AVIAT NETWORKS, INC. — Q1 Fiscal 2020 Summary
Business Context and Reporting Period
Aviat Networks designs, manufactures, and sells wireless networking products, solutions, and services for telecommunications, private networks, government, transportation, utilities, public safety, and broadcast customers globally. The filing covers the 13-week quarter ended September 27, 2019, compared with the quarter ended September 28, 2018. Fiscal 2020 ends July 3, 2020.
Financial Performance and Position
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $58.6 million | $60.5 million | Down 3.1% |
| Product revenue | $36.6 million | $39.1 million | Down 6.5% |
| Services revenue | $22.0 million | $21.4 million | Up 3.0% |
| Gross profit | $22.6 million | $17.9 million | Up 25.8% |
| Gross margin | 38.5% | 29.6% | Up 8.9 points |
| Operating income (loss) | $1.5 million | $(1.5) million | Improved by $3.0 million |
| Net income (loss) | $0.1 million | $(0.8) million | Improved by $0.8 million |
| Diluted EPS | $0.01 | $(0.14) | Improved |
| Cash flow from operations | $5.6 million | $(6.8) million | Improved by $12.5 million |
Operating margin was approximately 2.6%, compared with negative 2.5% in the prior-year quarter. Product margin increased to 43.1% from 31.5%, and service margin increased to 30.8% from 26.2%.
At September 27, 2019, cash and cash equivalents were $34.5 million, or $34.7 million including restricted cash. Total assets were $176.3 million and total liabilities were $106.4 million. Debt under the Silicon Valley Bank facility was $9.0 million, with $14.7 million of available credit. The facility expires June 29, 2020, and the company was in compliance with its financial covenants at quarter-end.
Capital expenditures were $1.3 million. Management expects approximately $4.8 million of additional capital expenditures during the remainder of fiscal 2020. The company repurchased $0.7 million of common stock during the quarter, leaving $4.4 million available under its repurchase authorization.
Material Changes Versus the Prior Comparable Period
- North America revenue increased 43.2% to $39.8 million, driven by private network projects and higher mobile operator sales.
- Africa and the Middle East revenue declined 25.1% to $10.6 million; Europe and Russia declined 8.2% to $3.4 million; and Latin America and Asia Pacific declined 67.4% to $4.8 million.
- Revenue declined modestly overall because international declines more than offset North American growth.
- Gross profit improved substantially because of higher North American volume and improved product and service margins.
- Research and development expense increased 5.7% to $5.2 million, while selling and administrative expense increased 6.8% to $14.6 million.
- Restructuring charges increased to $1.2 million from $0.8 million. The fiscal 2020 restructuring plan is intended to consolidate product development and right-size international and support resources.
- The company adopted ASC 842 lease accounting, recording $6.7 million of right-of-use assets and $7.0 million of lease liabilities at quarter-end. Prior periods were not restated.
- Income tax expense was $1.5 million, compared with a $0.7 million tax benefit in the prior-year quarter. The current-quarter expense included a $0.6 million increase in reserves for uncertain tax positions; the prior period benefited from a $1.6 million release of a valuation allowance related to a potential Brazilian tax refund.
Guidance, Outlook, Risks, and Unusual Items
Management expects fiscal 2020 revenue growth in North America, supported by a healthy backlog in private network projects, rural broadband and wireless internet service provider opportunities, and investment related to 5G deployments. Management has lowered its expectations for international revenue because of declining capital spending, competitive intensity, particularly from Chinese vendors, and less certainty regarding timing.
Remaining performance obligations were approximately $76.4 million at September 27, 2019, with approximately 70% expected to be recognized within the next 12 months. Advance payments and unearned revenue totaled $26.9 million, approximately half of which is expected to be recognized in fiscal 2020.
Key risks include pricing and margin pressure, fluctuations in customer and geographic mix, international political and economic conditions, foreign exchange exposure, supply-chain and subcontractor execution, customer payment timing, financial covenant compliance, competition, product development execution, customer concentration, restructuring execution, tax uncertainties, and litigation. Motorola Solutions represented 12% of quarterly revenue, and MTN Group represented 12% of accounts receivable at quarter-end.
Off-balance-sheet commercial commitments totaled $60.3 million, including standby letters of credit, surety bonds, and similar arrangements. Outstanding supplier and contract-manufacturer purchase obligations were $21.1 million, and software license commitments were approximately $2.4 million.
The company disclosed an approximately $1.0 million customer claim in Austria for alleged product defects, for which the reasonably possible loss cannot currently be estimated. An Indian regulatory enforcement matter remains ongoing; only an immaterial probable loss has been accrued, and any additional loss cannot currently be estimated.
Important Facts for Investors to Verify
- Whether North American growth and backlog can offset continued weakness and competitive pressure in international markets.
- Whether the company can sustain the significant improvement in gross margin and remain profitable after restructuring charges and tax expense.
- The renewal or replacement of the $25.0 million SVB Credit Facility before its June 29, 2020 expiration and continued compliance with its covenants.
- Cash conversion, particularly collections of accounts receivable and unbilled receivables, inventory growth, and customer advance payments.
- The timing and cash cost of the fiscal 2020 restructuring plan, including the $2.2 million restructuring liability outstanding at quarter-end.
- Potential effects of uncertain tax positions, deferred tax asset valuation allowances, international tax audits, and the Brazilian tax matter.
- Potential exposure from the $60.3 million of commercial commitments, customer and regulatory claims, and other contingencies.