Aviat Networks, Inc.

At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. Thank you. You may now begin.

Thank you, and welcome to Aviat Network's Third Quarter Fiscal 2025 Results Conference Call and Webcast. You can find our press release and updated investor presentation in the IR section of our website at .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 Aviat's strategy and outlook followed by Q&A. As a reminder, during today's call and webcast, management may make forward-looking statements regarding Aviat's business, including, but not limited to, statements relating to fiscal guidance, financial projections, business drivers, new products and expansions, and economic activity in different regions. These and other forward-looking statements reflect the company's opinions only as of the date of this call and webcast and involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. Additional information on factors that could cause actual results to differ materially from the statements expressed or implied on this call can be found in our most recent annual report on Form 10-K filed with the SEC. The company undertakes no obligations to revise or make public any revisions of these forward-looking statements in light of new information or future events. Additionally, during today's call and webcast, management will reference both GAAP and non-GAAP financial measures. Please refer to our press release, which is available in the IR section of our website at .aviatnetworks.com and financial tables therein, which include a GAAP to non-GAAP reconciliation and other supplemental financial information. At this time, I would like to turn the call over to Aviat's president and CEO, Pete Smith. Pete?

Thanks, Andrew, and good afternoon, everyone. Let's review the highlights from the third quarter. Total revenue of $112.6 million, non-GAAP gross margin of 35.8%. Record adjusted EBITDA of $14.9 million, up 17% versus the year-ago period. Non-GAAP EPS of 88 cents, up 13% -over-year. These results were possible thanks to Aviat's disciplined operating model and the hard work and commitment from the entire Aviat team. With our second consecutive quarter of record quarterly adjusted EBITDA, we see the work of our strategy to grow the scale of Aviat taking hold. Let's briefly discuss our end markets. Looking at our mobile service provider market, we had another good quarter. Products and services related to -a-Link were in line with our long-term expectations for the business. Software volumes were good, assisting with our improved gross margins -over-year. In a previous earnings call, we announced the launch of our ProVision Plus software for -a-Link. We are happy to report initial sales of ProVision Plus to -a-Link customers during the third quarter. The successful effort to sell ProVision Plus shows the significant progress we have made servicing our Tier 1 and larger mobile service provider customers that joined from the -a-Link acquisition. In private networks, Aviat continues to maintain its share of demand in North America and expand the sales funnel internationally. In public safety, we built and shipped additional phases of our recently won statewide network project. In the utility space, we are making progress cross-selling our offering of Apriza access radios and routers alongside microwave backhaul and are excited about the sales funnel developing with these customers. Based on investor inquiries, I would like to add that we have not seen any cancellations to date with our U.S. federal government customers as a result of spending reduction efforts. We attribute this to the mission-critical nature of our deployments. Regarding tariffs and the impact to Aviat, our team has been working diligently to mitigate the impact to our business and customers. We have deployed the playbook we used to successfully navigate the COVID supply chain crisis. In addition, our manufacturing partners have footprints that will permit optimization when the tariff landscape settles. Anticipating the tariffs, we ramped up our inventory purchases. For the vast majority of the hardware we sell in the U.S., it is assembled in the U.S. We believe Aviat has the largest operational U.S. footprint in the microwave space. During the quarter, we had strategic discussions with three U.S. headquartered Fortune 500 companies focused on doing more in the U.S. This may be a positive catalyst in approximately 12 months. Nonetheless, much of the tariff headline is focused on costs, and we do utilize components in contract manufacturing from international sources. We are working alongside our contract manufacturer and suppliers to adjust sourcing locations as available, but we expect exposure over the next couple of quarters. Our goal with the tariff impact to our business will be to be margin neutral through productivity, sourcing, manufacturing footprint, and price. I would now like to turn the call over to Michael to review the financial results of the quarter before coming back for some closing remarks.

