Aviat Networks, Inc. — Form 10-Q Summary
Business context and reporting period
Aviat designs, manufactures and sells wireless networking products, systems and services for communications providers, governments, utilities, transportation, public safety and other customers globally. The filing covers the 13 weeks ended September 29, 2017, the first quarter of fiscal 2018, compared with the 13 weeks ended September 30, 2016. The company operates as one reportable segment.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $56.2 million | $58.2 million | Down 3.5% |
| Product revenue | $35.1 million | $34.7 million | Up 1.0% |
| Services revenue | $21.1 million | $23.5 million | Down 10.1% |
| Gross margin | $17.3 million; 30.8% | $17.4 million; 29.8% | Margin up 1.0 percentage point |
| Operating loss | $1.2 million | $2.9 million | Improved by $1.7 million |
| Net loss attributable to common stockholders | $0.7 million | $0.6 million | Loss increased $0.03 million |
| Loss per share | $0.12 | $0.12 | Unchanged |
| Cash flow from operations | $4.9 million | $3.3 million | Improved by $1.6 million |
Gross margin was approximately 30.8% and the operating loss margin was approximately 2.2% of revenue. Product margin improved to 32.5% from 28.4%, primarily because of lower supply-chain costs, while service margin declined to 27.9% from 31.9% because of lower profitability on field-service projects.
At September 29, 2017, cash and cash equivalents were $39.1 million, restricted cash was $0.9 million, and short-term investments were $0.3 million. Total cash, cash equivalents and short-term investments were $39.4 million. Total assets were $152.2 million and total equity was $54.4 million.
Debt consisted primarily of $9.0 million outstanding under the Silicon Valley Bank credit facility. Available credit was $7.9 million after borrowing-base limitations and $2.7 million of outstanding letters of credit. The facility expires June 30, 2018, and the company was in compliance with its financial covenants at quarter-end.
Investing cash use was $1.4 million, primarily for property and equipment. Financing activities provided $0.01 million net, as $9.0 million of borrowings were offset by $9.0 million of repayments. Cash, cash equivalents and restricted cash increased $3.4 million during the quarter.
Material changes versus the prior comparable period
- Revenue declined $2.0 million, driven by lower services revenue and weaker sales in Latin America and Asia Pacific, partially offset by stronger North America revenue.
- North America revenue increased 8.5% to $31.0 million, while Africa and the Middle East declined 6.2% to $13.5 million, Europe and Russia declined 1.4% to $4.4 million, and Latin America and Asia Pacific declined 32.5% to $7.3 million.
- Gross profit was nearly flat, but the gross margin percentage improved because of better product margins and lower supply-chain costs.
- Research and development expense declined 2.9%, selling and administrative expense declined 9.6%, and restructuring charges decreased from $0.2 million to nominal levels.
- Operating loss improved materially, but net loss attributable to common stockholders increased slightly because the prior-year period included a larger tax benefit and the current period included $1.3 million of final Singapore tax-refund benefit.
- Operating cash flow increased to $4.9 million, helped by collections of accounts receivable and reductions in unbilled receivables.
Guidance, outlook, risks and unusual items
- Management expects quarter-to-quarter fluctuations and continued seasonality, with customer capital spending typically stronger in the second fiscal quarter and weaker in the third fiscal quarter.
- The company expects to spend approximately $6.0 million on capital expenditures during the remainder of fiscal 2018, primarily for development and manufacturing equipment and managed-services support.
- Management believes available cash, credit availability and expected customer collections should fund working capital and capital expenditures for at least the next 12 months, but renewal of the credit facility is not assured.
- Key risks include intense price and margin competition, customer and geographic concentration, delayed customer payments, foreign-exchange and political risks, economic weakness in international markets, supply-chain constraints, product-development execution, covenant compliance and dependence on key personnel and relationships.
- International operations remain affected by limited U.S.-dollar availability and currency devaluations in economies dependent on resource exports.
- The company had $1.1 million of restructuring liabilities at quarter-end, with approximately $0.8 million classified as current; remaining payments are expected through fiscal 2020.
- Outstanding purchase obligations were $21.8 million, software-license commitments were approximately $0.9 million, and off-balance-sheet commercial commitments were $45.8 million, including standby letters of credit and other arrangements.
- Austrian customer litigation includes a claim for $1.0 million related to allegedly defective products. The company has recorded no liability because the potential loss is not currently estimable and believes it has contractual and legal defenses.
- The company adopted inventory and intra-entity income-tax accounting updates with no material impact. It expects to adopt the new revenue-recognition standard in the first quarter of fiscal 2019 using a modified retrospective approach; installation revenue and certain sales commissions may be affected.
Facts investors should verify
- Whether the Silicon Valley Bank credit facility was renewed before its June 30, 2018 expiration and on what terms.
- Whether revenue weakness in services and Latin America and Asia Pacific continued or reversed in subsequent quarters.
- Whether improved product margins offset declining service profitability and competitive pricing pressure.
- Compliance with credit-facility covenants and the sufficiency of the borrowing base and liquidity.
- The ultimate outcome and potential exposure from the Austrian customer claim and other contingencies.
- The implementation impact of ASC 606 on installation revenue, sales commissions, reported margins and deferred revenue.
- The sustainability of positive operating cash flow given customer concentration, international collections and working-capital fluctuations.