates. The integration planning is progressing smoothly. Based on our learnings today, we now believe that the transaction will be accretive in the fourth quarter after close as compared to the fifth quarter previously stated. Based on the company's outlook, we are affirming our fiscal year 2024 guidance exclusive of the NEC business. We will update our guidance to include the NEC business after the closure of the transaction. Note that our guidance is on a full-year basis and reflects the project basis of our deployment. In Q1, we had a few projects that were accelerated and positively impacted the quarter. Based on the current project pipeline, we expect Q2 to be sequentially up from Q1. To reiterate, our fiscal year 2024 guidance is as follows. Revenue to be in the range of $367 million to $374 million, and adjusted EBITDA to be in the range of $51 million to $56 million. With that, Operator, let's open up for questions.

Thank you. [Operator Instructions]. One moment for our first question. Our first question comes from the line of Scott Searle with Roth. Your line is now open.

Hey, good afternoon. Thanks for taking my questions. Pete, Dave, great job on the quarter. Maybe just to start, Pete, it sounds like you've got a high degree of confidence in terms of the near term and intermediate term outlook, which is really divergent from what's going on in the rest of the world. I didn't hear India as part of your commentary. I was wondering if you'd give an update there. And then looking at the private networks business, it seems like there continues to be a lot of strength there. How far out do you have visibility on that front? And looking at your fiscal '24 guidance, I was wondering what are the swing factors to the upside? You've been pretty conservative, I think, in terms of how you look to the outer quarters and guide for the year. I'm wondering what the factors are that would help you out to the upside of the range that you've provided?

I think just thinking about India, we see probably 30% year-over-year growth. What quarter that it didn't hit in this quarter, and it's probably more likely to be in the January to June time frame. So we see India as being solid. With respect to visibility in the private network space, we came in with tremendous growth in backlog, our July 1 to June fiscal year. Again, this quarter, we were pleasantly surprised that our bookings of North America private networks were the highest they've ever been in a first quarter for Aviat. And that gives us confidence in the business, in the medium to long-term, because those projects typically, if we get a booking like now, we go into a design phase and revenue can start one quarter to three quarters later. So we think that that is going to play out and our backlog mostly would cover the next 12 months, the next 24 months, and very little goes past the 24 months period. So I think you might ask three questions and I hit on two of them so.

Yes, Pete -- just swing factors to the upside, Pete. Where do you see it? Because it seems like we're early days in terms of ARPA contribution in RDOF. I don't know if there's a number of percentage of the mix that you could quantify now, but it seems like it's early stages on that front. But looking to fiscal '24, where do you see the swing factors to the upside?

Yes, so we've seen some small design orders with respect to the RDOF and we would say that the RDOF funding looks like we'll get some more of it in the January to June time frame. The -- in the quarter we announced two large public safety wins. We think some of that came from ARPA. We see a lot of the ARPA money as being unspent and stretching out, needing to be spent by the end of 2026. So we think that that's going to be good and more immediate data. We really didn't expect to have record private network bookings in North America in our first quarter, and we did. So we think we're starting to see ARPA impact the demand environment and we think it will grow going forward.

Great. And lastly, if I could just to follow-up on NEC. It's nice to see that you're comfortable enough to move up the timeline of expected accretion. But it sounds like the integration ahead of the deal closing is progressing in line to better. But I'm wondering what the responses that you're getting from customers. How are you feeling about revenue attrition, how the customers like the deal, and kind of the expectations on that front going forward? Thanks.

So, we gave that in the past, we said that we expect there to be $150 million in revenue the first year after close. We're still comfortable with that. So we did model in some attrition and perhaps some global Tier 1 operator softness. So we factored that into the price we paid for the transaction, the deal. Then with respect to the customer engagement, I think the customers see a broad end portfolio from the combined entities. NEC has an incredible split-mount architecture. And Aviat brings routers, some standalone software and access products. So we have been factored that into the model. What we learned from the red line transaction to get revenue synergies is probably 12 months after close. And the initial conversations with customers would indicate that that's a real possibility.

Great. Thanks so much. Nice job on the quarter, and I'll get back in the queue.

Thank you. One moment for our next question, please. Our next question comes from the line of Jaeson Schmidt with Lake Street. Your line is now open.

Hey guys, thanks for taking my questions. Pete, just curious if you could provide an update on what you're seeing from that Huawei funnel. I think last quarter you mentioned the current funnel was over $80 million. Has there been any change?