Thank you very much, Pete, and good afternoon, everyone. I'll review some of the key fiscal 2025 third quarter results. Please note that our detailed financials can be found in our press release, and all comparisons discussed are between the third quarter of fiscal year 2025 and the third quarter of fiscal year 2024, unless otherwise noted. For the third quarter, we reported total revenues of 112.6 million, as compared with 110.8 million for the same period last year, an increase of 1.8 million, or .6% year over year. North America, which comprised 44% of our total revenues for the quarter, was 49.4 million, an increase of 5 million, or 11% from the same period last year due to growth in private networks. International revenues were 63.2 million for the quarter, a decrease of 3.2 million, or 5% from the same period last year. This was driven by a difficult year over year comparable, with APAC recording its best quarter on record in the Q3 fiscal 2024 period. Our trailing 12-month book to bill was over one in the quarter. Gross margins in 3Q were 34.9 on a gap basis and 35.8 on a non-gap basis. This compares to 32.5 gap and .1% non-gap in the prior year. Gross margins improved thanks to regional mix and software mix in the quarter. Third quarter gap operating expenses were 30 million, down versus 30.4 million in the year-ago period. Non-gap operating expenses, which exclude the impact of restructuring charges, share-based compensation, and deal costs, were 27.2 million, a decrease of 0.2 million versus the prior year. This decrease is due to disciplined cost management and increased efficiencies at Aviab. Third quarter operating income was 9.3 million on a gap basis and 13 million on a non-gap basis. This compares to 5.7 million gap and 11.4 million non-gap in the year-ago period. The third quarter tax provision was 1.1 million, representing an effective tax rate of 24%. 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. Third quarter gap net income was 3.5 million and non-gap net income, which excludes restructuring charges, share-based compensation, &A-related and other non-recurring expenses, and the non-cash tax provision was 11.3 million. Third quarter non-gap earnings per share came in at 88 cents on a fully diluted basis, up by 10 cents or .8% versus the year-ago period. Adjusted EBITDA for the third quarter was 14.9 million, or .2% of revenues, an increase of 2.2 million or .3% versus last year. This is another quarterly record of adjusted EBITDA for AVIAT and our second consecutive quarter of hitting this milestone. Moving on to the balance sheet. Our cash and marketable securities at the end of the third quarter were 49.4 million. Our outstanding debt was 73.9 million, bringing our net debt position to 24.5 million. With that, I'll turn it back to Pete for some final comments. Pete?

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

Thank you. As a reminder, to ask a question, you will need to press star 1-1 and wait for your name to be announced. Please stand by while we compile the Q

&A roster. The first question comes from the line of Jason Schmidt of

Lake Street. Jason, please go ahead.

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

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

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

Yeah, I would say that the U.S. Tier 1 CAPEX cycle is probably bottom with respect to us. And when you read the U.S. Tier 1 capital spending, what I would remind everyone is the capital spending typically goes five or first, and then as you move away from urban centers, you're more likely to use microwave in the suburbs and in rural deployment. So as CAPEX has bottomed and stabilized, I would say the lag period is about six months. So as the bottom, you know, what we think is the bottom in CAPEX is in, I think, the mid- to mid-20th century, we would expect a couple quarters and uptick in demand.

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

Yeah, I know. Yeah, look, maybe I'll just talk about the results first, because you're right, gross profits were a good story in the quarter for sure, building on even Q2 results, Q3 was even better. And really two reasons for that, both M&A related. So Pasalink is now in the comp in Q3 on a -on-year basis. So we've made some good improvements as we've integrated that business into Aviad. So we're seeing the gross margin uplift on a -on-year basis from that. And then the Apriza business as well, which was a Q1 2025 transaction, mixes us up. As it relates to Q4, a couple of thoughts. Number one, we'll probably get into tariffs, so I'll save some of the remarks for when we may get asked about that. But as it relates to the macro uncertainty, that's a part of it in Q4. And then we had a really strong software quarter in Q3, which we built upon a nice software quarter in revenues in Q2 as well. So that probably won't persist to the Q3 levels in Q4. So those are the two reasons why we don't see acceleration in gross margins in Q4. And we were, as Pete alluded to, guiding to the consensus where a little bit more conservative given the macro.

