Good afternoon. Welcome to Aviat Networks Third Quarter Fiscal 2025 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. Andrew Fredrickson, Director of Investor Relations. Thank you. You may now begin.

Thank you, and welcome to Aviat Networks' third quarter fiscal 2025 results conference call and webcast. You can find our press release and updated investor presentation in the IR section of our website at www.aviatnetworks.com, along with a replay of today's call. With me today are Pete Smith, Aviat's President and CEO, who will begin with opening remarks on the company's fiscal quarter, followed by Michael Connaway, 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 fiscal guidance, financial projections, business drivers, new products and expansions and economic activity in different regions. These and other forward-looking statements reflect the company's opinions only as of the date of this call and webcast and involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. Additional information on factors that could cause actual results to differ materially from the statements expressed or implied on this call can be found in our most recent annual report on Form 10-K filed with the SEC. The company undertakes no 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. Let's review the highlights from the third quarter. Total revenue of $112.6 million, non-GAAP gross margin of 35.8%, record adjusted EBITDA of $14.9 million, up 17% versus the year ago period. Non-GAAP EPS of $0.88, up 13% year-over-year. These results were possible, thanks to Aviat's disciplined operating model and the hard work and commitment from the entire Aviat team. With our second consecutive quarter of record quarterly adjusted EBITDA, we see the work of our strategy to grow the scale of Aviat taking hold. Let's briefly discuss our end markets. Looking at our mobile service provider market, we had another good quarter. Products and services related to Pasolink were in line with our long-term expectations for the business. Software volumes were good, assisting with our improved gross margins year-over-year. In a previous earnings call, we announced the launch of our ProVision Plus software for Pasolink. We are happy to report initial sales of ProVision Plus to Pasolink customers during the third quarter. The successful effort to sell ProVision Plus shows the significant progress we have made servicing our Tier 1 and larger mobile service provider customers that joined from the Pasolink acquisition. In private networks, Aviat continues to maintain its share of demand in North America and expand the sales funnel internationally. In public safety, we’ve built and shipped additional phases of our recently won statewide network project. In the utility space, we’re making progress cross selling our offering of Aprisa access radios and routers alongside microwave backhaul and are excited about the sales funnel developing with these customers. Based on investor inquiries, I would like to add that we have not seen any cancellations to date with our US Federal government customers as a result of spending reduction efforts. We attribute this to…

Thank you very much, Pete, and good afternoon, everyone. I’ll review some of the key fiscal 2025 third quarter results. Please note that our detailed financials can be found in our press release and all comparisons discussed are between the third quarter of fiscal year 2025 and the third quarter of fiscal year 2024 unless otherwise noted. For the third quarter, we reported total revenues of $112.6 million as compared with $110.8 million for the same period last year, an increase of $1.8 million or 1.6% year over year. North America, which comprised 44% of our total revenues for the quarter, was $49.4 million, an increase of $5 million or 11% from the same period last year due to growth in private networks. International revenues were $63.2 million for the quarter, a decrease of $3.2 million or 5% from the same period last year. This was driven by a difficult year over year comparable with APAC recording its best quarter on record in the Q3 fiscal 2024 period. Our trailing twelve month book to bill was over one in the quarter. Gross margins in 3Q were 34.9% on a GAAP basis and 35.8% on a non-GAAP basis. This compares to 32.5% GAAP and 35.1% non-GAAP in the prior year. Gross margins improved, thanks to regional mix and software mix in the quarter. Third quarter GAAP operating expenses were $30 million, down versus $30.4 million in the year ago period. Non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation, and deal costs were $27.2 million, a decrease of $0.2 million versus the prior year. This decrease is due to disciplined cost management and increased efficiencies at Aviat. Third quarter operating income was $9.3 million on a GAAP basis and $13 million on a non-GAAP basis. This compares to…

Thanks Michael. We are pleased with the results from this quarter and believe we are on the right track to delivering a good end to fiscal year 2025. In regards to guidance, we believe that Aviat will deliver results for fiscal year 2025 within the range of annual guidance previously provided. We expect to approximate the current full year consensus estimate on revenue and EBITDA. Over the last five years, we have most frequently issued guidance for the fiscal year in August. Given the nature of the macro environment and tariffs, we will maintain this practice. With that, operator, let's open up for questions.