I would say the route change we'd like to report is we increased our bookings from the Huawei share gain funnel by a little bit under 10%. So our bookings went up $3.3 million, so that continues to be a fruitful area for us.

Okay. That's helpful. And then just with your commentary on India being more of a kind of January, June impact. Would it be fair to expect gross margin to remain a relatively flat here in the December quarter just given your mix expectations?

Yes, so our gross margin was made progress versus the prior quarter and prior year as we said, the highest in six quarters. We expect the continued improvement. And like we said, alluded to last quarter, we expect a 100 basis point roughly improvement for the full-year. Project-based nature, it's not going to be a straight line, but we expect for the full-year to be about a 100 basis points above.

Yes, so Jaeson, that'll depend on kind of the Indian project timing. As the quarter it comes in, it'll be a little bit lower. The quarter doesn't come in, it'll be grow as far as it'll be a little higher.

Okay. Perfect. And then just the last one from me, and I know you guys have sort of outlined it in the past, but just want to get another confirmation that I mean you're not seeing any sort of pockets of excess inventory pop-up in any of the segments that you play in?

Absolutely not. And my comment in the script was that we covered that [indiscernible] in the last session, everything that we said about the ability to get for the likelihood of having double orders. It's not in the microwave place. And that's why we emphasize this quarter that we're 90% direct. We do installs on our biggest customers. So we would know if there was an inventory problem. So I want to say unequivocally, we do not have that problem.

I appreciate the caller. I'll jump back into queue. Thanks a lot, guys.

Thank you. One moment for our next question, please. Our next question comes from the line of Erik Suppiger with JMP Securities. Your line is now open.

Yes, thanks for taking the questions. First off, you said that you had record bookings in Q1 for North America. I think you also had record revenues. Can we assume that you had a healthy backlog on top of the revenues that you had a healthy addition to the backlog on top of having record revenues? And then secondly, you talked about some of the technology development. Can you give us an update on the modem chip that you've been developing with MaxLinear?

Yes, so we have record North America private network bookings. Our book-to-bill is over one and we coming into the year we had a record backlog. So we think our backlog is in great shape. Our chip development continues in a timely way. We will be ready to meet our customers' needs in terms of capacity, frequency spectrum, and total cost of ownership. One thing that I would add MaxLinear is the partnership remains solid and productive. And from a risk perspective, what is transpired as chips have "de-globalized." We've become aware of additional modem developments in Europe and in Asia that as investors have expressed some concern about any one semiconductor chip company dependency, we see the modem environment as what being less risky, but with that MaxLinear remains a great partner to Aviat and we're jointly executing on the technology development.

Okay, and then you had mentioned BEAD. Is there any change in terms of your timing? I believe funding for projects is probably a 2025 timeframe. Is that still the expected timeframe or is there any update in terms of your expectations for timing?

There's a little bit in the press that will say some of it might happen in calendar year 2024. We think the BEAD impact is going to be in the January to March quarter in the year 2025. So we're unchanged on that and I just thought I would talk about what you're reading in the press. We think it's an early 2025 impact. So I would add one more item, 45 of the 50 states have submitted initial draft to the NCIA, which is the first step in unlocking the BEAD funds. So, I talked about the overall timing. There's a bunch of precursor steps that need to happen for BEAD and this 45 of the 50 states submitting the initial draft is progressing and that's encouraging to meet the early 2025 impact.

Thank you. One moment for our next question. The next question comes from the line of Tim Savageaux with Northland Capital Markets. Your line is now open.

Hey, good afternoon, and congrats on the results. First, just a real quick question. Any 10% customers in the quarter seems like, given your commentary around U.S. Tier 1 strength, that's at least a possibility?

Yes, hey Tim, there was one around 10%, but we don't expect that to continue.

Okay, great. Can you say whether that was U.S. or international, or North America or international?

It was U.S.

Okay, great. And Pete, I think your 30% growth comment for the fiscal year, the type of growth you're looking for. And I wonder if you might have a similar metric for a U.S. rural broadband. You referenced the WISP show. I thought there was some kind of accelerating momentum and evidence around fixed wireless after a so-so period, the last really couple of years. But I think you've told us from time-to-time how fast your rural broadband business is growing in the U.S. I'm not sure you did this quarter, but any chance of getting a comparable type metric for U.S. broadband growth to the one you gave, I assume it might be greater, much greater potential?

