Aviat Networks, Inc.

Good afternoon. Welcome to the Avia Network's fourth quarter fiscal 2023 earnings call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. Please note, the conference is being recorded. I will now turn the conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations.

You may begin.

Thank you and welcome to Aviat Network's fourth quarter fiscal 2023 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 in approximately two hours. With me today are Pete Smith, Aviat's president and CEO, who will begin with opening remarks on the company's fiscal fourth quarter, followed by David Gray, our CFO, who will review the financial results for the quarter in fiscal 2023. 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 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 most recent annual report on Form 10-K filed with the SEC. The company undertakes no obligation 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 fourth quarter of 2023 and full year fiscal 2023. The company continued to focus and execute on our key long-term goals of top line growth, margin expansion, and bottom line improvement. Highlights from the fourth quarter include revenue of $91.2 million, which represents growth of 17.8% versus Q4 of last year. Adjusted EBITDA of $12.6 million, a 38% increase versus the same period prior year. Non-GAAP EPS increase of 30%. Strong debt-free balance sheet with $22.2 million of cash and marketable securities. For the full year fiscal 2023, Aviat achieved revenue growth of 14.4% to $346.6 million This represents our third consecutive fiscal year of double-digit top-line growth. Adjusted EBITDA of $47.0 million, a 23% increase over last year. Non-GAAP EPS growth of 20%. Year-end backlogs of $289 million, up 18% year-over-year. 336 new customers in fiscal year 2023. These financial and operational results reflect the continued demand we see for our products and services in the market, as well as the dedicated effort from Avia team members around the globe. Let's discuss key highlights of the fourth quarter and fiscal year. Starting with the global 5G opportunity, our business continues to see healthy demand from service providers, thanks to our differentiated offerings. In the US, we see rising demand for our microwave backhaul products, despite flat-to-down 5G capex spend from Tier 1 telecoms. Operators build their 5G networks by initial investment in fiber, and as the coverage progresses, microwave receives a larger portion of the funding to expand backhaul in suburban and rural environments. This makes Aviat's demand curve somewhat different from the overall 5G capex cycle. We believe there will be growth from continued domestic investment in 5G as network build-outs continue into less densely populated regions. Internationally, we are still in the early stages of the 5G rollout and see strong interest for Aviat's products. At the beginning of the fiscal year, we announced our VARTI Airtel win, which marked a new Tier 1 customer and geographic market for Aviat. Additionally, we see building momentum in Africa, Latin America, and Asia-Pacific. As a reminder, 5G currently makes up less than 15% of global mobile data traffic. We have many years ahead of operators investing in their 5G infrastructure. We see more opportunities to win selective Tier 1 and Tier 2 business. We will continue to target new accounts and win business away from our competitors when we see a distinct economic advantage that Aviok can offer to the customer. This will bring additional global scale and capabilities to our business to drive long-term shareholder value. Our funnel of opportunities against our largest global competitor continues to strengthen, and we are focused on executing to gain market share and customers. Our current identified opportunity funnel for Aviat to replace this competitor is over 80 million. Our fiscal 2023 revenue taken from this competitor was $24 million and our backlog is $34 million. We believe that the pressure on this competitor will remain for the foreseeable future and operators will continue to seek replacements in their networks. Shifting to our rural broadband business, the demand environment for this market remains strong. Government funding programs such as the Rural Digital Opportunity Fund and the Broadband Equity Access Deployment continue to develop, and we remain well-positioned with the Aviat store. RDOF-related orders continued in the quarter, albeit relatively small, and we anticipate increasing revenue from RDOF projects in calendar year 2024. Although the dollar impact of RDOF to Aviat continues to be difficult to quantify at this early stage, we have booked blanket purchase orders from WISPs for the coming year in excess of $10 million. We view this as an encouraging sign of demand in this space. The recent announcement of the Broadband Equity Access and Deployment or BEAD program allocations to state governments represents a positive step to unlocking the $42.5 billion program. As a reminder, this program was part of the bipartisan infrastructure law passed in 2021. The program is aimed at increasing the availability and affordability of high-speed Internet service across the United States, especially in rural and underserved areas. The announced allocations permit the states to begin planning their grant programs. From a timing perspective, we anticipate that approximately 20 percent of the announced allocations will begin flowing in late calendar year 2024. If other government broadband programs are an indication, the peak will be in three to five years following the initial release of funds with a long tail of spending. While the initial BEAD notice of funding strongly encouraged fiber deployment, we believe that the most economical and effective deployments will include wireless networks in the appropriate areas. Further, in recent meetings of the Subcommittee of Energy and Commerce, and the NTIA, no less than seven congressional representatives advocated for technology neutrality