Aviat Networks, Inc.

Good afternoon, and welcome to Aviat Network's second quarter fiscal 2024 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 this conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. You may begin.

Thank you and welcome to Aviat Network's second 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 second 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 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 revision of these forward-looking statements in light of new information or future events. Additionally, during today's call and webcast, management will reference both GAAP and non-GAAP financial measures. Please refer to our press release, which is available in the IR section of our website at www.avianetworks.com, the 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 second quarter of fiscal year 2024. We are pleased to report that Aviat continued its solid execution and achieved revenue and margin growth in the quarter. Highlights from the second quarter include revenue of $95.0 million, which represents growth of 4.8% versus Q2 of last year. Gross margin of 38.8% versus 35.7% in the same quarter a year ago. Adjusted EBITDA of $13.7 million, a record high 14.5% of revenue. Record non-GAAP EPS of $0.97. strong balance sheet with $45.9 million of cash and marketable securities, and a net debt balance of $3.6 million. Please note this quarter's revenue and profit growth is against the year-ago period that benefited from the large initial order from our Bharti Airtel win. These financial and operational results are driven by the continued implementation of Aviat's operating model and made possible thanks to the effort and execution of the Aviat team and our partners throughout the quarter. We will review key highlights of the second quarter, but first, let's discuss our completed acquisition of the NEC wireless transport business. Aviat closed the acquisition of the NEC wireless business on November 30th. We now refer to this as the Pasolink business. At this point, we can provide an update that will emphasize the components of the AVIAD operating model framework, see slide 17 in the investor presentation for an overview of the framework. First, the transaction consisted of taking over 18 plus entities which were arranged to serve customers across the globe. We have maintained and integrated these entities and their team members in alignment with our Asia PAC. Latin America and EMEA leadership teams. This approach has been agreeable with the customer base and aligned with the AVIAD customer focus element of the AVIAD operating model. Note that this work stream was a major factor in the time between signing and closing of the transaction. Second, we have conducted over 70 customer meetings and presented our combined product roadmap to the majority of customers, including all of the large customers. The feedback has been positive and encouraging. The combined product roadmap has reassured customers that Aviat will continue to offer innovation and value across our entire suite of products and services. During the period between sign and close, Aviat synthesized the combined product roadmap and innovation plan. We believe this Combined roadmap and innovation plan will bring leading solutions to the market. This is a demonstration of the importance of innovation in our operating model. Third, our core value of tenant. We reviewed the organization of both Aviat and Pasolink. On day one, we had a clearly defined working organization with roles, responsibilities, and reporting relationships. During the period between sign and close, We worked to take the best talent from both companies and organize for success. As a result, we were able to eliminate over 200 roles in the combined company. Our fourth operating model element is supply chain. This work will take several quarters. Progress that we have made thus far includes improved demand planning and forecasting, initiated rationalization of the supply chain, and developed an inventory optimization plan. Together, these actions should result in reduced lead times, lower working capital, and improved costs. Again, these actions will take several quarters for their results to materialize, and we believe they will create meaningful value for customers and shareholders. Additionally, our continued support of the Pathfilling portfolio is appreciated by customers who have invested significantly into the product lineup, thanks to its high-level performance and dependability. The customer base is excited to continue doing business with Aviat. Our plans to integrate our network management software, ProVision Plus, with PasoLink products will deliver improved functionality and ease of use to PasoLink customers. This is a request we have heard from many customers, and we are excited to deliver for them. This software will serve as a platform for product portfolio convergence in the years ahead. We look forward to continuing to meet with customers understanding their challenges and needs and delivering to meet their expectations. There will be opportunities for cross-selling products to Avia and Pasolink customers. We are already filling a sales funnel of such opportunities and anticipate that this will translate into revenue synergies in the future. We remain confident in hitting the goals we have established for the Pasolink business. One, $140 million in annual revenue run rate revenue contribution and two, achieving standalone gross margins of 33% and standalone adjusted EBITDA of 11 to 13% by the end of our second year of ownership. Aviat's confidence in delivering the targets are based on the Aviat operating model and our execution of it. Some history for context. 16 quarters ago, Aviat had quarterly revenue of $56 million with an adjusted EBITDA margin of 0.6%. At this juncture, we did not have an operating system. Today, we reported quarterly revenue of $95 million with a 14.5% adjusted EBITDA margin. We have built this operating system over the last 16 quarters. We demonstrated the operating system with AVIAD. and the Red Line acquisition, and we are now eager to show results with more scale. Moving on to the Aviat core business. We continue to benefit from the long-term trends in private network investments, 5G rollout in mobile networks, and the expansion of rural broadband coverage. Additionally, our exposure across different geographies and customers makes Aviat resilient to fluctuations in business and CapEx cycles. In private networks, Aviat is well positioned to grow, and we see demand remaining strong. Note that our private network business is now approximately 50% of our revenue. We continue to work through the two large statewide networks announced earlier this fiscal year, in addition to numerous smaller network projects. We believe that the America Rescue Plan Act, or ARPA, still has meaningful contribution to our business over the next three years by aiding state and local spending on private network upgrades and expansions. While some of the projects have had ARPA funding as a portion of their source, we believe that most of their budgetary allocations have come from traditional funding sources signaling a healthy appetite for private network spend and upgrades at the state and local government level. As ARPA funds get layered in, we see a strong private network spending environment. As a reminder, ARPA funds must be fully spent by the end of calendar year 2026. One of our focuses at Aviat has been to grow international private network business. Our recently announced partnership with SmartFriend Telecom in Indonesia is a good win for Aviat. Aviat will work closely with SmartFriend to deliver high-speed, ultra-reliable wireless connectivity, private wireless indoor and outdoor networks, and industry digitalization and automation services to private network customers across Indonesia. Completion of the Pasolink transaction and the associated geography and scale accelerated the discussions and made the private network partnership more compelling for Smartfront. In mobile networks, we are encouraged by the dialogue with customers expect this market will continue to provide growth prospects for Aviat as microwave transport spend for 4G and 5G networks remains healthy. Aviat was recently highlighted by three Tier 1 customers. Globe, MTN, and Barkey Airtel recognized Aviat as a key partner in their annual supplier evaluation award cycle. We view these nominations as proof of the value and superior performance that Aviat offers. I look forward to working closely with these three operators as they continue to invest in their networks. We expect the demand for microwave backhaul in mobile networks to remain strong in the years ahead. Much has been made of the forecasted decline in operator spending. According to Del Oro, worldwide RAN revenues are projected to remain approximately flat. We are undeterred. We believe we can grow in this environment for three reasons. First is the expected favorable mix of wireless transport. We spoke on the last earnings call that in developed countries, as telecom capex spend shifts to suburban and rural areas, the percentage of microwave increases. In developing countries, where wireless is more ubiquitous, 5G spend is still in front of us, and we will benefit in all areas. 