Good afternoon, welcome to Aviat Networks second quarter fiscal 2023 earnings conference call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. Now I'd like to turn the conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. You may begin.
Thank you. Welcome to Aviat Networks second quarter fiscal 2023 results conference call and webcast. You can find our Form 10-Q, press release and updated investor presentation in the investor relations section of our website at www.aviatnetworks.com, along with a replay of today's call in approximately two hours. With me today are Pete Smith, Aviat's 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 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, the impact of COVID-19 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 annual report on Form 10-K filed with the SEC on September 14th, 2022. 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 investor relations section of our website at www.aviatnetworks.com, and financial tables therein, which include a GAAP and non-GAAP reconciliation and other supplemental financial information.
At this time, I would like to turn the call over to Aviat CEO, Pete Smith. Pete?
Thanks, Andrew. Good afternoon, everyone. Thank you for joining us to review Aviat Networks results for the second quarter of fiscal year 2023. Aviat executed well against its plan this quarter. We continue to position ourselves to benefit from growth around the world in 5G, rural broadband, and private networks, as well as drive meaningful bottom-line improvement. In the second quarter of fiscal year 2023, Aviat delivered revenue of 90.7 million, which represents growth of 16.5% versus Q2 of last year. Record non-GAAP operating income margin of 12.5%. Adjusted EBITDA of 12.9 million, a 27% increase versus the same period prior year. Non-GAAP EPS increase of 32%. These results would not have been possible without the tireless dedication and execution of the Aviat team and our supplier partners.
Let's discuss some key highlights from the second quarter. The global 5G upgrade cycle continues to be a driver of Aviat's business and outlook. Our recent 5G win with Bharti Airtel in India is officially underway as we began delivering products in the second quarter. We are excited about this win in India as it represents an entirely new customer and geography for Aviat and demonstrates the value that we can deliver to customers through our products and services. Elsewhere around the globe, we continue to gain 5G business through increased customer focus. Part of this growth has come from execution on replacement opportunities from our largest competitor. Globally, our share gain funnel against this competitor is approximately 60 million. In fiscal year 2023, we have booked over 19 million in such opportunities year to date and have recognized over 8 million in year-to-date revenue.
We will continue to execute on these opportunities to take share of demand. In terms of capturing new 5G opportunities, we recently announced the release of our vendor-agnostic Multi-Band solution. This allows customers to leverage Aviat's best-in-class E-band and Multi-Band solutions to seamlessly migrate their existing networks to 5G with lower incremental investments. This creates a large upgrade opportunity for Aviat as it helps overcome high switching costs. The Aviat Multi-Band vendor-agnostic solution works with existing third-party microwave radios and is detailed in our investor presentation. Our solution provides extended distance and higher capacity alternatives versus competitive offerings. With regards to our rural broadband business, we continue to execute well, and the Aviat Store remains a point of differentiation for the company.
We recently refreshed the store to expand the products offered beyond our microwave radios and accessories to include software products like our Health Assurance Software or HAS and Frequency Assurance Software or FAS, as well as integrating our Access Products from the Redline acquisition. Some additional commentary on the government funding programs follows. We continue to anticipate RDOF, Rural Digital Opportunity Fund, to begin flowing the first half of calendar year 2023, and Aviat to see RDOF-related revenue in the second half of the calendar year. The recent RDOF authorization for an industry leader using Fixed Wireless Access in their deployments is encouraging, and we anticipate more providers to use wireless technologies in their RDOF deployments moving forward. Note that we anticipate a long ramp for RDOF funding. Fortunately, Aviat is still benefiting from customer spend from the CAF, Connect America Fund, and ARPA programs.
On the horizon is the BEAD program, Broadband Equity, Access, and Deployment, which we are optimistic about. The BEAD program has allocated 42.5 billion to expand high-speed internet access in all 50 U.S. states. There is much still to be seen about the implementation and allocation of the program, but WISPs should be a large beneficiary of BEAD, which bodes well for Aviat. In private networks, we are maintaining our leadership in North America and see increasing international opportunities. For example, in APAC, we secured a multiyear high-margin win with our Eclipse platform for a national public safety network. The integration of the Redline Communications business, which we now refer to as Access Products, continues to go better than anticipated. We are pleased with our progress from a cost takeout perspective, and we are beginning to see cross-selling opportunities for Aviat backhaul into Redline accounts and vice versa.
