Good day and welcome to the Aviat Networks announcement call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. You may signal to ask a question by pressing star one on your touchtone phone. Please note this event is being recorded. I would now like to turn the conference over to David Gray. Please go ahead.
Good morning, everyone, and thank you for joining this Aviat Networks Investor Call. Also joining us from Aviat in the call today are Pete Smith, Aviat Networks President and Chief Executive Officer, Gary Croke, Vice President of Marketing, and Keith Fannin, Vice President of Investor Relations. A live and archived webcast of today's call will be available on the company's website. During this call, management may make forward-looking statements, which involve risks and uncertainties that could cause our results to differ materially from management's current expectations. We encourage you to review the cautionary statements and risk factors contained in the press release, which is available on our website, and in the company's SEC filings such as its 10-Q and 10-K. Additional information about Redline Communications Group can be found on their website and their filings with the Canadian Securities Authorities.
Aviat Networks undertakes no obligations to publicly revise or update any forward-looking statements to reflect future events or circumstances. Furthermore, during the call, the company will discuss some non-GAAP financial measures. A short presentation was added to our investor relations website with additional details and commentary to supplement our prepared statement today. First, I'll start with an overview of the terms and financial implications of the Redline acquisition and then turn the call over to Pete for further discussion. Under the terms of the agreement announced yesterday, Aviat will pay approximately CAD 16.2 million or $12.9 million in an all-cash transaction to Redline Communications shareholders whose ticker symbol is RDL on the Toronto Stock Exchange. This equates to total consideration of approximately $8.3 million net of cash and debt currently on Redline's balance sheet.
Note that all subsequent figures will be stated in U.S. dollars only. Transaction has been unanimously approved by the board of directors of both companies. It is expected to be completed within six months, subject to approval by the shareholders of Redline Communications, along with other specified closing conditions. Now, let me give you some perspective on the potential contribution Redline brings to building Aviat Networks. During the 12 months ended December 31st, 2021, Redline posted $19.5 million in revenue with gross margins of 59.7% and adjusted EBITDA of -$1.4 million. From an earnings standpoint, we expect the transaction to be accretive to both adjusted EBITDA and non-GAAP earnings in the first year.
We are targeting over $4 million in annual cost synergies as we eliminate redundant public company costs, leverage our contract manufacturing relationship, and combine teams onto Aviat's operating platform. Assuming that is expected to add approximately $20 million in revenue to Aviat's Fiscal 2023 g iven our currently identified synergies, we expect $1.0 million to $1.4 million contribution to adjusted EBITDA in Fiscal 2023 and $0.07 to $0.10 in non-GAAP EPS. In year two and beyond, we expect revenue growth of mid-single digits, EBITDA margins approaching 15% and non-GAAP EPS accretion of $0.18 to $0.24. I will now turn over the call to Pete to provide additional details of this exciting development. Pete?
Thank you, David, and thank you to our shareholders who have dialed in for this call. I'm pleased to report today on our acquisition of Redline Communications. As you know, Aviat is a leading provider of wireless transport solutions in private networks worldwide. Over the past two years, we have discussed our private network business and our capital allocation strategy. Our goal has been to solidify our leadership in this space and grow our share of wallet with our key accounts with whom we are deeply entrenched. We have found a complementary business in Redline, and we will use cost synergies to pay for the acquisition. Redline is a Canadian-based manufacturer of licensed and unlicensed point-to-point and point-to-multipoint solutions with a robust private LTE offering and a roadmap to private 5G.
Their value proposition centers around delivering connectivity solutions for mission-critical applications that require high levels of reliability and security, very much aligned with Aviat's value proposition today. We have complementary products and customers with no overlap in product offering and very few common accounts, representing an opportunity for sales synergies for both product lines. Note, we have not assumed any revenue synergies in our financial models. This is an exciting opportunity for Aviat and Redline. The acquisition creates an integrated end-to-end offering for wireless access and transport in the private network segment. Aviat will expand its share in private networks by adding Redline's wireless access solutions to Aviat's existing wireless transport portfolio. Redline products will benefit from Aviat sales and marketing presence for broader reach l ikewise, Aviat will leverage Redline's presence in oil and gas and transportation verticals.