and cost-effective deployments. We believe this testimony strongly favors Microwave. There are still many details with BEAT, but we believe that Aviat has the right set of products and state-level relationships to benefit. We will continue to update the investor community as appropriate. Moving on to private networks. In the fourth quarter, our North America revenue of $55 million was driven by strong private network demand and a record private network backlog. We believe we have the strongest portfolio for private networks, including highly reliable, high-power microwave radios for lowest overall total cost of ownership, affordable, high-availability IP MPLS routers, LTE base stations, and evolved packet core solutions, point-to-point and point-to-multipoint access products, end-to-end management software with expert systems, and automation innovations for lowest OpEx and a full portfolio of turnkey services. We remain the leading microwave vendor in private networks in North America and growing share of demand around the world. We believe that the private network opportunity in North America will remain strong as networks upgrade to LTE to support video and other data-driven applications. The funding environment remains strong for state and local governments, positively impacted by ARPA funds. The private networks business will also continue to grow through new international opportunities. Our private network business drove the significant increase in year-over-year backlog, which we will get to shortly. In the fourth quarter, Aviat announced our new ultra-high power indoor radio. the IRU600 UHP. UHP is a new 11 GHz radio with the highest transmit power ever supported in the industry in this band, which will allow greater reliability, more capacity, and longer lengths. Most importantly, UHP's ultra-high RF performance enables the replacement of 80% of the 90,000 6 GHz links in the USA creating a significant upgrade opportunity with customers concerned about interference in the 6 gigahertz band. This is another example of Aviat innovating to meet customer needs and deliver value-add solutions. We have already secured our first order and expect shipments to begin in the first half of fiscal year 2024. In addition to the UHP radio, Aviat released a number of innovative products and offerings in fiscal year 2023, including IP and PLS support for our WTM all-outdoor microwave platform to lower total cost of ownership and simplify customer networks. Vendor-agnostic multiband solutions, which make it easier and cheaper for operators to upgrade their networks by adding Aviat's eBand or multiband alongside legacy microwave systems. This also lowers the barrier for entry for Aviat into a new network, This helps secure our win with Barti Airtel. Frequency Assurance Software, FAS, on third-party radios, which allows network operators to leverage our powerful software platforms to help them better manage their networks. Support for RDL3000, Avias Access Products, acquired via the Redline Communications acquisition, to ProVision Plus, which allows network operators to improve the simplicity and reliability of managing their networks. We are proud of these innovations we have brought to the market and are excited to continue offering new solutions and products to our customers in the year ahead. Since artificial intelligence is prominently featured in the news, we will share our perspective. Aviat believes that AI applications will use bandwidth and create more demand for capacity. In line with the telecom peer group, The amount of additional demand and timing is difficult to estimate at this point. More specifically, the generative AI branch of artificial intelligence requires low latency and consumes a lot of data, which bodes well for telecom equipment and backhaul needs. On the product and services front, Aviata has invested in fast frequency assurance software and has health assurance software products. These are both examples of expert systems that replicate a specialized knowledge set to provide powerful solutions to help customers manage their networks and monitor for interference and network health. This branch of artificial intelligence offers customers an impactful solution today. Going forward, Aviat intends to invest in additional software that eases the customer's burden of network operation. Moving on to the supply chain environment. We continue to see improvements. Nearly all of our supply has returned to pre-crisis performance. We have 13 components that remain in allocation. This is an improvement from 27 component allocations last quarter and over 100 a year ago. Additionally, component lead times continue to improve and are now normalized. We remain diligent in de-risking the supply chain and building redundancies where possible. Our results for our customers and shareholders would not be possible without the dedication of all of the Aviat employees. This was a great quarter and an excellent fiscal year. We remain focused and will continue to execute to grow and take share of demand. This has and will continue to be reflected in our financial and operational results. Aviat's core values include customer focus. As part of our focus on the customer, we advanced our voice of the customer process. The effort by our sales and marketing teams resulted in fiscal year backlog of $289 million. This represents an increase of 18% versus prior year. Note that we report on this metric annually to avoid the inherent quarterly fluctuations with a project-based business. Additionally, I'll highlight again that we added 336 new customers. This was driven by state and local governments, service providers, red line customers, and the expansion of the store platform internationally. Given the high cost to switch, we believe that these new customers, along with our backlog, sets us up well for growth in fiscal year 2024 and beyond. With that, let me turn the call over to David to review our financials before coming back for some final comments. David.