5G phases. Second is our global presence. Operator spending is heavily region-dependent. Given our presence in 20 Tier 1 operators spread fairly evenly across Africa, Asia-Pac, India, Latin America, and the US, we are protected from a slowdown in any one country or region. Investor sentiment is largely driven by the US Tier 1s, of which we have exposure to only one. Third is our confidence in our ability to take share. As we mentioned, we believe Aviat has the industry's leading portfolio of e-band and multi-band products with single and dual channel band, single box multi-band, extended distance, and vendor agnostic multi-band. 5G will drive a shift towards these technologies where we are well positioned. We have a large installed base of Pasolink. And with the Aviat portfolio, we have a strong value proposition for network migration. On top of our product offerings, we remain optimistic on the Huawei share gain opportunities in many regions. This will ultimately drive a share expansion for Aviat. Moving to the rural broadband business, Aviat had a record amount of sales in the first half of fiscal year 2024 in the Aviat store. This is a good indication of the healthy demand and we expect this to remain strong in the quarters ahead as operators spend Rural Digital Opportunity Fund, or RDOF, awards. Recently, there have been questions about rural broadband capex in 2024. We believe that demand for microwave backhaul in this market will remain steady throughout the year. Microwave offers network operators cost-effective backhaul while still enabling high-speed connections and ample bandwidth capacity. The broadband equity access and deployment program, or BEAD, will begin to impact AVIAT in calendar year 2025. This timing remains unchanged from our original expectations from when BEAD allocations were announced last year. Progress continues to be made with all states having submitted their proposals to the National Telecommunications and Information Administration or NTIA, for review and approval. We have received some questions from investors regarding the potential conflict of the BEAT program and the enhanced Alternative Connect America cost model program, or enhanced ACAM, with the concern that AVIAD customers may be excluded from receiving BEAT funding. We do not believe that this will be an issue among AVIAD customers, and we look forward to supporting them and their BEAD-related activities. With that, I will turn it 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 2024 second quarter financial highlights, noting our detailed financials can be found in our press release and 10Q filed this afternoon. As a reminder, all comparisons discussed today are between the second quarter of fiscal 2024 and the second quarter of fiscal 2023, unless noted otherwise. For the second quarter, we reported total revenues of 95.0 million as compared to 90.7 million for the same period last year, an increase of 4.4 million, or 4.8%. On a constant currency basis, our revenue would have been 95.5 million. North America, which comprised 54% of our total revenue for the quarter, is $51.3 million, a decrease of 1.4% from the same period last year due to timing of public safety projects. For the first six months of fiscal 24, North America is up 6% versus the prior year, and bookings remain strong. International revenue was $43.7 million for the quarter, an increase of $5.1 million, or 13.1%, in the same period last year. Both in Latin America and Asia Pacific regions, more than offset currency headwinds for local services in Africa and the large initial Barti Airtel shipment in the second quarter of last year. Our trailing 12-month book-to-bill ratio remained above 1, as it has since fiscal 2018. Gross margins for the quarter were 38.8% on both a gap and non-gap basis, as compared to 35.5% gap and 35.7% non-GAAP in the prior year. The improvement was driven by higher software revenue, favorable project mix, and moderating material costs. Second quarter GAAP operating expenses were $31.8 million, an increase of $8.3 million from the prior year, driven by M&A-related deal and restructuring costs and higher R&D investment. Second quarter non-GAAP operating expenses which exclude the impact of restructuring charges, share-based compensation, and deal costs were $24.3 million, an increase of $3.3 million driven by the higher R&D investment. Second quarter operating income was $5.0 million on a GAAP basis and $12.6 million on a non-GAAP basis compared to prior year GAAP of $8.7 million and a non-GAAP of $11.4 million. or a decrease of 42% and an increase of 10.9%, respectively. Second quarter tax provision was $2.3 million compared to $3.1 million last year. As a reminder, the company has nearly $500 million of NOLs that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. As a result of the past acquisition, we will be revising our non-GAAP cash tax estimate starting in our third quarter on fiscal 2024 from $0.3 million to $0.5 million per quarter. Second quarter GAAP net income was $2.9 million, down from $6.0 million last year due to the previously mentioned M&A-related expenses. Second quarter non-GAAP net income, which excludes restructuring charges, share-based compensation, M&A-related costs, and non-cash tax provision was $11.9 million compared to $11.1 million for the same period last year. An increase of $0.8 million or 7.3% driven by revenue growth and margin expansion partially offset by the additional R&D investment. Second quarter non-GAAP EPS came in at $0.97 per share on a fully diluted basis compared to $0.94 per share for the same period last year an increase of 3.2%. This modest increase in APS was accomplished even with the addition of 251,000 shares to the weighted average diluted shares outstanding coming from the passive link acquisition. Adjusted EBITDA for the second quarter was $13.7 million, an increase of $0.8 million, or 6.5% from the prior year. Adjusted EBITDA margins were at a record 14.5% for the quarter. Moving on to the balance sheet. The addition of the NEC wireless business had a significant impact on our balance sheet during the quarter. First, we drew down on the $50 million term loan to fund the deal. Then we added over $51 million of accounts receivable and $35 million in inventory. We also assumed $12 million of accounts payable and $6 million in other liabilities. Our cash and marketable securities at the end of the second quarter increased to $45.9 million, from $35.5 million in the prior quarter, leaving us with a modest $3.6 million in debt net of cash. We fully expect to be net cash positive by the end of the third quarter. Our strong balance sheet allowed us to capitalize on the NEC acquisition opportunity with continued flexibility to evaluate capital deployment options going forward. In the quarter, Aviat used $330,000 to repurchase just over 11,000 shares of Aviat stock at an average price of $29.59 per share. With that, I'll turn it back to Pete for some final comments. Pete?

