AVIAT NETWORKS, INC. Q2 FY2025 earnings call

• Strong financial and operational performance: total revenue $118M, up 26%; non-GAAP gross margin 35.3%; adjusted EBITDA $14.8M, up 22%; non-GAAP EPS $0.82.
• Pasolink: revenues near $35M, orders averaged $35M over last three quarters, first radio shipped from Thailand CM.
• Private networks: strong quarter, public safety and rural broadband segments performing well.
• Products: strengthened software cybersecurity, introduced Multi-Band max (MB max) product.
• Team changes: new EMEA commercial leader and global operations/supply chain leader; strengthened board and audit function.

Total revenue for Aviat Networks in Fiscal Q2 2025 was $118 million, up 26% versus the same period a year ago. North America contributed $58 million, which was 49% of total revenues, an increase of $7.3 million or 15% from the same period last year. International revenue was $60.2 million, an increase of $17.2 million or 40% from the same period last year, driven primarily by the Pasolink acquisition. GAAP gross margin was 34.6% and non-GAAP gross margin was 35.3% in Q2.

• Guidance remains as previously stated.
• Factors that could swing guidance up: better rural broadband performance, faster conversion of private network projects, global spending on mobile network operator upgrades.
• Factors that could affect lower end of guidance: supply chain ripples, Tier 1 demand pushouts, slower backlog conversion.

• Supply chain risks related to tariffs.
• Currency and payment issues in Africa.
• Potential delays in Tier 1 projects due to timing.

Q: Hey guys, thanks for taking my questions and congrats on the strong results. I'm curious if you could just lay out what the one or two businesses or customers that really drove that strong outperformance in the December quarter?

A: Yes, maybe I'll just start with how we did on bookings and then start with the good performance from the Pasolink business as Pete alluded to. We almost hit the ramp rate on revenues that we committed to on the year and then bookings was in excess of the revenues that we recorded in the quarter. So Pasolink bookings was upwards of $40 million and then we had a really nice quarter from the recently acquired 4F business as well and that was helpful from a year-over-year standpoint in North America. So it was really good to see those two recent purchases performing above the plan. And then just from a booking standpoint, we talked about it a little bit in my remarks, but the third quarter in a row where the book-to-bill was greater than one and just from a mathematical or numerical standpoint in the quarter, book-to-bill was 1.08. So those commercial dining nights are just kind of a smattering of what went well in the quarter.

Q: Okay, no, that's really helpful. And just want to make sure I fully understand your comments surrounding the U.S. Tier 1. I know you noted it was up sequentially in Q2, but have your expectations changed at all for fiscal '25 in that market?

A: I think the U.S. Tier 1 we have factored into our guidance and a faster recovery would be a benefited, Jaeson. So that's the best way to think about it.

Q: Got you. And then just the last one from me and I'll jump back into queue. You noted kind of the first radio from your CM in Thailand on the Pasolink business. Just curious if you could help us understand where Pasolink gross margins are and how we should think about those scaling the rest of this fiscal year?

A: Yes. Gross margins for the company overall rebounded really nicely in the second quarter versus where we're in the first quarter. And part of that was a better performance in Pasolink. We think that over the second half of the year as we complete the manufacturing transfer into our CM more fully that there's probably a little bit more runway on the gross margins, more likely in the fourth quarter versus kind of the mid-30s position that we were in the second quarter, but Pasolink both revenues and gross margins, really good story.

Q: Hey, good afternoon. Thanks for taking my questions. Great job on the quarter, guys. Really impressive to see the quick snapback. Maybe to dive in, just from a global supply chain standpoint, Mike, Pete, could you take us through your current exposures, what risks you've got, if any, in the current rapidly evolving tariff environment? And could you also address a little bit more in detail some of the working capital improvements? It sounds like we had a great quarter this quarter, but if I look at the inventory turns and DSOs, it looks like there's more room for improvement. So how should we be thinking about that over the next couple of quarters?

A: All right. So I'll do the supply chain and inventory, and then Michael can do the working capital. So in COVID, Aviat distinguished itself via the supply chain management. I think the environment with respect to tariffs coming, tariffs going is challenging. It's likely to produce some ripples in the supply chain. So we've dusted off the COVID playbook, and we're going to use that learning to deal with any potential supply chain interruptions, right? I would say in the last week, we've had discussions with three Fortune 500 U.S. based companies about supply chain. Those three companies are really very happy that we have a U.S. basis and are pretty well-positioned to deal with what the supply chain interruptions that the tariffs may confront us with. But then on inventory, I would say, we are gearing up for the Pasolink transition to the contract manufacturer. So we will probably have peak inventory this quarter as we complete our bridge build. And so I would say Q4 and beyond will start to turn some of that inventory into cash. And then let me turn it over to Michael on the working capital.

