Aviat Networks Inc
NASDAQ:AVNW
Earnings Call Analysis
Q2-2024 Analysis
Aviat Networks Inc
The company's reasons for continued growth in the present environment include an expected favorable wireless transport mix in developed countries shifting to under-served areas, an ongoing 5G roll-out in developing countries, and a diversified global presence that mitigates risks of regional slowdowns. They anticipate significant opportunities for market share gains due to their leading portfolio of e-band and multi-band products and are poised to benefit from shifts in 5G technology as well as potential opportunities arising from the Huawei market share re-allocation. Additionally, the firm experienced a record first half of fiscal year 2024 sales in its Aviat store, indicative of strong demand in rural broadband facilitated by both RDOF awards and anticipated BEAD program contributions starting in 2025. This demand is expected to maintain microwave backhaul market stability throughout the year, asserting investor confidence in a sector initially facing skepticism.
Financially, the company has shown a revenue increase to $95.0 million, up by 4.8% compared to the previous year, and a constant currency revenue of $95.5 million. North America saw a slight reduction due to project timing, but international revenue grew by 13.1%, buoyed by the performance in Latin America and Asia Pacific. Moreover, the company managed to improve gross margins from 35.5% to 38.8% due to higher software revenue and a more favorable project mix alongside mitigating material costs. The slight increase in operating expenses and income tax provision adjustments portrays a savvy use of nearly $500 million NOLs, demonstrating a prudent approach to cash management and shareholder value optimization. The anticipated rise to net cash positive by the end of the quarter further underpins a bullish financial outlook.
The Pasolink business acquisition is proceeding well, with advance integration and contribution levels expected to reach $140 million annually. The company has updated their fiscal year 2024 guidance, predicting revenues to be between $425 million to $432 million and adjusted EBITDA to range from $51 million to $56 million. Despite slight initial dilution from the Pasolink business, the company maintains unchanged EBITDA guidance due to strong core business profitability. The acquisition is set to become accretive by the July to September 2024 quarter, earlier than the initial fourth-quarter forecast, showcasing both strategic acquisition success and underlying business strength.
The adjusted EBITDA was $13.7 million, a 6.5% increase, reflecting the company's ability to manage costs effectively even with increased investments in R&D. Non-GAAP EPS also rose by 3.2%, signaling revenue growth and margin expansion despite additional R&D spend. These figures, in combination with a record EBITDA margin of 14.5% for the quarter, align with the company's strategy of growing through a combination of organic initiatives and opportunistic acquisitions.
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Good afternoon, and welcome to Aviat Networks Second Quarter Fiscal 2024 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn this conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. You may begin.
Thank you, and welcome to Aviat Networks second quarter fiscal 2024 results conference call and webcast. You can find our press release and updated investor presentation in the IR section of our website at www.aviatnetworks.com along with a replay of today's call. With me today are: Pete Smith, Aviat's President and CEO, who will begin with the 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 then 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 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 most recent annual report on Form 10-K filed with the SEC. The company undertakes no obligation to revise or make public any revision 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 IR section of our website at www.aviatnetworks.com and financial tables therein, which include a GAAP to non-GAAP reconciliation and other supplemental financial information.At this time, I would like to turn the call over to Aviat's President and CEO, Pete Smith. Pete?