Thanks, David. Before opening for Q&A, I will provide updates on our guidance, inclusive of the Pasolink business. We are raising our fiscal year 2024 guidance as follows. Revenue to be in the range of $425 to $432 million, and... adjusted EBITDA to be in the range of $51 to $56 million. This updated guidance reflects contribution from the acquired Pasolink business in the remainder of the fiscal year. We anticipate that the revenue from the Pasolink business will continue to ramp over the next four quarters to reach annual contribution levels of $140 million. We are leaving our adjusted EBITDA guidance unchanged, even though we anticipate slight dilution from the Pasolink business in the remainder of the fiscal year 2024. This is a result of the confidence we have in the core Aviat business profitability and the benefits of the Aviat operating model. You can reference slide 19 in our investor presentation for an outline of how we see the Pasolink business impacting the pro forma cost structure through the end of fiscal year 2024. We would also like to improve our accretion guidance. We previously said we expect Pasolink to be accretive by the fourth quarter of ownership. We would now like to update our outlook for the deal to be accretive by the third quarter after close, specifically the July to September 2024 quarter. This is a sign of our confidence in the work that we have done thus far and our line of sight to improve profitability in the Pasolink business. We also want to state that we are committed to the combined businesses reaching our long-term EBITDA goal of 15%. With that, operator, let's open up for questions.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone.