Q: Yes, no. So weaving the working capital into cash overall, the CFOA that we printed was 21 million, which was, as we said, a record for the company. If you look back at both Q2 of 2023 and Q2 of 2024, the two most recent comparable periods CFOA for Aviat was negative in both of those other quarters. So the improved results in 2025 were driven because we achieved our first quarter of material working capital reductions since we've owned Pasolink sequentially. And that looks even more impressive when you consider that we did it on roughly $30 million more revenues versus Q1. So all-in-all, really pleased with how cash finished in Q2. But you alluded to it, Scott, and you're right, there's more to do on it. And Pete kind of underlined it. Q3 inventory probably doesn't get much better. Pete said peak inventories. He and I are, of course, on the same page. But that unlock will materialize itself likely more in Q4 and provide that tailwind, Scott, that you alluded to a little bit for our fiscal 2026.

Q: Great. Very, very helpful. And maybe quickly, kind of shifting gears to some of the key end markets, it sounds like private networks, and I looked at the North American sales number, were covered pretty nicely. I wonder if you could provide a little bit more color on that front. And then geographically from a service provider standpoint, I think at a high level, we're hearing stabilization from other telco vendors out there across the broader macro landscape, whether it's Europe, North America, Latin America. I wonder if you could talk a little about what you're seeing from a geographic standpoint, engage with those carriers and kind of how that's giving you comfort when you look at fiscal '25 and beyond?

A: Okay. So let's just take private networks briefly. I -- the public safety market is continuing to perform. If you want a proxy for that, look at the leader in the public safety space, Motorola. Our second biggest application set is utilities. Utilities have been under invested for 40 years. And if you look at the industrial companies that sell into the utility space, all the analysts in that industrial utility space are bullish. And we would say that we're bullish as well. On the, I think on the U.S. Tier 1, it's stable. It's at a lower level that we would like, but we've, we've already factored that in. And then outside of the U.S. there are some folks that are growing their networks. We would say Southeast Asia, Latin America, Eastern Europe are all areas of strength.

Q: Great, very helpful. Lastly, if I could, for RF, you mentioned that in your opening remarks, it sounds like that's off to a good start. I'm wondering if you could just provide a little bit of color in terms of, applications and geographies where you're seeing that adoption? Thanks.

A: So the number one application is utilities. One of the remarkable things in our due diligence was that there was only 11% overlap in the utility customers. So there's got to be, as we train the -- cross train the sales forces there's going to be cross training -- there's going to be cross selling opportunities. So we're really excited about that. And 4RF was a relatively small company with a sales footprint in the U.S. but outside the U.S. it was very limited and we're starting to see some traction outside the U.S. particularly Europe, the Middle East and a little bit in Asia back. So it's good.

Q: Maybe one last one quickly and then I'll get back in the queue, but it's still a pretty broad range for the guidance for this year of 430 to 470. I'm wondering real quickly, just what are the swing factors from the lower end of that range to the higher end of that range? Thanks and congrats on the quarter again.

A: Thanks. I think, some things that would swing it up would be better performance in rural broadband. You would see faster conversion of private network projects. Those would be two and global spending on network upgrades in the mobile network operators. That would be the screen track. Thanks, Scott.

Q: Yes, and congratulations on the quarter. I was wondering on the, on the margin improvement, is that a -- is it a mixed issue? Is it a utilization issue? Is it something to do with Pasolink? I was wondering if you could give us a little more detail on that?

A: Yes, no, great question. I'd say that our gross profits obviously rebounded really nicely in the quarter versus Q1 levels. And you hit it. It was really improved revenue mix mostly into critical nodes of performance. One, our geographic dispersion of our revenues as North America improved significantly versus 1Q. And then our product mix and software sales, as well was better in Q2 than in Q1. And just say one other thing, just cause Scott had the question on, for our rep, which we call internally our Aprisa business. But that business in particular had a really nice quarter for us on revenues. And that's an incremental boost to our mix too, since it trades at more favorable gross margins than Aviat's historical averages. So, all of those things were additive from a mixed standpoint in Q2 versus Q1.

Q: Thank you. And I was wondering if you had any 10% or more customers in the quarter, if you could talk about that?

A: Yes. So over the last two quarters, our largest customer has been different Q1 versus Q2, and neither of them tripped the 6% level. So the way we have very little, we have high customer diversification and very little customer concentration risk.

Q: Okay. And I just want to compliment you on the seasonality slide 21. That's very helpful.

A: Yes. Thanks. Thanks very much.

Q: Thank you. Good afternoon and nice quarter guys. First question is regarding, North America Tier 1 SP, Service Providers. I guess, still muted despite very strong revenue. So, a couple of questions there. Is it because of, if it's the inventories they still have? And if so, what's the timeline as far as working down those inventories?

