Aviat Networks, Inc.

Thank you and welcome to Aviat Network's first 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 Conaway, our CFO, who will review the financial results for the quarter. Pete will then provide closing remarks on Aviab's strategy and outlook, followed by Q&A. As a reminder, during today's call and webcast, management may make forward-looking statements regarding Aviab'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 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.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. Let's discuss Aviat Network's first quarter of fiscal year 2025. Total revenue of $88.4 million with non-GAAP gross margin of 23%, adjusted EBITDA of minus 7.7 million, non-GAAP EPS loss of 87 cents. As we previewed in our last earnings call, we expected the results in our fiscal Q1 to be difficult. In the quarter, our team dealt with the revenue impact from ongoing U.S. Tier 1 CapEx weakness, as well as timing challenges from both private network, and international projects. Additionally, management faced the priority of closing out the year-end audit and completing our SEC filings throughout the quarter, which distracted from our execution. To provide some additional perspective for investors, the global microwave market saw an 8% year-over-year contraction in the most recent quarter based on industry research from Del Oro. This is the fourth consecutive quarter of overall microwave revenue declines. The market softness has been driven principally by mobile network CapEx declines. Aviat has been able to avoid the impact of the broader market decline until recently, thanks to our private network business and our share gain funnel. However, in the most recent quarter, we were unable to offset the Tier 1 weakness. Nonetheless, we have seen in the FCC coordination filings that Aviata has continued to grow its share of demand in North America and outperform the market. Aviata has grown its share of demand in the microwave space globally in recent quarters and over the past several years. We believe we have the best all outdoor radios on the market, including a portfolio of E-band and multi-band solutions that are unmatched. We also lead in all indoor solutions, as is evidenced by our new state private network and have a competitive split-bound offering for international customers. Our access solutions are strong and highly penetrated in the segments we serve. Gross margins were significantly impacted by lower volume and by mixed shift away from North America and towards our international business. Based on our revenue and profitability, we aggressively managed our operating expenses and continue to do so where possible. We expect that our Q2 operating expenses will be lower than Q1. As a reminder, we currently have some higher operating expenses associated with our preparation for the stoppage of transition services with NEC over the next two quarters. We anticipate that the back half of fiscal year 2025 will see more favorable operating leverage for Avion. Moving on to product and customer updates. Last quarter, we discussed our growing opportunity of selling Avion's network management software, ProVision Plus. to Pasolink product customers. To provide more color to investors, we believe that this will be a $50 million upgrade opportunity over the next five years. There are over 1 million Pasolink radios installed across 500-plus customers today. Moving these customers to ProVision Plus represents a significant upgrade for them in terms of usability and features over the prior NMS software they had access to. For Aviat, this is an attractive opportunity to grow our software revenues and further demonstrate our focus on offering value-add products and services to those customers acquired as part of the Pass-a-Link transaction. Our Prisa product line, which was acquired in the 4RF transaction, recently notched its first purchase order for our Prisa 5G router to an American utility company in the Southwest. This is an exciting development in the growth of Aviat's private 5G business. I'll also mention that we're already realizing cross-selling revenues from the 4RF acquisition. As a reminder, approximately 90% of our combined private network customers are non-overlapping. Additionally, recent events such as the cyber attack against America's largest water utility highlight the criticality of having secure private networks with trustworthy and dependable hardware for infrastructure providers. Just as we see a long upgrade cycle in public safety networks, we expect there will be a significant investment cycle in grid and utility infrastructure modernization. As proof, we are already engaged in projects with two Midwestern electric utilities that have selected our Preza Access products as part of their network upgrades and modernizations. These two contracts total more than $8 million, are expected to begin shipping products by the end of this calendar year. We are pleased with how the 4RF tuck-in acquisition has progressed to date and expect to have more good news to report in the quarters ahead. Lastly, we are beginning plans to transfer the manufacture of Pasolink products from NEC's in-house manufacturing in Japan to Aviat's contract manufacturer. We believe that this transfer will enable Aviat to more quickly and efficiently manage orders and inventory relating to Pasolink products, and over time, result in lower overall costs and better gross margins. As a result of this manufacturing move and to ensure continued service to our customers, we anticipate and have already begun building an inventory stock of Pasolink products on the order of $20 to $25 million. We expect that this inventory will subsequently be worked down over the next 18 months. Before coming back for some additional comment on our outlook, I will turn it over to Michael to review the financial results of the quarter.

Thank you very much, Pete, and good afternoon, everyone. I'll review some of the key fiscal 2025 first quarter results. Please note that our detailed financials can be found in our press release, and all comparisons discussed are between the first quarter of fiscal year 2025 and the first quarter of fiscal year 2024. unless otherwise noted. For the first quarter, we reported total revenues of $88.4 million, as compared with $86.9 million for the same period last year, an increase of $1.5 million or 1.7% year-over-year. North America, which comprised 48% of our total revenue for the quarter, was $42 million. a decrease of 23% from the same period last year due to Tier 1 softness and timing of certain large projects in our private network's business. International revenue was $46 million for the quarter, an increase of $14 million, or 44%, from the same period last year. This growth was driven primarily by the addition of revenues from the Pasolink acquisition. Our trailing 12-month book to bill was over one in the quarter. Gross margins for the quarter were 22.4% on a GAAP basis and 23.2% on a non-GAAP basis. This compares to 35.9% GAAP and 36.2% non-GAAP in the prior year. The decline in our gross margins was driven principally by two items. Lower overall volumes worked against us from a period cost and operating efficiency standpoint. And secondly, we had a mix shift away from higher margin projects and regions in the quarter. We expect some of these factors to begin normalizing in the quarters ahead. Fourth quarter gap operating expenses were $35.4 million, an increase of $9.1 million from the prior year driven by the addition of Pasolink and 4RF-related AuthX and increased R&D expenses as we prepare to end Pasolink-related transition services with NEC. Non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation, and deal costs, were $30 million, an increase of $6.2 million, driven by Pasolink, 4RF, and increased R&D costs. In the first quarter, we analyzed and reviewed expenses and headcount to ensure that we are aligned with the current demand environment. There is still work ongoing here, and we expect to show continued progress on cost out and improved earning results as the year progresses. Fourth quarter operating income was minus $15.6 million on a GAAP basis, and minus $9.5 million on a non-GAAP basis. The first quarter tax provision benefit was $5.5 million. As a reminder, the company has approximately $450 million of net operating losses or NOLs that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. First quarter GAAP net income was minus $11.9 million and non-GAAP net income, which excludes restructuring charges, share-based compensation, M&A-related and other non-recurring expenses, and the non-cash tax provision, was minus $11.1 million. Fourth quarter non-GAAP earnings per share came in at minus 87 cents on a fully diluted basis. Adjusted EBITDA for the first quarter was minus $7.7 million. This was impacted by the lower gross margins and elevated OpEx in the quarter. Moving on to the balance sheet. Our cash and marketable securities at the end of the first quarter were $51 million. In the quarter, we pulled down our revolving loan facility, bringing our outstanding debt to $81 million at the end of the quarter. The consumption of cash was driven primarily by our purchase of 4RF, and negative gap pre-tax earnings in the quarter. With that, I'll turn it back to Pete for some final comments. Pete.