Please stand by while we compile the Q&A roster. And our first question comes from the line of Theodore O'Neill with Litchfield Hills Research.

Thank you very much, and congratulations on the good quarter.

Thanks, Dale.

So, Pete, I was wondering if you could give us all your viewpoint on the first 30 days of ownership with the NEC business and how that's going.

I think David will take that question because he'll give a little bit of financial color. So there you go.

Okay, thanks, Theo. Yeah, so we're really encouraged by the progress we've made so far on the integration. Our planning in the interim phase allowed us to quickly take cost out of the combined business on day one, as well as introduce the Aviata operating model to our new team members. We also met with a significant number of customers, and the feedback has been positive. From a revenue perspective, We only had real operational ownership of the business for about a week during the quarter. And the reason for that, obviously, when we first closed, we had to do physical counts of inventory and transfers as well as IT systems and data migration. And then once we got things up and running, we had the holiday season at the end of the month. So a fairly limited amount of time that we actually ran the business for the quarter. So with that very limited sample of activity, in the quarter, we think would likely lead to extrapolation errors inconsistent with our true expectations of this business if we were to break it out separately. We'll start to do so in the third quarter once we have a full quarter of operations. One other item of note, we typically only break out our backlog once a year at year end, and we'll do so again this year, but because our next report will include the Pasolink backlog, we'll go ahead and disclose our AVIAT backlog performance without Pass-a-Link one last time. At the end of Q2, our core backlog was up 24% versus the same time last year. For further context, we reported at the end of fiscal 2023 that our backlog was up 18% versus the prior year. In that six-month interim period, we've increased the increase from 18% to 24%. I think that's all very indicative of a very healthy core business.

Okay. And I'm just a little interested here in the adjusted EBITDA guidance. Since slide six shows that Pasolink has a zero contribution for EBITDA, if I'm reading this right, keeping the guidance the same implies that there's some really good stuff going on with the core of your business. Can you comment on that?

Yeah, we agree. Yeah, we would agree. In the absence of the Pass-a-Link transaction, we would be raising the core profitability guidance range. So what I would say is stay tuned on that as we execute. Perhaps there will be an update on that later in the year.