Moving on to supply, the supply chain environment. We continue to see improvements. For approximately 98% of our supply, we have returned to pre-crisis performance. Alas, we need 100%. Currently, we have 27 components that remain in allocation. Note that it takes approximately 2,000 components to deliver our microwave system. Of the remaining components on allocation, semiconductor chips on the 28 nm node remain problematic. We have come a long way, but are not done de-risking the supply chain. Fortunately, Aviat has been able to avoid significant supply chain interruptions through the crisis period. Throughout the supply chain crisis, Aviat has held elevated inventory levels. These elevated inventory levels started at the outset of COVID-19 and have persisted and increased through the recent China reopening. We have built resiliency to the third derivative of the supply chain, which is subject to the reopening risk.
Based on the past few years of execution and building inventories, we will declare peak inventory levels at Aviat and anticipate improvements over the next several quarters as lead times and allocation continue to moderate. This quarter, we saw no missed revenue opportunity due to supply chain shortages. Aviat remains committed to building resiliency in our supply chain by proactively identifying at-risk components and secondary suppliers. Our work in moving Redline's manufacturing base over to Aviat's is a good demonstration of an opportunity where we believe we will see improved reliability and results through a stronger supply chain. I will now turn the call 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 2023 second quarter financial highlights, noting our detailed financials can be found in our press release and Form 10-Q filed this afternoon. As a reminder, all comparisons discussed today are between second quarter fiscal 2023 and second quarter fiscal 2022, unless noted otherwise. For the second quarter, we reported total revenues of 90.7 million, as compared- 77.9 million for the same period last year, an increase of 12.8 million or 16.5%, driven by strong growth in Asia Pacific, Europe, and Latin America, as well as the contribution from the Redline acquisition. North American revenue, which comprised 57% of the total revenue for the second quarter, was 52.0 million, and international revenue was 38.7 million.
We continued our trend of trailing four-quarter book-to-bill ratio above one, started back in fiscal 2018. Gross margins for the quarter were 35.5% and 35.7% on a GAAP and non-GAAP basis, as compared to prior year margins of 36.2% and 36.3% for GAAP and non-GAAP. Current quarter margins were weighed down by initial shipment of equipment for a large Asian 5G project. These project margins will improve substantially in subsequent quarters as we recognize revenue on higher margin services and software. Second quarter GAAP operating expenses were 22.6 million, an increase of 2.7 million from the prior year, driven by the inclusion of Redline operating expenses and a 0.9 million restructuring charge in the quarter.
Second quarter non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation, and deal costs, were 21.0 million. This is an increase of 1.8 million from the prior year, primarily due to the Redline acquisition. On a like-for-like basis, we continue to manage costs aggressively. Second quarter tax provision was 3.1 million, essentially flat to last year. We continue to report our non-GAAP tax expense as 0.3 million per quarter based on a reasonable estimate of cash taxes we expect to incur. The company has over 500 million of NOLs manifested as the almost 90 million deferred tax asset on our balance sheet that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. We recorded second quarter GAAP net income of 6.0 million compared to 5.9 million last year.
Second quarter non-GAAP net income, which excludes restructuring charges, FX impacts, share-based compensation, M and A-related costs and non-cash tax provision, was 11.1 million compared to 8.5 million for the same period last year. Second quarter non-GAAP EPS came in at 0.94 per share on a fully diluted basis compared to 0.71 per share for the same period last year, an increase of 32%. Adjusted EBITDA for the second quarter was 12.9 million, an increase of 2.8 million or 27.4% from the prior year. Adjusted EBITDA margins were 14.2% for the quarter. Moving on to the balance sheet. Our cash and marketable securities at the end of the second quarter were 21.6 million from 22.9 million the prior quarter.
Accounts receivable continued to be impacted by limitations on 4RF availability in certain emerging markets, extending the collection cycle. We continue to leverage our balance sheet to mitigate supply chain risks via buffer stock and supplier deposits. Given recent improvements in our supply chain, however, we will begin to unwind these investments in future quarters. We continue to have a strong debt-free balance sheet, leaving us well positioned to execute our long-term plan. With that, I'll turn it back to Pete for some final comments. Pete?