Thank you. [Operator Instructions] First question comes from the line of Jason Schmidt of Lake Street. Jason, please go ahead.

Hey guys. Thanks for taking my questions and congrats on the strong results. Pete, I just want to start with guidance. I know you're maintaining that $430 million to $470 million range. Just curious, what the swing factor you think is to sort of that high-end versus the low-end?

Yeah. Well, I think we also confirmed the consensus. So that's where I think we should be. And I think there's, possibilities for some pull-ins to avoid tariffs. We have the inventory. One of the questions that we got along the way during the quarter; what about push-ins and pull-outs? And I would say we probably had one or two pull-ins and push-outs, but you could imagine that there could be more to beat the tariffs in this quarter than previous quarters. So that would swing us up. But what we're most comfortable with is leaving -- guiding on an annual basis and sticking to it as we try and improve our performance to Street expectations.

Okay. No, that makes sense. And I know you're not baking in sort of any significant contribution from the U.S. Tier 1 market. But just curious, what you're currently seeing there and if you think we've reached the bottom?

Yeah. I would say that the U.S. Tier 1 CapEx cycle is probably bottomed with respect to us. And when you read the U.S. Tier 1 capital spending, what I would remind everyone is the capital spending typically goes fiber first. And then, as you move away from urban centers, you're more likely to use microwave in the suburbs and in rural deployments. So, as CapEx has bottomed and stabilized, I would say the lag period is about six months. So, as the bottom -- what we think is the bottom in CapEx is in -- we would expect a couple of quarters an uptick in demand.

Got you. That's helpful. And just the last one for me, and I'll jump back into the queue. Michael, looking at gross margin, obviously, really strong in March, can you build upon that here in June? Or just given the mix you had in March, would we expect it to take a step back?

Yeah. No. Yeah. Look, maybe I'll just -- I'll talk about the results first, because you're right, gross profits were a good story. In the quarter for sure, building on even Q2 results, Q3 was even better. And really two reasons for that, both M&A related. So, Pasolink is now in the comp in Q3 on a year-on-year basis. So, we've made some good improvements as we've integrated that business into Aviat. So, we're seeing the gross margin uplift on a year-over-year basis from that. And then the APRISA business as well, which was a Q1 2025 transaction mixes us up. As it relates to Q4, just a couple of thoughts, number one, we'll probably get into tariffs. So, I'll save some of the remarks for when we may get asked about that. But, as it relates to the macro uncertainty, that's a part of it in Q4. And then we had a really strong software quarter in Q3, which we built upon a nice software quarter in revenues in Q2 as well. So that probably won't persist to the Q3 levels in Q4. So those are the two reasons why we don't see acceleration in gross margins in Q4, and we were, as Pete alluded to, guiding to the consensus, we're a little bit more conservative given the macro.

Okay. It’s perfect. Appreciate the color. Thanks guys.

One moment for your next question. The next question comes from the line of Scott Searle of Roth Capital Partners. Scott, please go ahead.

Hey, good afternoon. Thanks for taking the questions. Great job on the quarter. Pete, maybe just to jump in on North America, down a little bit sequentially, yet gross margins stayed pretty good there. I guess Mike answered that a little bit, but wondering if there's anything in particular going on there, kind of, what the outlook you're seeing for North America. And maybe fold that into Mike's comments about gross margins and tariffs, can you quantify what you think the impact is? What we should be thinking about, whether it's June or as we start to get into fiscal 2026, the impact of the headwinds?