We believe the acquisition of Redline has three main benefits for Aviat and our shareholders. First, it immediately improves our financials. The additional $20 million in revenue in a high-margin private network segment is accretive to gross margin percentage, adjusted EBITDA, non-GAAP EPS, and free cash flow in the first year. Second, this acquisition enhances Aviat's private network offering. It gives an end-to-end solution of wireless access and transport for private networks, essentially providing access to more share of wallet in private networks. We believe we can leverage respective sales channels to sell more of both Redline and Aviat products and fina lly, we advance our 5G offering.
We are better positioned as a private 5G company focused on the most active segment, private 5G, which according to IDC, is projected to grow at a 35% CAGR, and will reach $8 billion by 2026. That concludes our prepared remarks, and I'd like to turn the call over for questions.
Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. That's star one to ask a question and we will take our first question from Scott Searle at Roth Capital. Please go ahead.
Hey, good morning. Thanks for taking my questions and congratulations on the deal. It seems like it's highly complementary.
Thanks, Scott.
Hey, guys, maybe just quickly on the terms of the transaction, I'm just wondering if there are any collars, if there are any breakup fees, just in terms of the basic structure of the deal?
Yeah, there is a breakup fee. I think it's 4% if Redline were to take a superior offer.
Okay, great, and then j ust in terms of the product portfolio and verticals, Pete, you talked about quickly oil and gas, transportation. I wonder if you could flesh out in terms of some of the mix of business that you're seeing on that front. Also, is there any sort of recurring revenue component as it relates to their private network implementations?
It's a small recurring revenue and software. It's about 85% hardware, 15% software and services. I brought Gary on the line if he wanted to comment some more. Gary, why don't you jump in?
Yeah, sure. Hi, Scott. Thanks for your question. As Pete said, this is really a geographically complementary as well. Most of the Redline business is in the rest of the world in oil and gas and mining segments. Most of our business is in the U.S. Our private business is heavily focused on public safety and utility. We believe we can use our sales channel, especially in the U.S., but also in other regions to grow this business and take both their unlicensed and their private LTE product into our verticals, especially the U.S. utilities.
Great. Thanks so much, v ery helpful, and If I could just, I think recent results from Redline have been pretty good top-line growth. I think some of that's a little bit of a bounce back and some new products in their portfolio. What does the pipeline and the visibility look like on that side of the business? Is there a big backlog that you've got visibility to or, you know, thinking about that $20 million figure that you threw out for Fiscal 2023, do you have line of sight to that now?
Yeah. At their December 31st quarter, they had their highest bookings in three years at $7.5 million and t heir backlog was $13.6 million. We think Redline brought in a new CEO about six months ago with a pretty big commercial focus and he has been driving bookings, and building backlog, and that's why, you know, we feel pretty confident in the modest growth that David talked about with respect to looking forward.
Lastly, if I could, I know you're not building in sales synergies at the current time, but if you look at your existing installed base in private networks, you know, what percentage of that customer base is addressable with the Redline product portfolio? I think there'd be a lot of overlap in terms of extending your access then into the enterprise for other connectivity, be it IoT or otherwise. I'm just kind of wondering if you guys have been able to kind of get a rough idea and flush it out at the current time. Thanks and congratulations again.
Thanks, Scott. Look, I don't know that we could be specific in how much we could sell into our private networks, but when we did our diligence, we saw potential in our key risks, which are public safety, in utilities and in oil and gas, water, wastewater. T hat would lead me to conclude that we think we have opportunity in all of our installed private network base. That's probably too bold, but we did do channel checks on all of it, and there is an opportunity, Scott. Qualitatively, I would say we have opportunity in all of our private network business.
Great. Thanks and congrats again.
Thanks.
Thank you. Our next question is from Theodore in Litchfield Hills Research.