Thanks, David. Before opening up for Q&A, I'd like to add a few comments and summarize our performance. Year-to-date, we have executed on our long-term growth drivers of 5G, rural broadband and private networks. In North America and around the world, we continue to grow and capture additional share of wallet through our differentiated product, software and services offerings. We also remain focused on increasing profitability and generating meaningful shareholder value over the long term. Based on our results, the hard work and dedication of the Aviat team and the demand environment, we are raising our revenue and profit guidance for fiscal year 2023. We now anticipate revenue for fiscal year 2023 to be in the range of 340 million-347 million and adjusted EBITDA for the fiscal year 2023 to be in the range of 45 million-47.5 million.
This is an increase on both the lower end and the higher end of guidance for both figures. With that, operator, let's open the call for questions.
Certainly. Ladies and gentlemen, if you have a question at this time, please press star one one on your telephone. If you wish to remove yourself from the queue, simply press star one one again. One moment as we compile our roster. Our first question comes from the line of Scott Searle from ROTH. Your question, please.
Hey, good afternoon. Thanks for taking my questions. Nice job on the quarter. Hey, Pete, maybe to jump right in on gross margins, even though they were down sequentially in the quarter, product revenue, product gross margins were up. I'm wondering if you could give us a little bit more color on that, particularly given that you got some initial contribution from which tends to be lower gross margin and where we can expect that to go over the next couple of quarters as you start to see more normalization on the component side. Then on the other side of the ledger, the service, gross margins seem like they were down. Any one-time items or something that we should be thinking about in that, segment of the business going forward?
Hey, Scott, this is David. I'll take that. Actually, I'll start in reverse on the service margins. Service margins tend to be a bit volatile, to begin with, but they're subject to kind of some of the idiosyncrasies of the revenue recognition standard. We have to go through a process of repricing every quarter, which impacts the allocation of revenue across, you know, services and equipment. This quarter, we had a, you know, what's called a carve-out from services that ended up in equipment. It was kind of bucket to bucket.
That did impact our service margins this quarter, and also positively impacted equipment and kind of masked the dilutive impact of that large tier one project that we talked about, that again, that should be a temporary impact to this quarter and improve sequentially as we start mixing in higher margin services and software into that project. It's a bit idiosyncratic, but fundamentally, I think we're in good shape and things are looking more positive going forward.
Scott, to just add, when we won the Bharti Airtel business, we said we were going to crank up our cost reduction machine. That takes a little while and, you know, we're gonna get the volume benefits. We see improvements coming on the margin side, and we thought taking the NEC business and improving it over time was the right thing to do.
Got you. Very helpful. Maybe just to follow up on that, Dave, I mean, how should we be thinking about gross margins though over the next couple of quarters in aggregate? Should they be starting to tick up then as we start to see some, you know, alleviated pressure on the component and cost and expedite front, you know, offset a little bit by India? Is that the best way to be thinking about it?
Yeah, I think that's a good way to think about it. It should definitely be moving north from where we were this quarter. I think the back half looks relatively strong. Of course, there's always some give and take there. But, you know, in the, you know, certainly, you know, probably at least 100 basis points higher than what we currently had this quarter. You know, I think for the full year, we'll probably still end up higher than what we were for full year fiscal 2022.
Great. If I could just lastly follow up, in terms of the guidance, very strong December quarter. Looks like, you know, you're guiding kind of in line with where the first half is. You guys have tended to be a little bit conservative on that front historically. It sounds like order stock starts to kick in in the second half of calendar 2023. I'm wondering, what kind of visibility do you have in the near term, you know, given that your book-to-bill has been running over one? What are some of the key elements and swing factors as we're looking, you know, in the first half year? Should we basically then kind of very early, but be expecting a little bit of pickup certainly as we get into the back half of calendar 2023? Thanks.
I mean, as far as visibility is concerned, you know, roughly 80% of our coming quarters revenues are, you know, coming out of backlog. However, it's not quite as simple as it sounds because there are, you know, some big projects in there, and the timing of the revenue recognition associated with those projects can be somewhat dynamic. There's always give and take there. You know, I think we feel good about, you know, the rest of the year, and I think that's reflected in our guidance adjustment.