Yeah. So I think Michael can talk about the tariffs. I thought the quarter had -- the North American quarter, we had a good private network business. And if you roll back the clock, we are between projects with the US Tier 1, and that's what would -- that's what showed up in the revenue. What I often say to investors is a good proxy for the US private network business is to look at MSI's report, and they would say that the demand environment for public safety is very good. We would say the same. And then utilities, which is our second biggest application in private networks has been historically underinvested and things like video and grid security are driving demand. So we feel good about those. And we are in between projects on US Tier 1, and we're hopeful that the next project will kick in. And the question that was asked previously about the demand cycle in Tier 1s, we would say the CapEx bottom is in, and we're a couple of quarters from that rolling through to microwave demand.

Yeah. And just as it relates to tariffs, because Pete mentioned part of it in his prepared remarks. But what I found after being in the Chair for roughly a year is some of what we're doing now springs from the playbook of how Aviat managed through COVID. And so one of the things we did that we talked about was we brought in some more inventory in anticipation of potential tariff regime changes. And then in terms of the effects, in order to put an illustrative upper bound on the exposure, we think in the near-term, it could be as high as roughly somewhere between 2% and 2.5% of our COGS. But as of this very moment, we're working hard with our supply base to minimize those effects. And at the same time, we're committed to passing on to our customer base only what we can't mitigate ourselves. So thinking -- linking it back to gross margins in the immediate term, this may cause a little bit of gross margin rate pressure for owners, but we do not anticipate any per share earnings leakage, widening the aperture though, over the long term, thinking about treating all our constituents as fairly as possible and like partners, we think will compound to longer-term benefits to owners. So that's what we're doing on tariffs and a little bit of the spin through the P&L and how it may affect.

If I could sneak in just a -- go ahead Pete.

Go ahead, Scott.

No, I was just going to ask, Pete, in terms of just a follow-up on pull-ins, right? It sounds like you haven't seen them yet, but I just want to clarify that, that you haven't seen them, particularly looking at the North American numbers, that's where I think it would show up. And if I could just throw in the last one. There had been some talk about potential opportunities with a large Tier 1 in MDUs. I'm wondering if you could give us any updates or thoughts on progress on that front. Thanks.

All right. So pull-ins and push-outs were normal. And I think that we were -- to put a quantify, I think we had two pull-ins and two pushouts in the quarter, and that's kind of -- that's less than normal in terms of project movements. It's a fair hypothesis to think that there could be more in this quarter to beat the tariffs. I would also say with respect to the tariffs, we have -- we performed well through COVID. We're reusing the appropriate part of the playbook. And we recently exited Fukushima and put the Pasolink business into our CM and that builds the proper processes. As the tariff landscape settles, we think we have the skill to move our product manufacturing from one site to another and we'll be able to probably in a couple of quarters, find the low-cost tariff solution. And then your last question, I believe, is around MDUs. So I'm going to maybe be a little bit long-winded. So MDU is part of a trend for fixed wireless access for apartment buildings, and it's an example for -- of data needs driving networks. It pushes capacity demands to the edge of the network. It creates an opportunity for Aviat technology to be used in applications outside of the traditional backhaul space and specifically high-growth fixed wireless access. This trend could start with apartment building or some other category. Nonetheless, some of the technology limitations with the contemplated architectures favor Aviat technology. And a lot of investors have called about a specific Tier 1 customer who recently said that they've launched an MD solution in more than 15 markets. That was a public disclosure. And what we would say with Aviat's perspective is, in general, the more MDU connections, especially with wireless access are good for future backhaul needs. We don't want to comment on others' public disclosures. But the further we -- some super smoothing Aviat investors have gone out in the field and saw some Aviat gear. We want to acknowledge that. So it's not deniable. And then finally, Aviat in conjunction with Intercom have launched the 28 gigahertz and 39 gigahertz hardware platform that will serve the fixed wireless access space. And we also have Aviat software and services to go along with the hardware. And we are excited about fixed wireless access. And given disclosure constraints, I think that's -- this is the appropriate place to stop. So thanks for the question, Scott.

Thanks. I'll get back in the queue.

One moment for your next question. The next question comes from the line of Theodore O'Neill of Litchfield Fields Research. Theodore, please go ahead.

Thanks very much and congratulations on the strong quarter. My first question is about OpEx being able to hold it flat year-over-year. And I mean, looking at the numbers here, it looks like R&D is the reason for it. Could you give us a little background on what's happening there and whether you expect to continue holding OpEx?