Okay. And one more question here on slide 5. you talk about expecting $140 million contribution from Pasolink. And I'm assuming that since you have salespeople on both sides that have to learn new products, that that's going to ramp more or less linearly throughout the next four quarters. Have I got that? Is that about right?

I would say progressively. So we expect our low revenue quarter to be the quarter we're in, and we'll move progressively up over the next four quarters. And We see $140 million of revenue, and we want to be conservative in saying that we will stepwise go up on that $140 million as we progress. But we are actively working to shorten lead times and cycle time with the PasoLink business. So what we'd like to do is we're committed to $140 million. million, we'd like to say that we will progressively increment, move up as we go through the four quarters. But as we bring the Pasolink business into the Aviat operating system, we may modify the way that $140 million will play out. But for a current The way we have it modeled and the way we would ask the investor base to model it is model it as a progressive step up for now.

Okay, thanks very much.

Thank you. One moment, please, for our next question. And our next question comes from the line of Scott Searle with Roth MKM.

Hey, good afternoon. Thanks for taking the questions, and congratulations on the record numbers. Thanks, Scott. Maybe just to quickly follow up on the prior question related to PASA link, I just want to clarify here. We're going to ramp up to 140 million for the year, so we're exiting four quarters from now at a number that's above that 35 million, but you're also, that's reflecting actively managing down lead times. you know, within the channel. So it seems like we're off to a better start overall in terms of what you guys are seeing from customers, initial engagements on the NEC front. And then just to follow up on the cash flow front on that front, it sounds like I think you said $35 million of incremental inventory that came aboard with NEC. It sounds like you're going to be actively working that down as well then. So I'm kind of wondering how you're thinking about incremental cash flow coming out of the deal.

So David will take the cash flow.

Okay. Hey, Scott. So, yeah, from a cash flow perspective, you know, we expect NEC will be possibly impact cash in the near term, and by the near term I mean the next couple quarters, right? So we acquired over $50 million in AR with, you know, only $12 million in accounts payable. So as that, you know, is collected and paid out, that should generate cash. Now, we do expect a large working capital adjustment, which is disclosed in the 10Q, but that'll be a fourth quarter item. So, net-net will still be positive there, and then in the medium term, which I take to mean the first 18 months of ownership, we'll be able to generate – the core business of the passive-link business will generate modestly positive cash flow, but then we have the inventory you know, reduction that provides substantial upside to it as we work to reduce those inventory levels to our target is about a third of what we currently got. Yeah.

Gotcha.

Go ahead, Scott.

Oh, no, and just that $140 million run rate, I just want to clarify that. That is what you expect contribution from NEC over the next four quarters, $140 million, ramping from a smaller number to a larger number as we exit that fourth quarter. Is that correct?

That's correct.

Okay. And if I could follow up, Dave, on the gross margins, it was a great quarter. It sounds like there was some software benefits in there. I think there's also some new product mix that you called out as well, 11 gigahertz. I know you've been working. You've got some routers and switches that have been factored into the mix. You know, how should we think about gross margins going into the current March quarter? I know it tends to be volatile from quarter to quarter, but I assume the trajectory still continues to be on an upward basis, even though I guess we're going to have the first quarter of a full NEC contribution in March. How should we be thinking about gross margins?

Okay, yeah, so this quarter, you know, is a record quarter for gross margins for the core Aviat business. And, again, that was largely attributable to software. and favorable project mix, I wouldn't expect that level of margins to persist in the near term on the core. It does tend to be a little bit lumpy. But we remain confident in our previous guidance of 100 basis points improvement for the full fiscal year versus the fiscal 23 on the core business. So now with Pasolink, we do expect that to be somewhat dilutive to our margins in the near term. And I think if you model gross margins in total to be in the 34% to 37% range for the remainder of fiscal 24, that would be good. And then we expect to drive synergies thereafter, which will drive the pass-a-link gross margins further north and mitigate any dilutionary effect that they have.