Great. Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Erik Suppiger from JMP Securities. Your question, please.
Thanks for taking the question. Congrats on a good quarter. Can you talk a little bit about some of the competitive dynamics with Huawei? Was that part of the factor of why your international was particularly strong this quarter?
You know, we don't like to name specific competitors, but that's the large competitor in the script that we alluded to.
Mm-hmm.
In part, the share gain in India, I would say Huawei contributed to that. You know, we put together the script and our story on Monday, and then on the 30th, you know, the Huawei restrictions came out from the Department of Commerce. We haven't fully digested it's gonna be more favorable for us. We've, you know, I think we said we have 60 million of funnel, and we're starting to execute on that. We think that that's a favorable trend and the restrictions that were announced on January 30th will, you know, give us some time to figure out if that's, you know, it's either at worst, it's neutral.
If it's gonna be positive, we'll be able to figure it out over the next 90-180 days.
Okay. Very helpful. Just talk a little bit about, kinda the play between fiber and microwave. Any, any updates there in terms of kinda general adoption trends, one versus the other?
Yeah. I think, you know, the share is about steady, you know, at the competitive front between fiber and microwave. What I would point to in terms of making Aviat more robust with respect to the fiber competition is our Multi-Band extended distance and our Multi-Band vendor-agnostic innovations allow us. The vendor-agnostic allows us to work with third-party microwave, and the extended distance that's explicitly designed to make us more competitive versus fiber. Overall, we have a chart in our investor presentation, and I wouldn't say that there's any share shift between fiber and microwave at this point in time.
Okay. Last question. North America grew, I think, a couple perceta. Are you seeing impact from macroeconomics? Is that playing much of a factor there? Or, how are you thinking of the North American business from an economic perspective?
Yeah. We think North America. Right, our whole business is project-based, right? North America's growth was a little muted this quarter. But we see that the backlog's up almost double digits versus the same period, point in time, last year. We have a backlog that's increasing. We have, I would say, longer projects. Our North America business is dominated by private networks, which we haven't seen any slowdown. We, you know, we read the headlines like everybody else, but we're hard pressed to say that there's a macroeconomic impact to the North America or the overall Aviat business. The growth in Q2 is really a project timing impact rather than something in the macro.
Very good. Thank you very much.
Thank you. One moment for our next question. Our next question comes from the line of Tim Savageaux from Northland Capital. Your question, please.
Hi, good afternoon, and congrats on the results. When I stay with North America, I think another feature of the quarter is Verizon making the 10% customer list, which I think is, I don't know when the last time that happened was, but feel free to let me know. You know, is that indicative, and I guess I ask this question both from a North American and global perspective. I mean, do you see 5G backhaul here, you know, obviously you've got the Bharti deal ramping, taking a greater role in terms of driving the company's growth, you know, throughout the balance of the year or short term than your other two major growth drivers? You know, we know the Bharti is a Huawei replacement. What's driving the strength at Verizon? Can follow up then.
Yeah. You know, we looked a little bit about Verizon. They've been a long-term customer of Aviat, and they've typically been right under the 10% threshold. You know, we see overall connectivity driving the uptick at Verizon. It's a combination of LTE Advanced 5G, so that, you know, drives the need for more mobile backhaul to fix wireless access transport. We see all of those trends. You know, we like all of our growth drivers, 5G, private networks and rural broadband. But right, for the next couple of quarters, I think our growth is gonna be driven by 5G.
You know, Tim, we have the kind of running dialogue about when is RDOF gonna have an impact. You know, we think the recent developments would point in the back half of calendar year 2023. You know, we think, you know, our guidance would probably factors in 5G over the next couple of quarters. As we start to think about a guide for fiscal year 2024, we will see the impact of rural broadband and the funding, which is perhaps more definitive than I have been.
Duly noted. You mentioned a bunch of numbers there that I wanna go back through because I think they're you know, probably pretty interesting. Was the 60 million, is that the estimate of the opportunity for share gain over a certain period of time? I think you mentioned with regard to your big competitor, then you went through, I think, some bookings and revenues, recognized 19 million and 8 million respectively. I'd just love to get a sense of how significant a piece of that the India business is versus what you're seeing globally.