Thank you, Pete, and good afternoon, everyone. During my remarks today, I'll review some of the key fiscal 2023 fourth quarter and full year financial highlights. Noting our detailed financials can be found in our press release file this afternoon. As a reminder, all comparisons discussed today are between fourth quarter of fiscal 2023 and the fourth quarter of fiscal 2022, unless noted otherwise. For the fourth quarter, we reported total revenues of $91.2 million. as compared to $77.4 million for the same period last year, an increase of $13.8 million, or 17.8%, driven by strong growth in all regions. North America, which comprised 60% of our total revenue for the quarter, was $55.1 million, an increase of $6.4 million, or 13%, from the same period last year, driven by our private networks and Tier 1 business. International revenue was $36.0 million for the quarter, an increase of $7.4 million, or 25.8% from the same period last year, with particular strength in the Middle East and Latin America. As Pete mentioned, our backlog grew 18% to $289 million. Continuing our trend of trailing four-quarter book-to-bill ratio above one started back in fiscal 2018. Gross margins for the quarter were 35.8% and 36.2% on a GAAP and non-GAAP basis, as compared to 35.5% and 35.7% in the prior year. The improvement in gross margin was driven by better price-cost dynamics, partially offset by regional mix. Fourth quarter GAAP operating expenses were $26.3 million, an increase of $4.1 million from the prior year. fourth quarter non-GAAP operating expense, which exclude the impact of restructuring charges, share-based compensation, and deal costs, were $22.0 million, an increase of $2.5 million. The increases in both GAAP and non-GAAP operating expenses were primarily due to the addition of Redline, while GAAP was further impacted by M&A expenses related to our acquisition of NEC's microwave transport business. Fourth quarter gap and non-gap operating income were $6.3 million and $11.0 million compared to prior year gap of $5.2 million and non-gap of $8.1 million or increases of 20.6% and 34.9% respectively. Fourth quarter tax provision was $2.4 million compared to $2.8 million last year. As a reminder, the company has $500 million of NOLs that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. Fourth quarter GAAP net income was $3.3 million as compared to $4.5 million last year, which included a one-time gain of $2.6 million on marketable securities. That did not repeat. Fourth quarter non-GAAP net income which excludes restructuring charges, share-based compensation, M&A-related costs, and non-cash tax provision was $10.3 million compared to $7.8 million for the same period last year, an increase of $2.5 million, or 32.1%, driven by growth and margin expansion. Fourth quarter non-GAAP EPS came in at $0.87 per share on a fully diluted basis compared to $0.67 per share for the same period last year, an increase of 29.9%. Adjusted EBITDA for the quarter was $12.6 million, an increase of $3.4 million, or 37.5% from the prior year. Adjusted EBITDA margins were 13.8% for the quarter. Moving on to the balance sheet, our cash and marketable securities at the end of the fourth quarter totaled $22.2 million with no debt. up from a net cash position of $16.2 million the prior quarter. Fourth quarter cash flows from operations were $7.4 million, driven by significant improvement in our inventory levels from $40.9 million in Q3 to $33.1 million in Q4, as we consumed some of our buffer stock that helped us navigate the supply chain issues of the past two years. We made good progress in terms of DSO. our net DSO declined by five days versus Q3. Note that net DSO includes trade AR and unbilled balances, net of advance payments and unearned revenue, and is a key indicator of our working capital efficiency. Our balance sheet remains very solid, leaving us well-positioned to execute our long-term plans. With that, I'll turn it back to Pete for some final comments.