Thanks very much for that. Yeah, I just have one question sort of on the R&D front. Looking at the two companies combined and the R&D efforts, are there overlaps or are there synergies there? I wonder if you could talk a little bit about how each side can, you know, each firm can help the other with on the R&D front.
Yeah. Our plan is to keep the Redline Communications R&D team intact. There is technical synergy, for instance, in our network management software and the Redline Communications network management software. We think, you know, a year or two out, we can have a stronger offering across the access and backhaul side. Both of us have RF technology, i n our, you know, diligence period, we did have joint conversations with both R&D teams. The R&D teams get along great, speak the same language b ecause there's synergies that we haven't modeled, and there's going to be overlap of skill sets so that we could, you know, strengthen Aviat's products and strengthen Redline's offering.
Great. Thanks very much.
Thanks.
As a reminder, to ask a question, please press star one. Our next question is from Orin Hirschman in AIGH. Go ahead.
Hi. Good morning. How are you? Congratulations on the acquisition. I t would appear based on the paid-in capital that the acquisition's had a lot of money put into it, $175 million or something of that nature. T here must be something very special on the technology here that's attracting you in addition to just the raw accretion. What is that? What's proprietary or semi-proprietary to the patent portfolio? Is it a certain way they do something that may not even be patented? Is it the 5G? What is it that we hear in your voice that's attracting you so much here?
Yeah. You gave me multiple choice, Orin. It is the pathway to create a 5G platform. One of your, you know, choices is really what did it. We think they have a solid virtual Cloud in this and private LTE. We spent a lot of time on the diligence of how to get to private 5G. W e have a good backhaul offering for private 5G, and this takes us to the access side, and we can get more share of wallet. To kind of link back to Theo's question, you know, the RF stuff that goes in there, the network management, that will be technically synergistic. We have channel.
I n your question, you talked about the financial benefits, right? All of those things. If we didn't see a clear path to private 5G, we wouldn't have done the deal.
What is technically difficult about private 5G compared to, let's say, your existing public 5G?
All right. Let's have Gary take that call, s orry, that question.
Thank you.
Yeah, Orin. L ook, Redline solutions have been purpose-built for industrial networks, s o they're ruggedized, reliable, secure. They have certifications that many of these industrial enterprises need. They're environmentally hardened. This is unlike most of the other 5G or LTE products on the market that have been built for carriers and wireless access, fixed wireless access. It 's you know, it's this highly secure, hardened targeted portfolio for these industrial networks and, y ou know, just to build on some of the other comments Pete made around private LTE. So we've done a significant amount of voice of the customer work here, specifically with our industrial enterprise customers like power utilities in the U.S.
What our customers are telling us is that they have an unmet need for broadband communications, specifically for security, automation, and mobile workforce communications. They’re also telling us they prefer to build their own networks, their own infrastructure versus leasing from the carriers due to these security and reliability needs, but also to maintain control. Combine those factors with the positive spectrum environment that we're seeing now. There's dedicated spectrum in CBRS and 900 MHz is available for private enterprise use in the U.S. By the way, it's not just the U.S., Germany, France, U.K. have all made spectrum available for private applications like this and a s we've talked to our customers, they're ready to move forward with private LTE and 5G especially the utility market.
Many of them have budgeted projects now for this. We believe with Aviat's large and loyal customer base, we're well positioned to just bolt on the wireless access solutions to our deployed base of transport. T hose ruggedized features that Redline offers is really attractive to this segment.
Okay, great. Thank you so much.
There are no other questions at this time.
Great. Let's close it out. W e think the Redline acquisition is financially attractive for Aviat shareholders, an opportunity to demonstrate the Aviat operating system. This is the journey we've been on for the past two years and that's produced good financial returns and growth. It significantly advances Aviat in private networks and specifically will create a 5G platform. With that, we look forward to keeping you up to date on the regulatory reviews. I'm l ooking forward to our next earnings call. Thanks everyone for joining and w e'll talk to you soon.
Thank you. This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
Thank you.