I would say that's a really good way to get us to back out the India business. I would say the India business of that, the revenue is over half. To kinda put it in the ballpark, it's over half. But it's not over, let's say maybe, you know, 25% of the funnel. The reason I make that statement is that the funnel is a mosaic of opportunities where we're not just dependent on taking share from one or two accounts. We see that these restrictions are having a broad, broader impact. We're getting, you know, we're getting looks at customers that historically we have not. Is that helpful?
Got it. The funnel was the 60 million, correct?
Yeah, the funnel is the 60 million.
Great. Last question for me. You mentioned record non-GAAP operating margins, 12.5%. Obviously you did have some, you know, nice revenue upside there in the quarter. You know, longer term, have you guys given some consideration as to where those, you know, obviously it's, you know, dependent on gross margins to some degree, as well as, you know, some revenue growth. Do you have a sense for where operating margins can go over time now that you've kind of achieved this recent milestone?
Well, I would say that we, you know, our stated milestone is for EBITDA margins to reach 15%. We're in spitting distance, but we're not quite there yet. I'll tell you this, we're heading into our strategic planning season here. We'll probably have, you know, kind of dust off the playbook there and figure out where we wanna be from that standpoint. We'll, you know, to respond to your question as well, pay specific attention to our operating margins.
Got it. Thanks very much.
Thanks.
Thank you. As a reminder, ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. One moment for our next question. Our next question comes from line of Theodore O'Neill from Litchfield Hills Research. Your question please.
Thanks very much. Congratulations on the good quarter. I appreciate you discussing the inventory turns and the DSOs in the prepared remarks. I was wondering if you could talk about if you're seeing anything on the inflation side either improving or not improving.
Yeah, it's been fairly stable, right? I mean, we're still having some instances on select components where we'll have to pay some expedite fees. As far as general price increases are concerned, they've been few and far between. Actually we're trying to push the tide the other way at this point and start realizing some, you know, calling some of that back that we've incurred over the past year and a half. You know, more to be seen on that, but for right now we see the situation is stable.
Can you give us an update on the, on the new chip you're building with MaxLinear, some timing on that, and if that chip is gonna help with some of the semiconductor allocation issues you've got?
We, you know, we're still in the. We still haven't given the when we expect it out, but that project is progressing nicely. We think our investment has helped us get prioritized with respect to access to the modem supply chain, right? I think, you know, a couple quarters from now we'll give more definitive timeline on when the chip will start to impact our top and bottom lines.
Will those chips be part of a new product line or will they go into existing products? Or both?
Both.
Okay. All right, thanks very much.
Thank you.
Thank you. We have a follow-up question. Just one moment. Our follow-up comes from the line of Scott Searle from ROTH. Your question please.
Hey, Pete, maybe just to follow up on Redline, you're two quarters in now. I'm wondering, you know, if you could give us a little bit of an update about how that's tracking from a revenue standpoint. It sounds like you're starting to get some cross synergies from a sales perspective in terms of backhaul capabilities. But I'm wondering, you know, what that pipeline of opportunity is looking like on the private networks front, you know, kind of how we should think about that going forward over the next, you know, 12+ months. Thanks.
The, the private network funnel is starting to grow. We haven't had a win. You know, when we got prepped for the call, we thought about talking about that more and we said we wanted to have a win before we started to kind of, you know, put that in the earnings deck. We see, you know, when we, when we made the acquisition of Redline, we thought that, you know, our channels and our access to private networks and the product portfolio was gonna work, and it's not working yet, but we think we're one to two quarters away from saying, yeah, the investment thesis is proven. With respect to revenue, it contributed less than 10%.
It was accretive to our gross margins. We are ahead of the EBITDA guidance we gave for the year on Redline. We said it was 1 million-1.4 million, and we factored that into our increased EBITDA guidance that we mentioned at the end of the recorded call.
Great. Thanks.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Pete Smith for any further remarks.
Well, thanks everyone for attending the call and your support. Fortunately, the line stayed open during the Austin ice storm. We are looking forward to updating our progress in 90 days and let's stay in touch. Thanks, everyone.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.