Thanks Andrew, and good afternoon, everyone. Thank you for joining us to review Aviat Networks' results for the second quarter of fiscal year 2024. We are pleased to report that Aviat continued its solid execution and achieved revenue and margin growth in the quarter.Highlights from the second quarter include, revenue of $95.0 million which represents growth of 4.8% versus Q2 of last year, gross Margin of 38.8% versus 35.7% in the same quarter 1 year ago, adjusted EBITDA of $13.7 million, a record high 14.5% of revenue, record non-GAAP EPS of $0.97, strong balance sheet with $45.9 million of cash and marketable securities and a net debt balance of $3.6 million. Please note, this quarter's revenue and profit growth is against the year ago period that benefited from the large initial order from our Bharti Airtel win.These financial and operational results are driven by the continued implementation of Aviat's operating model and made possible, thanks to the effort and execution of the Aviat team and our partners throughout the quarter. We will review key highlights of the second quarter, but first, let's discuss our completed acquisition of the NEC wireless transport business.Aviat closed the acquisition of the NEC wireless business on November 30. We now refer to this as the Pasolink business. At this point, we can provide an update that will emphasize the components of the Aviat operating model framework. See Slide 17 in the investor presentation for an overview of the framework.First, the transaction consisted of taking over 18 plus entities, which were arranged to serve customers across the globe. We have maintained and integrated these entities and their team members in alignment with our Asia-Pac, Latin America and EMEA leadership teams.This approach has been agreeable with the customer base and aligned with the Aviat's customer focus element of the Aviat operating model. Note that this workstream was a major factor in the time between signing and closing of the transaction.Second, we have conducted over 70 customer meetings and presented our combined product roadmap to the majority of customers, including all of the large customers. The feedback has been positive and encouraging. The combined product roadmap has reassured customers that Aviat will continue to offer innovation and value across our entire suite of products and services.During the period between sign and close, Aviat synthesized the combined product roadmap and innovation plan. We believe this combined roadmap and innovation plan will bring leading solutions to the market. This is a demonstration of the importance of innovation in our operating model.Third, our core value of talent. We reviewed the organization of both Aviat and Pasolink. On day 1, we had a clearly defined working organization with roles, responsibilities and reporting relationships. During the period between sign and close, we work to take the best talent from both companies and organize for success. As a result, we were able to eliminate over 200 roles in the combined company.Our fourth operating model element is supply chain. This work will take several quarters. Progress that we have made thus far includes improved demand planning and forecasting, initiated rationalization of the supply chain and developed an inventory optimization plan. Together these actions should result in reduced lead times, lower working capital and improved costs.Again, these actions will take several quarters for their results to materialize and we believe they will create meaningful value for customers and shareholders.Additionally, our continued support of the Pasolink portfolio is appreciated by customers who have invested significantly into the product lineup, thanks to its high level of performance and dependability. The customer base is excited to continue doing business with Aviat.Our plans to integrate our network management software, ProVision Plus, with Pasolink products, will deliver improved functionality and ease of use to Pasolink customers. This is a request we've heard from many customers and we are excited to deliver for them. This software will serve as a platform for product portfolio convergence in the years ahead. We look forward to continuing to meet with customers, understanding their challenges and needs and delivering to meet their expectations.There'll be opportunities for cross-selling products to Aviat and Pasolink customers. We all -- are already filling a sales funnel of such opportunities and anticipate that this will translate into revenue synergies in the future. We remain confident in hitting the goals we have established for the Pasolink business: one, $140 million in annual run rate revenue contribution; and two, achieving stand-alone gross margins of 33% and stand-alone adjusted EBITDA of 11% to 13% by the end of our second year of ownership. Aviat's confidence in delivering the targets are based on the Aviat operating model and our execution of it.Some history for context. 16 quarters ago, Aviat had quarterly revenue of $56 million with an adjusted EBITDA margin of 0.6%. At this juncture, we did not have an operating system. Today, we reported quarterly revenue of $95 million with a 14.5% adjusted EBITDA margin. We have built this operating system over the last 16 quarters. We demonstrated the operating system with Aviat and the Redline acquisition, and we are now eager to show results with more scale.Moving on to the Aviat core business. We continue to benefit from the long-term trends in private network investments, 5G rollout in mobile networks and the expansion of rural broadband coverage. Additionally, our exposure across different geographies and customers makes Aviat resilient to fluctuations in business and CapEx cycles.In private networks, Aviat is well positioned to grow, and we see demand remaining strong. Note that our private network business is now approximately 50% of our revenue. We continue to work through the 2 large statewide networks announced earlier this fiscal year in addition to numerous smaller network projects. We believe that the American Rescue Plan Act, or ARPA, still has