Thanks, David. Before opening up for Q&A, I'd like to put some context around the demand environment, summarize our fiscal year, and provide a few updates. Over the past several months, we have received many calls focused on the channel dynamics of microwave compared to fiber. We see vast differences in the channels and will detail three distinguishing characteristics. First, throughout the supply chain crisis, the largest Constraint impact in a quarter was less than $2 million in Aviat revenue. With this ability to meet demand, we never experienced the order pattern witnessed in the fiber space. The fiber space experienced many instances of double ordering. Our lead times prior to the supply chain crisis and today are similar. Note that prior to the supply chain crisis, during the crisis, and today we can book and ship certain orders within a given quarter. As a result, our customers did not place duplicative orders in an attempt to see which order was filled first. Second, Aviat's business is approximately 60% private networks. The majority of these customers are government entities and utilities. Due to the critical nature of these customer networks, the customers expect to be prioritized. At the outset of COVID, Before the supply chain crisis, we ramped our inventory purchases to support mission critical networks. As a result, we did not disappoint our customers and double ordering did not ensue. Third, many of Aviat's customers operate small and medium sized networks. These networks are often sourced to a single supplier. As a result, the probability of substitution is low. This strongly discourages double ordering that prevailed in the fiber space. Further, we have excellent insight into our largest mobile network operator since we performed the installations. Lastly, the Aviat store holds inventory for ISPs. As a result, our customers do not have an incentive for double ordering, and we have reasonable knowledge of the inventory held at our customers. We will close this discussion with a comment related to the fiber versus microwave comparison as it relates to CapEx spending. As noted previously in the call, we observed the headlines that U.S. Tier 1 CapEx spending is declining year over year. Aviat is undeterred since network bills typically proceed with fiber first, followed by microwave. Therefore, this mixture of CapEx spend is shifting to favor Aviat's microwaves. Fiscal year 2023 represented a significant year for Aviat Networks. The company continues to grow. We successfully integrated our first acquisition in greater than 10 years with Redline Communications and achieved results ahead of our financial model for this acquisition. We announced the NEC microwave transport acquisition, which builds on the 2019 North America Channel Partnership. Our strategy has expanded. historically have focused on growth in private networks, Tier 2, and ISPs. As we have developed a portfolio and our value proposition, we have the wherewithal to pursue and win select Tier 1s. We now include select Tier 1s in our overall strategy. As an update on the NEC transaction, We currently expect the transaction to close in the October to December quarter, subject to regulatory approval and customary closing conditions. Aviat remains focused on our growth drivers of 5G, rural broadband, and private networks. The 5G upgrade cycle is still early. In rural broadband, there is significant government funding in the U.S. and other select countries that aim to expand the availability of high-speed Internet access. Aviat is well positioned to address this market, and we see these government efforts as a positive catalyst for our business. Lastly, we see increasing demand for private network builds for critical communications and data needs. Based on the company's outlook, we are establishing our fiscal year 2024 guidance exclusive of the NEC business. We will update our guidance upon closure of the NEC transaction. Revenue for fiscal year 2024 to be in the range of $367 to $374 million, and adjusted EBITDA to be in the range of $51 to $56 million. Based on the current weather pattern, order pattern, and record backlog, we expect revenue to build through the fiscal year. Our business comps on an annual project basis rather than a sequential quarterly basis. We expect our first quarter to show modest growth compared to fiscal year 2023. Second quarter was strong growth. Third quarter, again, modest. And the fourth quarter will be our strongest. We will revisit guidance as the year develops, and we work with our customers on the timing of our backlog. With that, operator, let's open it up for questions.

All right. And to ask a question, you will need to press star 1-1 on your telephone. And to remove yourself from the queue, please press star 1-1 again. Please stand by, we'll compile the Q&A roster. One moment for our first question.