So, the reason I answered the India question is because I had that prepared. But so I don't have the specificity that you're perhaps looking for, but let me give a little bit of flavor. Our rural broadband business continues to be about 9%. We would say it's probably growing on the higher end or exceeding our fiscal '24 growth rate. But to be more specific, I don't have those answers in front of us. What would accelerate it would be the RDOF funding kicking in. And we're also encouraged by the expansion of the 6 gigahertz frequency broad license band which because we think, that fixed wireless opportunity drives more for backhaul. So, we would qualitatively agree with you. We're not ready to put a number to it, Tim.

Okay, thanks. And last question for me. I mean, I think you noted a pretty strong backlog, which your port once a year coming out of last quarter. And I think, sort of U.S. private networks was the key driver there. And mentioned you hadn't expected this order strength to continue, but am I right in thinking you've had, I guess two quarters in a row here of, I don't know if you would consider above trend type growth. And can you talk about market growth versus share gain? I guess probably versus Nokia, principally, as a growth driver in private networks?

We would say, it's hard to say who we're taking the share from, but we are growing above market trend in our private network business. And we would say that it's principally due to share gain. But I wouldn't break out who we're beating, but we know that we are taking share.

Okay, thanks very much.

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

Thank you very much and congratulations on a good quarter. My first question is if you could talk about your international revenue on a constant currency basis?

Yes, sure. Thanks, Theo. Yes, so given the strength of the U.S. dollar and some devaluations, on a constant currency basis our total revenue for Q1 would have been up by 8.9% versus 7.8%. That's not something we've typically discussed or disclosed or framed in that way previously. It hasn't had that material of an impact, but with the advent of NEC, we'll probably start talking about that in a little bit more detail going forward because it will become a slightly bigger factor in this business.

Why will it become a slightly bigger factor?

Well, because more, right now, yes, only 10% of our revenue currently is denominated in non-USD currencies, right? And most of that is for services where the cost of goods sold is incurred in non-USD currency. So it's well-matched there. With NEC, they historically have had more revenue in local currency, whether it be for products or services. We'll work to migrate that to more of our SOP, but for the near-term that might become a bit more of a factor for us.

And on the same subject, do you pick up more, do you add sales force from the NEC acquisition?

Yes, absolutely. So we will pick up about 200 employees with a lot of, I would say the lion's share of those employees being sales or sales support or network engineers to support sales.

Okay, great. And you made some great progress on bringing down accounts receivable, and I was wondering, do you have a target for that, like a DSO target you're trying to hit?

Yes, I think what we said previously that our long-term net DSO target, this is net of unearned and advanced payments, we want it to be around 80 days. And I think we can get there in the fairly near-term. I won't put a specific quarter on it, but it shouldn't take us that long to get to that range.

Okay, thanks very much.

Thank you. [Operator Instructions]. Our final question comes from the line of Dave Kang with B. Riley. Your line is not open.

Thank you, good afternoon. My first question is on NEC. I was wondering if any of their financial metrics changed since the date of the transaction that was announced several months ago?

No, I mean, we did say in our remarks that we think it'll be accretive one quarter earlier, and that's based on the integration, collaboration we've done to date. So that's an improvement, but the top-line and the margins remain unchanged.

That's kind of surprising, since there's sort of like a flip-flop of you guys, so they have more exposure to public 5G operators now?

Yes, I will say they have exposure to Tier 1s. We modeled it conservatively, so with the slowdown in Tier 1 CapEx spending, we still are committed to the numbers we've set previously. So we modeled it accordingly. That's I guess the best way to say that.

Okay, and my follow-up is on your long-term, you provided gross margin, EBITDA targets of 40% and 15% just wondering what the timeframe for that and what kind of revenue are you assuming and does it include NEC?

Yes, so the gross margin targets did not include NEC. That will, as we disclosed previously be somewhat dilutive in the near-term, but we expect to be able to prove on those going forward. Just looking at the core Aviat business ex-NEC, I think if we achieve the 100 basis point improvement year-over-year, that's a good step forward in reaching that target. And then on the EBITDA side, I think we'll be pretty close to that on a regular basis here as we exit the year just based on the revenue gains and leveraging the business.

Got it. Thank you.

Thank you. I would now like to turn the conference back over to Mr. Pete Smith for closing remarks.

Well, thanks to all of the investors for your continued interest in Aviat. This is being our first quarter. We think we have a foundation for a great fiscal year. We're looking forward to closing the NEC transaction and updating you in 90 days. Thanks everyone for joining the call.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.