Gotcha. Okay, very helpful. Lastly, if I could, Pete, just to follow up on your comments on North America, just want to clarify not to read into the softness year over year. You continue to have a big backlog, it sounds like, on public safety and other fronts related to ARPA. And if I could follow up on the bead commentary as well, we've seen some commentary from Calix and others talking about a little bit of a pause, not just related to ACAM, but just kind of digestion and application for those bead funds. I know that traditionally has not been a big customer base of yours in terms of wireless-sized beads, but I'm wondering if you're seeing any impact or any slowdown whatsoever ahead of those bead awards starting to happen, you know, in mid to late 2024. Thanks.

Yeah, so first, we never thought Bede was going to impact calendar year 24. So, you know, in our script, we basically said we think Bede is still on track. We really believed it was going to have an impact, say, a year from now. So that's part one. And then part two, I think rational economics is starting – to prevail, right? The whole idea of BEAT is to connect unconnected or under-connected Americans. And for certain deployments in less dense areas, suburbs, and rural developments, wireless makes more sense. And so we think that the oversubscription to fiber is starting to rationalized, and we think that the opportunity for wireless will be improved. And what I would also talk a little bit more about is the six gigahertz frequency. That's been delayed from the summer of 2023. Now the FCC is saying that that should happen on March 8th, and we think that When that unlicensed broadband service comes in, it'll pave the way for more microwave backhaul, and we think that's going to have a positive effect on both RDOF and bead appropriations. That was maybe more than you bargained for in your question, Scott.

That was perfect. Thanks, Pete. I'll get back to you.

Okay.

Thank you. One moment, please, for our next question. And our next question comes from the line of Eric Suppiger with JMP Securities.

Yeah, thanks for taking the question. Congrats. First off, can you explain why the Pass-a-Link revenue ramps up? What are the dynamics that... that are at play that start off small and then pick up. And can you give us some context in terms of how we should anticipate the contribution in the March quarter?

Okay. So, the reason we are focused on a ramp up is because We want to – the business is new to us, and we want to make sure we set expectations and build into it. So it's not any seasonality or any customer dynamics. It's just the way we think it's going to take us a little time to ramp up the – the factory, our water management system, our deliveries. So that's the way we want to deal with that. And David, do you want to answer the range for the next quarter's revenue?

Yeah, I think the range for next quarter's revenue should be thought of in the mid-20s kind of range. Like Pete said, there'll be a ramp up here. And we're Pretty good with that number, and we are going to do what we can to get some upside, but I think that's where he should be.

Eric, just while we're on this, Scott asked about the ramp. You asked for the ramp, so let's get out the FY25 revenue range for modeling purposes ought to be 515 to 520 for FY28. For everybody who's on the call, we're on a July 1 through June 30 cycle.

Okay, that's great. Then last question. You did talk about combining the products as your longer-term roadmap. What is the timeframe in terms of getting the products combined?

I would say that that's a... After year two, in the third year of ownership, we can start to see the convergence of hardware. And we, you know, in the prepared remarks, we talked a lot about the software. And the Pasolink customers are eager to migrate to the Aviats network management software. So that's our first priority. And we would hope that, one, you know, year one, year one and a half, we will start to be able to deliver that software to the historical NEC customer base. And then in your post-year 24 months, we can start to see the convergence of hardware.

Great. Okay. Thank you.

Thank you. One moment, please, for our next question. Our next question comes from the line of Jason Smith with Lake Streets.

Hey guys, thanks for taking my questions. I just want to circle back to the gross margin. I know you laid out 34 to 37%, which seems like a little bit better than that kind of 33% initial number. Just curious, what are the dynamics driving that? Is it just feeling better about the mix, whether it's product or geography in the core Avia business or the pass link business getting margins lifted quicker than expected? Any color there would be helpful.

Yeah, so the 34% to 37% was a combined number, right? So it's going to be, you know, we're assuming that the Pasolink business is going to be around 30% for this fiscal year. And just doing the math, that would indicate that, you know, the core aviat margins are going to be, you know, in the 37% range or so. So we feel pretty good about that. And then, you know, we've got – pretty solid synergy roadmap to improve our cost structure there and get the passive link margins moving north here in the not-too-distant future.