Our first question comes from Scott Sear from Roth.

You may begin.

Hey, good afternoon. Thanks for taking the questions. Nice job on the quarter and appreciate the color. Pete, maybe to start on the gross margin front, looks like product had a good quarter. services a little bit of a softer quarter. I know that really tends to depend on mix. I was wondering if you could elaborate a little bit more on that, if there's anything to read into the quarterly changes, and how should we be thinking about gross margins looking out at the September quarter?

Hey, Scott. It's David. I'll take this one. So, yeah, I think, you know, I wouldn't read too much into the mix between service and product, right? You know, we've disclose it separately because those are the rules. But in reality, as a project-based business, we tend to evaluate it at the project level irrespective of whether services margins for one project are high or low or vice versa for equipment. From an overall outlook standpoint and sequential outlook, we did have some barely large projects that were somewhat dilutive to our overall margins, but we think the inflation cost and price dynamics are kind of moving in our favor now. We did experience a bit of margin improvement quarter over quarter sequentially, and we would expect that trend to continue as we look out into FY24, you know, I think we'd be looking at, you know, kind of a somewhat similar trend of growth overall that we saw from Q3 to Q4, I think is a reasonable guideline. We expect – hope it's stronger, but I think that's good.

Great. Helpful. And, Pete, maybe if I could, you spent some time talking about RDOF and BEAD. But ARPA funding has really been starting to filter into the results. I think there have been a number of wins, whether it's coming from various public safety, utility, or in some cases tribal lands. I'm wondering how that pipeline is looking and how important that is as we look out to the fiscal 24 timeline.

Yeah, so I think, you know, we had a, thanks to everyone for listening. Our prepared remarks went a little long. We cut the tribal lands. part of the script. So we see strength there. With respect to the ARPA funds, they need to be used by December 31st. You know, some other research is out there that has said that only less than 10% of that has been spent. So we think that that is going to bode well for our growth going forward. And we, you know, When we win projects, our backlog is up significantly. Sometimes we know that it's ARPA funds, and sometimes we don't. But our private network backlog is at our record demand, and we would think that part of that could be tied to the ARPA allocations.

Great. Helpful. And lastly, if I could, Just to follow up on the NEC transaction, it sounds like that's still tracking your expectations for the October-December timeframe. I'm wondering if you could just elaborate or reiterate what the expectations were. You know, you had some goals in terms of cost cutting, some gross margin, et cetera. I'm wondering if you could just give us a quick update in terms of your latest thoughts on that front and how you're feeling about customer retention. Thanks.

Yeah. When we announced the transaction, we thought about customer retention, and we said that we were going to do, in the first 12 months after close, $150 million in revenue. We said that we wanted to get to, by the fifth quarter, to make it accretive. exiting the second year we wanted to get it in the 11 to 13 percent EBITDA range so I would say that we feel good about all of those commitments and you know what we we will definitely do is as we close the transaction we will update our overall model and you know what I have to say is NEC has been extraordinarily cooperative and in the interim period, and that cooperation bodes well for certainly exceeding our profitability targets.

Great. Thanks so much. I'll get back in queue. Thank you. One moment for our next question. And our next question comes from the line of Eric Stupiger.

from JMP Securities. Your line is open.

Yeah, thanks. Change the question and congrats on a good quarter. First off, that backlog number, is that going to continue to grow from these levels or is that a seasonally peak and then it comes back to get into this Q1? And then I have a follow-up question.

So on the backlog, right, we have a project-based business, so we only disclose the backlog once every 12 months. So I think, you know, we see our funnel that just 12 months from now the backlog should be greater than 289, but we basically provide that insight in case, you know, that's what we do. David, do you have something to add?

Yeah, no, I think, you know, just to add to that, our goal is to maintain a book-to-revenue ratio above one on a trailing 12-month basis, which says that, you know, essentially our orders are growing faster than our revenue overall. Okay.

And then secondly, just on the funding environment, do you have a sense, and I'm speaking more on the rural broadband side, how much of the projects that you're working on at this point do you think are getting funding from RNOC or some of the available funding out there? How much of the market is that influencing at this point?