Okay. Perfect. Appreciate the caller. Thanks, guys.

One moment for your next question. The next question comes from the line of Scott Searle

of Roth Capital Partners. Scott, please go ahead.

Hey, good afternoon. Thanks for taking the questions. Great job on the quarter. Hey, Pete, maybe just to jump in on North America, down a little bit sequentially, yet gross margins stayed pretty good there. I guess Mike answered that a little bit. But wondering if there's anything in particular going on there, kind of what the outlook you're seeing for North America, and maybe fold that into Mike's comments about gross margins and tariffs. Can you kind of quantify what you think the impact is, what we should be thinking about, whether it's June or, as we start to get in fiscal 2060, impact of the headwinds?

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

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

So if I could sneak in just a... Go ahead, Pete.

Go ahead, Scott.

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

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

get back in the queue.

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

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

Yeah, I know. Our OPEX performance was certainly a bright spot for us in the quarter. And it's something that we've really worked hard on since I joined in particular. We messaged that the second half of 2025 would be lower versus the first half in OPEX because we were rolling off of the transitional service agreement with NEC. And, Theodore, your point in particular, even on a -over-year basis, it's in our R&D spending bucket. And so that's what you see specifically going on there. It's the TSA and then the DSA, the Developmental Services Agreement with NEC. But kind of moving on and zooming out a little bit, the other important thing that we did in the first part of 2025 was we took the opportunity to prune some additional costs out of the business. And we're also seeing that bear fruit now in an even better OPEX performance in Q3 than we thought we could achieve in the back half of 2025 when we planned our year. So you kind of hit it. It's down on a -over-year basis a little bit. But as a percentage of revenues, if you look at it in that context, OPEX was just the shade over 24% of sales, which is the lowest it's been in over two years. So, I mean, look, you hear a lot of businesses talk about being disciplined, operational executors and whatnot. But where that actually starts at the root is espousing a low-cost mindset in everything a company does. And the good thing is that's something Pete and I share as a common leadership characteristic. So good to see that playing through. So you asked if that's going to continue, and the one-word answer is yes.

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

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

One moment for your next question. And as a reminder, in order to ask a question, please press star 1-1 on your telephone and wait for your

name to be announced. The next question comes from the line

of Dave Kang of B. Riley. Dave, please go ahead.

Yes, thank you. Good afternoon. B., regarding your outlook, if you strip out first three quarters, the midpoint looks to be around 130, 131, so that's about an 18, 19 million sequential increase. Just wondering if you can go over some of your assumptions on the bubble drive that 18, 19 million sequential uptick.

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

Got it. And then just a couple on the geography. Okay, first, North America, Chair Wins didn't sound like they didn't really pick up. So they were muted in two Q and three Q. Just wondering if you're seeing any activities out of those guys going into this quarter.

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

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

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

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

Got it. Thank you.

One moment for your next question. The next question comes from the line of

Tim Savijo of Northland Capital Markets. Tim, please go ahead.

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

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

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

with

respect to demand.

Okay,

great.

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

What

could that look like from a business perspective?

Yeah, so just to comment on the customer concentration, we don't have any single customer over six and a half percent of revenue. And let's say U.S. Tier 1 kicked in. It could be top line lift anywhere from two and a half to five percent of revenue.

Thanks very much. Appreciate it. One moment for your last question. The last question comes from the line of Rustam Kenga of

Citizens. Rustam, please go ahead.

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

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

If we're helpful caller, thanks, Michael.

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

We'd like to thank everyone for joining in your interest in Aviad. We will talk to you again in another quarter. And thanks again.

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