Gotcha. And then, Pete, I know in your prepared remarks you talked about some potential revenue synergies, cross-selling opportunities. Those aren't baked into your targets, but can you just discuss some of the areas or geographies you're most excited about?

Uh, so we're most excited about software and that would be, you know, every place other than in the U S it's particularly with the tier one customers that came over in, uh, from, from NEC to Avia and, uh, needed. So that would be part one. And then part two is we are very excited about Indonesia. And the reason we're excited about Indonesia, and that was really Smartfriend was a representative. So we think that Indonesia is ripe for private networks. It's an industrialized nation that has lots of microwave, but there's the Indonesia telecom operators typically deliver the private network services, and this is what the Smartfriend – press releases about where we can go into Tier 1s and emerging economies and bring the AVIAT private network offering and deliver to, say, mining, oil and gas, public safety customers where they had principally been riding on the the carrier's backbone and the number one geography for that kind of application is Indonesia. So to sum up, put it simply, we're most excited about software synergy sales and the region or the country we're most excited about is Indonesia.

Okay, that's really helpful. And then just the last one from me and I'll jump back into you. The India rollout, do you still expect that to happen here in the March quarter and then a ramp again in June?

So, we're pretty confident that it'll happen sometime between March 1 and June 30th. So, there's the quarterly timing on that. So, that's what I would say, Jason. And that can drive a little bit of lumpiness between the March and the June quarter. The good news is we're confident, we're engaged in the India customer base, and we're conservative with respect to our timing. So for modeling purposes, put it in the June quarter, but it could happen in the March quarter.

Okay, that makes sense.

Thanks a lot, guys. Thank you. One moment, please, for our next question.

And our next question comes from the line of Dave King with B Reilly.

Thank you. Good afternoon. Going back to Indonesia, so once it gets going, I mean, how big can it get? Can it become like maybe 10%, maybe high single digit?

High single digits, definitely, 10%. We'll see, but we're not anticipating that at this point.

High single digits is the right answer, I think, for now.

Got it. And then equally on India, how big can they get?

We would say a little bit lower than Indonesia. Yeah, a little bit lower than Indonesia.

Oh, okay. Yeah. Got it. And then what about margins from Indonesia and India as well? I mean, are they going to be below corporate average?

So, look, India, we've said before, is below corporate average. But as we get volume, we think that we can take cost out. On the you know, look, the Indonesia business is being driven by the Pasolink product, which is below corporate average. And so I would say for now, that's the way to think about it. But, you know, we've said that we would get the Pasolink gross margins from 30 to 33%. And we've also said that when we get to that 33% level, we'll have another vantage point. And then we'll start talking about how far we can go beyond the 33% gross margin level, and that is, you know, the Indonesia business is principally Pasolink, and I think that's the best color we can give from our vantage point today. And, you know, ask the same question in a couple quarters, and hopefully I'll be able to give you a more favorable answer, Dave.

Got it. And my last question is, can you just talk about pricing environment, any changes up or down? Stable. Stable. Stable.

Got it. All right. Thank you.

Thank you. One moment, please, for our next question. Our next question comes from the line of Tim Savageau with Northland Capital Markets.

Good afternoon, and congrats on closing the deal. Let's see, where to begin here? The backlog commentary, and while I appreciate the growth metric, I've got a few more questions on that, which is I think you gave us at last fiscal year end. Associated with that, 18% growth was a backlog of $289 million, given your Book to bill commentary in the interim. I assume that's higher, but would love to get as much specifics as I can. I assume we're, you know, reasonably over 300 million, but do you have any color or commentary on that?

I think your math there, back of the envelope, is reasonable as far as the north of 300. Yeah.

Jim, we don't have the math broken out in front of us, but it's pretty simple math.