That's hard to say. What I can point to is last quarter we said that we had orders from four of the largest RDoP recipients. They were small in nature, and those projects are continuing. I would also say in the script we mentioned 10 million or so of blanket purchase orders. We see the rural broadband demand environment improving, and what I would say we don't know is how long some of those RDOF recipients, how long it's going to take to convert, you know, what we see as design activity into volume purchases.

Very good. Okay, thank you.

Thank you.

One moment for our next question.

And our next question will come from Jason Schmidt from Lake Street.

Your line is open.

Hey, guys. Thanks for taking my questions. Just curious if you could provide an update on the Red Line business. It sounds like you continue to see really good traction there. It outperformed your expectations. But what's the funnel look like for fiscal 24?

So here's what I could say. You know we don't have the funnel broken down Right right in front of us But what I can say is the first year what we did was we stabilized the business we took out the Canadian public listing cost so and that went better than expected and You know year two of the ownership. We're starting to recognize that cross-selling opportunities, right? So selling Aviab product to Redline customers and vice versa. And then thirdly, you know, in the last 90 days we announced, or approximately 90 days, we announced putting our network management software on the Redline products, which we think over the next six months we'll start to land some of those and we'll drive some additional margin expansions.

Okay, that's helpful. And then just as a follow-up, how big of a contributor was the Aviat store in fiscal 23 or just Q4?

In the fiscal year, it was about 8% to 9%, pretty similar to contributor as last year.

Okay, perfect. Thanks a lot, guys. One moment for our next question.

And our next question will come from the line of Theodore O'Neill from Litchfield Hills Research. Your line is open.

Thank you very much, and congratulations on the good quarter, Pete. Thanks, Theo. First question on guidance. If I take the midpoint of the range of guidance for sales in EBITDA, it implies that EBITDA grows twice as fast as revenue. What's the driver for that?

Yeah, so look, we've had an emphasis on profitable growth since I arrived here, and that's what we're continuing to do. We think favorable mix driven by North America private networks, adding more software into the mix, and we get leverage out of our increase in volume. And that doubling on the midpoint of profitability versus top-line growth is is also while we plan to invest in R&D. So I think that, you know, our plan is to execute that, and I really think that's an insightful question. Theo, thanks.

Okay. On the BEAD state allocations, I've read that – New Mexico and Minnesota are saying that if they do an all allocation to fiber, they're not going to reach the goals of getting everyone on broadband. Does that create an opportunity for microwave? And also, if it does, is there some selling effort that needs to go on to make that happen?

Okay, so let me talk about the selling effort first. The reason Aviat's excited, but it's early days for it's a little bit premature for Pete, is Aviat's best relationships out of all of our customers are with state governments, and that's due to our 911 first responder private network business. So we are really excited about what Minnesota and New Mexico and the seven congressional representatives that we cited said. So we think that this is a great opportunity for us, albeit a little bit out in time. And then the comments on fiber being too expensive, it is. It is. There was a congressional rep from Kentucky basically said, are we going to really run fiber to seven homes? And what Minnesota and New Mexico said is that fiber is too expensive. And certainly to connect low-density endpoints, it doesn't make sense. So we see this as an opportunity. We see states starting to say they'll get more mileage for their money using wireless, and we're starting to see it in Congress. So we think that this is a fantastic development, and we just need to continue to use our technology Our sales channel that carries the 911 private network business, it's to the same states, the same procurement organization. We think we're well positioned.

Okay. My last question is that last week the FCC granted special authority to AT&T to use a microwave backhaul in Maui because the cable network infrastructure was destroyed. Are you seeing... Any increase in weather disaster awareness among your clients as a possible sales benefit for using microwaves? Or is this just something that always happens whenever there's a disaster?

So this happens typically in disaster, right? So we have a network on Maui. What we did for the customer when this happened was... It's not the AT&T deployment, but it's the utilities. We help monitor their network. We recommended the damage that they had, how they should respond from a networking perspective. We do this when hurricanes hit. We did this with the Nashville bombing issue. And here's one thing that I'd like to emphasize. The reason microwave has traction in situations like this is because it's faster to deploy, and it's actually more reliable than fiber.