meaningful contribution to our business over the next 3 years by aiding state and local spending on private network upgrades and expansions.While some of the projects have had ARPA funding as a portion of their source, we believe that most of their budgetary allocations have come from traditional funding sources, signaling a healthy appetite for private network spend and upgrades at the state and local government level. As ARPA funds get layered in, we see a strong private network spending environment. As a reminder, ARPA funds must be fully spent by the end of calendar year 2026.One of our focuses at Aviat has been to grow international private network business. Our recently announced partnership with Smartfren Telecom in Indonesia is a good win for Aviat. Aviat will work closely with Smartfren to deliver high-speed, ultra-reliable, wireless connectivity, private wireless indoor and outdoor networks, and industry digitalization and automation services to private network customers across Indonesia. Completion of the Pasolink transaction and the associated geography and scale accelerated the discussions and made the private network partnership more compelling for Smartfren.In mobile networks, we are encouraged by the dialogue with customers, expect this market will continue to provide growth prospects for Aviat as microwave transport spend for 4G and 5G networks remains healthy. Aviat was recently highlighted by 3 Tier 1 customers: Globe; MTN; and Bharti Airtel, recognized Aviat as a key partner in their annual supplier evaluation award cycle. We view these nominations as proof of the value and superior performance that Aviat offers and look forward to working closely with these 3 operators as they continue to invest in their networks.We expect the demand for microwave backhaul and mobile networks to remain strong in the years ahead. Much has been made of the forecasted decline in operator spending. According to Dell'Oro, worldwide RAN revenues are projected to remain approximately flat. We are undeterred.We believe, we can grow in this environment for 3 reasons. First is the expected favorable mix of wireless transport. We spoke on the last earnings call that in developed countries, as telecom CapEx spend shifts to suburban and rural areas, the percentage of microwave increases. In developing countries, where wireless is more ubiquitous, 5G spend is still in front of us, and we will benefit in all 5G phases.Second is our global presence. Operator spending is heavily region dependent. Given our presence in 20 Tier 1 operators spread fairly evenly across Africa, Asia Pac, India, Latin America and the U.S., we are protected from a slowdown in any one country or region. Investor sentiment is largely driven by the U.S. Tier [ 1s ], of which we have exposure to only one.Third is our confidence in our ability to take share. As we mentioned, we believe Aviat has the industry's leading portfolio of e-band and multi-band products with single and dual channel band, single-box multi-band, extended distance and vendor-agnostic multi-band. 5G will drive a shift towards these technologies where we are well positioned.We have a large installed base of Pasolink. And with the Aviat portfolio, we have a strong value proposition for network migration. On top of our product offerings, we remain optimistic on the Huawei share gain opportunities in many regions. This will ultimately drive a share expansion for Aviat.Moving to the rural broadband business. Aviat had a record amount of sales in the first half of fiscal year 2024 in the Aviat store. This is a good indication of the healthy demand, and we expect this to remain strong in the quarters ahead as operators spend Rural Digital Opportunity Fund, or RDOF awards.Recently, there have been questions about rural broadband CapEx in 2024. We believe that demand for microwave backhaul in this market will remain steady throughout the year. Microwave offers network operators cost-effective backhaul, while still enabling high-speed connections and ample bandwidth capacity.The Broadband Equity, Access, and Deployment Program, or BEAD, will begin to impact Aviat in calendar year 2025. This timing remains unchanged from our original expectations from when BEAD allocations were announced last year. Progress continues to be made with all states having submitted their proposals to the National Telecommunications and Information Administration, or NTIA, for review and approval.We have received some questions from investors regarding the potential conflict of the BEAD program and the Enhanced Alternative Connect America Cost Model program, or Enhanced ACAM, with the concern that Aviat customers may be excluded from receiving BEAD funding.We do not believe that this will be an issue among Aviat customers, and we look forward to supporting them in their BEAD related activities.With that, I will turn it 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 2024 second quarter financial highlights, noting our detailed financials can be found in our press release and 10-Q filed this afternoon. As a reminder, all comparisons discussed today are between the second quarter of fiscal 2024 and the second quarter of fiscal 2023, unless noted otherwise. For the second quarter, we reported total revenues of $95.0 million as compared to $90.7 million for the same period last year, an increase of $4.4 million or 4.8%. On a constant currency basis, our revenue would have been $95.5 million.North America, which comprised 54% of our total revenue for the quarter, was $51.3 million, a decrease of 1.4% from the same period last year due to timing of public safety projects. For the first 6 months of fiscal '24, North America is up 6% versus the prior year and bookings remained strong.International revenue was $43.7 million for the quarter, an increase of $5.1 million or 13.1% in the same period last year. Both in Latin America and Asia Pacific regions more than offset currency headwinds for local services in Africa and the large initial Bharti Airtel shipment in the second quarter of last year.Our trailing 12-month book-to-bill ratio remained above 1 as