Yes. No. our OpEx performance was certainly a bright spot for us in the quarter, and it's something that we've really worked hard on since I joined in particular. We messaged that the second half of 2025 would be lower versus the first half in OpEx, because we were rolling off of the transitional service agreement with NEC. And Theo, to your point, in particular, even on a year-over-year basis, it's in our R&D spending bucket. And so that's what you see specifically going on there. It's the TSA and then the DSA, the developmental services agreement with NEC. But kind of moving on and zooming out a little bit, the other important thing that we did in the first part of 2025 was we took the opportunity to prune some additional costs out of the business, and we're also seeing that bear fruit now in an even better OpEx performance in Q3 than we thought we could achieve in the back half of 2025 when we planned our year. So you kind of hit it. It's down on a year-over-year basis a little bit. But as a percentage of revenues, if you look at it in that context, OpEx was just a shade over 24% of sales, which is the lowest it's been in over two years. So I mean, look, you hear a lot of businesses talk about being disciplined, operational executors and whatnot. But where that actually starts at the root is spousing the low-cost mindset in everything the company does. And the good thing is that's something Pete and I share as a common leadership characteristic. So good to see that playing through. You asked, if that's going to continue. And the one word answer is yes.

Okay. And Pete, in your prepared remarks, you mentioned you're having strategic communication with U.S. customers about doing more business with US suppliers. Is that something that would be incremental to sales driven by the tariffs?

I wouldn't say let's put it in the model, but it's a possibility that didn't exist in the pre-tariff environment. So that's why I said that, it would take maybe 12 months to materialize, but some of our larger customers are thinking and what we believe we have the largest operational footprint with respect to US microwave assets. So if the tariff environment is going to persist, this could be something that is beneficial to Aviat. So it's -- while we struggle to model what the cost of the tariffs might be in a changing environment, I wanted to be balanced and say, if tariffs persist, then there -- given our footprint, there's going to be possibilities to land US-oriented business as well.

That makes sense. Thanks very much.

Yes.

One moment for your next question. [Operator Instructions] The next question comes from the line of Dave Kang of B. Riley. Dave, please go ahead.

Yes. Thank you. Good afternoon. Pete, regarding your outlook, if you strip out first three quarters, the midpoint looks to be around $130 million, $131 million. So that's about $18 million, $19 million sequential increase. Just wondering if you can go over some of your assumptions, I mean, what will drive that $18 million, $19 million sequential uptick?

Yes. No, Dave, I wouldn't -- the backwards math of taking out Q1 or kind of the arithmetic that you just verbalized. What we're guiding to is we think consensus on the year is the right spot for us. So if you backwards math in revenues, for example, using the current consensus as the guidepost on the year, you get to somewhere between $116 million, $120 million roughly in revenues. So in the context of the quarter, that's kind of where we see it. So the sequential build of $20 million that you get to by maybe just doing the average or stripping out Q1 is not really what we're guiding to in the context of the fourth quarter.

Got it. And then just a couple on the geography. First, so North America Tier 1s didn't sound like they didn't really pick up, but they were muted in 2Q and 3Q. Just wondering if you're seeing any activities out of those guys going into this quarter?

It's normal activity at the level between projects. We would say that we're working on landing a couple more projects. But the CapEx -- the Tier 1 CapEx spend was really designed to say we think that ticks up in probably two quarters. So that's what we would say.

Got it. And then similarly, Africa, that was kind of muted last quarter or 2Q. Just wondering what you saw out of those customers?

Yes, nothing new or out of the ordinary, but you alluded to it, and it's kind of a roughly flat environment.

Look, I think Africa is currency constrained. So when -- so the availability in Africa for dollars and euros is limiting that. So in a lower interest rate environment, I think, that would improve, and I don't think it's going to improve significantly until interest rates moderate.

Got it. Thank you.

One moment for our next question. The next question comes from the line of Tim Savageaux of Northland Capital Markets. Tim, please go ahead.