Okay. Thank you very much.

One moment for our next question.

And our next question will come from the line of Tim Savargo from Northland Capital Markets. Your line is already.

Great, thanks. And congratulations on your third year of double-digit revenue growth. And on the order growth in particular, which looks to be, you know, let me start with a two. Given the strength and backlog that you reported, And so I'll kind of ask my annual fiscal year end question about, well, a couple of things really about, you know, that order growth and backlog growth relative to what you're guiding to from a revenue growth perspective, trying to relate those two items. And then, you know, as you look at the fiscal 23, you're kind of flattish in the U.S. and big international growth. Based on the order book or any other visibility you might have, how do you expect that to change into 24, I guess, given what you're seeing from a backlog perspective? I'll follow up on that.

So with the backlog, the growth and backlog was the principal driver of that was growth in North American private networks, right? So 23 was flattish growth. In North America and we we see North America the demand environment Picking up so we'll get a bigger contribution from North America Than we did in 23. We also think that that favors margin margin growth and then in terms of how to think about the backlog and you know kind of our last couple sentences around the guidance and we did, you know, in the recently completed quarter, we did see some big projects come in. And the statement about wanting to look at how the customers' projects develop is really related to, you know, how fast we get to design freeze and how fast we get that to revenue. And if that, you know, if the customers want to, move quickly, then we will, as the year progresses, update our guidance. And if they kind of go at a slower pace, then we'll leave the guidance as is. But we're hopeful, Tim.

Great. At this point, can you say that you expect, you know, on a percentage basis, faster growth in North America than international?

I wouldn't go that far because, you know, you've got, you know, kind of rule of big numbers working against North America a little bit. But I think, you know, it should be closer. All right.

Got it. And, you know, Pete, you mentioned that as you look forward with a greater North America contribution, you would expect that to be, especially in private networks, you expect that to be accretive in gross margins. That's sort of what we saw, you know, Q3 to Q4, both a pretty big volume increase and positive mix shift to North America, and yet we didn't see much in the way of gross margins. You may have touched on it already, but if we can just kind of dig down on that as, you know, why we didn't see more. gross margin expansion given those two positive kind of mixed drivers? Well, one volume, one mix, I guess, two positive drivers.

Yeah, well, the mix actually went against us in Q4 a little bit, right? I mean, there was a regional mix component, certainly with North America returning to growth, that did help us, but there was kind of a broader headwind within our overall product mix. And it could be, you know, for this business, it could be a little volatile, right? Because we do have a large software component. If that fluctuates quarter to quarter, that can swing it, you know, 20, 30 basis points. So, you know, I think there wasn't anything. The dynamics behind Q4 were positive. We expect that kind of level of improvement to continue. And, yeah, we'll take it from there.

Okay. So I just Lower software revenue, I guess, is that my takeaway there? Okay. Sounds good. And maybe last question for me. I don't know if your terminology has changed, Pete. I think last quarter, with regard to the Huawei replacement pipeline, you talked about bookings, revenues, and backlog, and eventually we got that all to foot. Now you're talking about funnel of $80 million, I think, versus a commentary on bookings of 50 last quarter. I don't know if those are two different things. You know, your backlog would suggest bookings of 58 million or whether the funnel has expanded and you're just giving us a broader sense of the opportunity.

The funnel has expanded. So we're giving you a broader sense of the opportunity. Yeah. So to be specific, in last quarter, what we wanted to communicate was at the end of Q3, year-to-date revenue of 14.5, that we have bookings of 36.1 and a funnel of 50.5. And now we would say that bookings are about the same, revenue went to 24, and the overall funnel is 82. So we see the the opportunity building there.

Does that help?

Sorry, I was on mute. Yeah, no, I was on mute there. Sorry. That's good for me. Well, I guess one other factor I might have expected, too, from a mixed standpoint, where you'd see higher North America and yet you know, not much impact in gross margins. I might have assumed that was maybe a lot of Verizon coming in at year end at lower margins, but it sounds like that's not the case.