Yeah. And my simple math points to a pretty darn good book to bill coming out of all that as well. I'd say comfortably over one. But in that context, you seem to be and you typically see seasonal declines in revenues in Q1, given your kind of implicit pass-the-link guide, you seem to be guiding to that again. So I've just sort of typical carrier spending behavior in certain quarters or, you know, what are you seeing in terms of typical seasonality, you know, March down, June up? Sounds like India could help that.

Yeah, just to clarify, you're talking about calendar Q1, hour Q3, right?

That is correct. Sorry.

Yeah. I think, you know, we would agree with your statement, Tim, with that. So we hope to do better, but we need to own the Pasolink business a little bit longer to understand the seasonality and, you know, We're hopeful that shortening the cycle time, working the inventory down will lead to faster delivery of product, faster revenue ramp. So I think where we're at right now, we would agree with your statement and we hope to improve the business where we could say, well, that pattern will no longer hold, and I think that that would be, you know, we'd have a vantage point for the fiscal year 25 to make that statement for, make a different statement, but your statement for where we are now is most likely correct.

I'll take that given today. Okay, well, I think we might be mixing up Abiat-Stanil and seasonality in March and Tasselink in June, but assuming maybe some degree of uptick in Tasselink revenues as you move into June, I mean, you look to be, you know, guiding the standalone business into pretty solid growth this year, right? 7%, 8%, something like that. Yeah. And you look to be guiding it flat next year, which is a little, wait a minute, please, Pete. which is a little bit dissonant with some of the bookings and backlog and commentary that we've seen. Now, that assumes that Pasolink gets to a full 140, and maybe that's not a good assumption. But there still seems to be a lot of it, and not flat, up 1% to 2%, I guess. And I'm not reading that kind of change in your business. So maybe we can delve into that a little bit deeper.

Yeah, so look, we typically guide the next fiscal year in August, and for where we're at now, we want to be conservative, and I wouldn't read, you know, you're right. We came out with the backlog statements. We think the core is healthy, and, you know... What the analysts have said to me, if we don't give a number, you'll put the number together on our behalf. So you're right to give us a bit of a hard time on the FY25 number. This is where we're comfortable, but as time goes on, I would expect us to do better. But that's the number we're comfortable with right now.

Yeah, I don't know if that was a hard time, just doing a little math here, but I hear you. A couple more quick ones. So, you know, obviously the gross margins were surprisingly strong, especially given the international mix. You cited a couple of factors, and you're also very strong. It appeared to be an APAC, might have been LATAM as well. Can you talk a little bit more about kind of what happened there in that region and how you're able to have, you know, high end of the range gross margins with that degree of international mix?

Yeah, like I said, I think, you know, if you look at the regions where the region where the software was most beneficial, it was an APAC. And then, you know, also in the Americas, Pete mentioned the record store revenues in the first half. That also is margin accretive as well as, you know, we had some favorable or easing material input costs. So that provides a bit of a tailwind to us as well. So all those factors combined really are kind of a confluence of events. But again, we can be a little bit lumpy. So I think our full year guidance is solid.

Okay. Last one for me. You noted R&D up pretty sharply here in the quarter. I assume that's still standalone, or does it include anything from NEC given when you closed it on the one hand? And on the other, when you talk about incremental spend in R&D, is it from that elevated baseline or some other baseline?

So the R&D does include a month worth of NEC additional costs that are contractually spelled out with them. And then we're up on just an organic basis as well. That's a planned increase as we work to develop the product roadmap. a little bit lower than we had anticipated in Q1, if you will. But I think we're on track for kind of our four-year guidance there. And it's not overspending in any way. It's rationally thought out, and this is what we had planned.

Okay, fair enough. But it sounds like maybe something a little over the Q1 24 expense baseline would be relevant for your incremental guide than Q2 per se, since it's a stub. Is that? Yep. Follow me on that one? Okay.

Very fair.

All right. Great. Thanks very much.

Thank you. Thank you. I would now like to hand the call back over to CEO Pete Smith for any closing remarks.

Thanks, everyone, for joining. We look forward to updating you on our continued progress in about 90 days. Be safe. Talk soon.

Thank you for participating. This does conclude today's program, and you may now disconnect.