Thanks and good afternoon, and congrats on the results. My first question is about seasonality, especially, in the US. And you seem to have followed that pattern here down in March. We've seen that the last couple of years, we've also seen a 20% plus. I don't know if that's seasonal or just coincidental, but I think it's seasonal. Increase in the June quarter. I guess this year, is there anything that would lead you to conclude you might see something different? Are there some potential offsets on the international side to work against that? Or how do you see your outlook for US revenues in the context of that seasonality?

No. I mean it's -- the guidance that we're sort of affirming at this point, Tim, is the consensus. And if you back into what Q4 would be from a revenue standpoint, you get to a bit of a build versus Q3, yes, but not a 20% bump. As you alluded to, there have been years in the past where Q4 blows it out of the water versus Q3. And it's just -- for us, it's the uncertainty in the market as it relates to tariff and the broader macro was something that we wanted to make sure we erred on the conservative side. I wouldn't say though that there's some specific dampening element going on that were -- that we talk about specifically. So that would be my spin on it.

Yes. So look, we're trying not to get talked into higher consensus. Michael said that our bookings were -- our book-to-bill was over one. The bookings in this quarter look good at the five weeks into the quarter. So we think the demand environment is good. We acknowledge that Africa is muted probably due to interest rate, and we remain in between projects at the U.S. Tier 1. The Motorola stuff on public safety, we would agree with what has been published about Motorola's demand environment. I think that's a pretty fulsome set of remarks with respect to demand.

Okay. Great. And Pete, you mentioned several times now being between projects from a Tier 1 standpoint and just looking to get a little more color on that. I think at least maybe pre-Pasolink, you had Verizon threatening 10% of revenue here and again. I assume they're much lower now. What I'm trying to get a sense of is to the extent you're no longer between projects, what sort of impact that could have in the business from a revenue perspective of going back, whether it's more 5G or fixed wireless access? What could that look like from a business perspective?

Yes. So just to comment on the customer concentration, we don't have any single customer over 6.5% of revenue. And let's say, U.S. Tier 1 kicked in, it could be top line lift anywhere from 2.5% to 5% of revenue.

Thanks very much. Appreciate it.

One moment for your last question. The last question comes from the line of Rustam Kanga of Citizens. Rustam, please go ahead.

Great. Thanks guys. Thanks for taking the question. And nice adjusted EBITDA outperformance. Just one on the tariffs. Michael, I appreciate you providing the upper bound of 2% to 2.5% on COGS. Just sort of thinking about your comment about only passing on surcharges to customers that you couldn't mitigate yourselves. It sounds kind of like if the COVID playbook stakes out, then you wouldn't need to do that and the upper bound on the surcharge would be that 2% to 2.5% to get you to margin neutral. Am I thinking about that correctly?

Yes. I mean the arithmetic of it, you are. And it's an intentional playbook for us is, first, work back through the supply base as hard as possible to get offsets. And then Pete and I are driving -- you kind of alluded to it, driving more potential longer-term manufacturing changes. And this is -- it's -- the effect for us is ameliorated a little bit by an incumbent supply base in the US, which we think is the best in breed in our competitive space. So we've got a little bit of tailwind on it already. And then only after we get through those mitigation effects, do we then pass on the delta. And I just -- I've seen this before this level of this movie and this level of uncertainty, you got to be really careful to treat all your partners exactly as such, you treat them like partners. So that's what we intend to do. And I was really careful in my remarks and how I'm kind of broadcasting what we're going to do as it relates to tariffs that it's earnings per share neutral. It may have a little bit of an effect on gross profit margin dampening in the near term. But for owners, I think it's the right thing for us to do long term. So anyway, that's a little bit more just of our own point of view as we think about it at the company level, just for those interested and then a little bit more detail on what we're doing to mitigate the cost side of it.

Super helpful color. Thanks, Michael.

This now concludes the question-and-answer session. I would now like to turn it back to Pete Smith for closing remarks.

We'd like to thank everyone for joining and your interest in Aviat. We will talk to you again in another quarter, and thanks again. Bye.

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