That's actually a fair statement, Tim. Yeah. Yeah. And so I would say that your suspicion is true. And, you know, I'd also like to say that, you know, with the Wall Street research of Tier 1 CapEx. Our biggest domestic Tier 1 customer was strong and continues to be strong.

Got it. And I guess real last question for me. Strong enough to make it on the 10% list for the year or did you have anyone else getting to 10%? No.

We have none in the quarter. No 10% for the quarter or for the year.

Great. Thanks very much. Thank you. One moment for our next question. And our next question comes from the line of Dave Kang from B. Reilly.

Your line is open.

Thank you. Good afternoon. First question is on the NEC acquisition. Just wondering if their trailing 12-month revenue changed materially since they have a greater exposure to service providers compared to you?

So, no. So, they're not, their TTM data is not materially changed from the time that we put together our investment thesis.

And also going forward, you don't expect any material changes?

No, we don't. And recently I visited their largest customer. Yeah, I visited their largest customer, and they're within 1% to 2% of what we modeled. And here I'll go further. The second biggest region, our leader was there today, and they're within percentage points of the way we modeled it. So I would say the data we used in our investment thesis remains intact.

Got it. And then on Barty, I guess, you know, just try to find out what inning are we in. You know, some are saying it's just getting started. Some are actually saying things have plateaued out. So what do you see from your side?

We expect significant growth from Barty in fiscal year 24, both top and top-line contribution, and when we took that business, we said that it was low margin, and we've been able to execute on our value engineering projects, so we expect that we'll get some margin lift as that demand materializes. So we feel good about that.

Got it. Got it. And then my last question is for David. What was capex for the quarter and what do you think, what's your projection for the year?

Okay. So for the quarter, it was I think about $400,000. Let me just verify that. I've got a full year cash flow. And then for FY24, It's going to be a little bit higher this year. You know, we finished FY23 with capex of $5.3 million. We've got in our plan around, you know, six, six and a half for this year as we do have some refreshment investments coming up, but nothing out of the ordinary.

Got it. Thank you.

you and one moment for our next question and our next question will actually be a follow-up from scott zero from roth capital markets your line is open hey pete just to quickly follow up on a couple of geographic questions you you talked about um

the cadence of network builds being led by fiber and then the evolution to wireless transmission or backhaul. You know, looking at DISH, you know, they've gotten to the 70% pop coverage mark. Now it gets a little bit more difficult in terms of covering those incremental pops. I assume that's basically commentary around that and the expansion going forward will have more microwave links in it. So number one, I'm wondering if you're seeing more on that front, kind of what your broad-based expectations are for the upcoming fiscal year. And then two, looking at Europe, it continues to be a very small portion of the mix. They're behind from a 5G build standpoint, and wireless transmission has always been a big component of those network builds. It always seems like you guys are kind of on the cusp of some business expanding there. I'm just wondering what your high-level thoughts are in terms of growing that as an opportunity, or should we not be planning on some future growth and contribution coming from the European arena? Thanks.

Yeah. Okay, so first DISH, right, to restate, DISH met the federal deadline to cover 70% of the U.S. population by June 30th. DISH looks to be taking a breather on CapEx for the first six months of our fiscal year, and we expect the microwave rollout to really start you know, in the January to March quarter, and we feel like we're well positioned. So that's what I would say about DISH. I would say in the Europe region, we have a couple big projects. We see some weakness from the one of the specialists that's headquartered in Europe, and we think that that will help drive double-digit growth in Europe in fiscal year 24. So there's a little color.

Great. Thanks so much.

Thanks.

Thank you. And that will conclude Q&A for today. I want to turn the call back over to Pete Smith for any closing remarks.

Yep. Well, thanks to our shareholders and the investment analysts for joining the call, listening to our extended remarks on our fiscal year 23. We think it was a great year. We look forward to providing an update on the next quarter and the next 90 days and hopefully getting to close in a short amount of time and giving an update on the NEC wireless transport transactions. Thanks, everyone. Talk to you soon.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.