A: It's not inventory related. It's there -- we're basically between projects.

Q: Oh, so it's more of a timing issue then.

A: Yes. Yes.

Q: And so March quarter, is that going to be still that, you know, still going to be muted or how should we think about such trajectory?

A: Look, I think, their run rate is factored into our overall guidance. And if they decide to turn the projects on, then we'll have upside. And if not, I think it'll materialize in Q1 FY '26.

Q: Got it. And then, past quarter, you also talked about Africa, a couple of Africa customers being we just update there with those customers?

A: Yes. I would say we still see some weakness in Africa and that's largely driven by currencies and their ability to pay. And with the interest rates on the dollar and the Euro being elevated, I would say that Africa will remain at that level for the foreseeable future.

Q: Got it. So probably not this calendar year then, or?

A: Yes. Well, look, I'm not in the business of predicting interest rates, but, so let's say that for this calendar year, I think Africa demand will be you know, relatively modest.

Q: And just, how should we expect Europe to do this year given, I guess, like Germany and other countries dealing with recession and geopolitical situations. So, any color or your expectation on Europe?

A: We're seeing good funnel and good conversion of the funnel in Europe. So, there's been some legislation around the Chinese vendors, which could be some encouragement for us. So we see Europe as being potentially a growth driver, Dave. And I think some of the Chinese competitor dynamics are factored in there. And, I think there's some recognition of the Aviat value proposition, which could or could turn into growth for us.

Q: Yes, Tim here. Let me go back to the seasonality slide and maybe in combination with some of the commentary on the guidance range. But I guess I'll boil it down into this one question. Would you expect Q2 to be the peak revenue quarter for the year, I guess, given what you're saying about seasonality? And I understand you got some downward seasonality in the March quarter, typically. But given your bookings and backlog commentary that would seem to be fairly conservative, although that's what's implied at the low end of your range, that Q2 is likely to peak. So I'd love to get you to respond to that and then follow up?

A: Yes, look, I mean, we put that chart in there for a reason, so I'm glad that some folks has had kind of alluded to it and the setup on the year is, fairly well choreographed as it relates to how the seasonality pattern typically plays out. So, the persistence of a little bit less revenues in Q3 versus Q2. That is what we think will occur, as it relates to 2025 to relatively persistent trend. It gets even more pronounced if you were to adjust 2024, normalize out the effective past length. But then in Q4, which is our June quarter, revenues typically increase. And if the bookings, that we've seen in Q4, Q1, Q2, all three quarters of which have been greater than a book-to-bill greater than one, if those bookings persist in Q3, then there's no reason that Q4 shouldn't be potentially even a bigger revenue outcome than Q2. So that's kind of the, the setup in our minds as we're thinking about the second half of the year.

Q: I have a little bit to add on this, Tim. So, some of the March quarter is affected by weather, the installs of private networks, and if the weather is challenging, those installs will be done the first two weeks of April. So we want to be conservative with respect to the March quarter. And I think Michael answered his -- gave his perspective on the June quarter.

Q: Okay, great. And I'll follow up on the range question. Pete, you mentioned some factors that could drive things to the upside. I wonder if I could get you to talk more about what would have to happen to get the lower end of the range. Well, first we'll start that on revenue. And I think it becomes even a more difficult question on EBITDA, given how well your, how strong your margins were in Q2, but that's good. We'll get to that in a moment and start on the top line?

A: Well, look, we talked earlier about, supply chain ripples and if there's a supply chain ripple that's tariff induced, I could see that, having a negative consequence, right? The globally Tier 1 demand is that, if there's pushouts or project delays, that could be another negative. Thirdly conversion, we have good backlog. How fast do we take that backlog design, configure the network and get it shipped. But if our customers are slower on that part of the conversion cycle, those could all have a impact where we'd wind up at the lower end of the range.

Q: Okay. But you're kind of seeing the opposite of that right now. So something material would need to change to the downside to get us to the low end. Is that fair to say?

A: Look, we've just been through a very difficult time and I am not going to take it. I don't want to give anyone the idea that things are better than there are. I think we rather than tweak the model, we'd like to just have the opportunity to prove ourselves again and again.

Q: Right. Fair enough. But I had one more here, on the EBITDA side. So maybe a similar discussion, but even kind of more pronounced. Are there any factors or were there in Q2 that are, you know, in the gross margin side or elsewhere that are maybe non-recurring where you could see either some deterioration in gross margin or increases in OpEx that would kind of take you off your current EBITDA margin run rate?

A: No, I wouldn't say anything non-recurring, in nature like that, Tim, in the quarter.