it has since fiscal 2018. Gross margins for the quarter were 38.8% on both a GAAP and non-GAAP basis as compared to 35.5% GAAP and 35.7% non-GAAP in the prior year. The improvement was driven by higher software revenue, favorable project mix and moderating material costs.Second quarter GAAP operating expenses were $31.8 million, an increase of $8.3 million from the prior year, driven by M&A-related deal and restructuring costs and higher R&D investment. Second quarter non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation and deal costs. were $24.3 million, an increase of $3.3 million driven by the higher R&D investment.Second quarter operating income was $5.0 million on a GAAP basis and $12.6 million on a non-GAAP basis compared to prior year GAAP of $8.7 million and a non-GAAP of $11.4 million or a decrease of 42% and an increase of 10.9%, respectively.Second quarter tax provision was $2.3 million compared to $3.1 million last year. As a reminder, the company has nearly $500 million of NOLs that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. As a result of the past acquisition, we will be revising our non-GAAP cash tax estimate starting in our third quarter of fiscal 2024 from $0.3 million to $0.5 million per quarter.Second quarter GAAP net income was $2.9 million, down from $6.0 million last year due to the previously mentioned M&A-related expenses. Second quarter non-GAAP net income, which excludes restructuring charges, share-based compensation, M&A-related costs and non-GAAP cash tax provision was $11.9 million compared to $11.1 million for the same period last year, an increase of $0.8 million or 7.3%, driven by revenue growth and margin expansion, partially offset by the additional R&D investment.Second quarter non-GAAP EPS came in at $0.97 per share on a fully diluted basis compared to $0.94 per share for the same period last year, an increase of 3.2%. This modest increase in EPS was accomplished even with the addition of 251,000 shares to the weighted average diluted shares outstanding coming from the Pasolink acquisition.Adjusted EBITDA for the second quarter was $13.7 million, an increase of $0.8 million or 6.5% from the prior year. Adjusted EBITDA margins were at a record 14.5% for the quarter.Moving on to the balance sheet. Addition of the NEC wireless business had a significant impact on our balance sheet during the quarter. First, we drew down on the $50 million term loan to fund the deal. Then we added over $51 million of accounts receivable and $35 million in inventory. We also assumed $12 million of accounts payable and $6 million in other liabilities.Our cash and marketable securities at the end of the second quarter increased to $45.9 million from $35.5 million in the prior quarter, leaving us with a modest $3.6 million in debt net of cash. We fully expect to be net cash positive by the end of the third quarter.Our strong balance sheet allowed us to capitalize on the NEC acquisition opportunity with continued flexibility to evaluate capital deployment options going forward. In the quarter, Aviat used $330,000 to repurchase just over 11,000 shares of Aviat stock at an average price of [ $29.59 ] per share.With that, I'll turn it back to Pete for some final comments. Pete?
Thanks, David. Before opening for Q&A, I will provide updates on our guidance, inclusive of the Pasolink business. We are raising our fiscal year 2024 guidance as follows.Revenue to be in the range of $425 million to $432 million, and adjusted EBITDA to be in the range of $51 million to $56 million. This updated guidance reflects contribution from the acquired Pasolink business in the remainder of the fiscal year.We anticipate that the revenue from the Pasolink business will continue to ramp up over the next 4 quarters to reach annual contribution levels of $140 million. We are leaving our adjusted EBITDA guidance unchanged, even though we anticipate slight dilution from the Pasolink business in the remainder of the fiscal year 2024.This is a result of the confidence we have in the core Aviat business profitability and the benefits of the Aviat operating model. You can reference Slide 19 in our investor presentation for an outline of how we see the Pasolink business impacting the pro forma cost structure through the end of fiscal year 2024.We would also like to improve our accretion guidance. We previously said, we expect Pasolink to be accretive by the fourth quarter of ownership. We would now [ write out ] the -- outlook for the deal to be accretive by the third quarter after close, specifically the July to September 2024 quarter.This is a sign of our confidence in the work that we have done thus far and our line of sight to improve profitability in the Pasolink business. We also want to state that we are committed to the combined businesses reaching our long-term EBITDA goal of 15%.With that, operator, let's open up for questions.
[Operator Instructions] Our first question comes from the line of Theodore O'Neill with Litchfield Hills Research.
Congratulations on the good quarter. Peter, I was wondering if you could give us all just your viewpoint on the first 30 days of ownership with the NEC business and how that's going?
[ Theo ], I think David will take that question because he'll give a little bit of financial color. So I'll let David go.
We're really encouraged by the progress we've made so far on the integration. Our planning in the interim phase allowed us to quickly take cost out of the combined business on day 1, as well as introduce the Aviat operating model to our new team members. We also met with a significant number of customers, and the feedback has been positive. From a revenue perspective, we really had real operational ownership of the business for about 1 week during the quarter. And the reason for that, obviously, when we first closed, we had to do physical accounts of inventory and transfers as well as IT systems and data migration. And then once we got things up and running, we had the holiday season at the end of the month.So a fairly limited amount of time that we actually ran the business for the quarter. So with that very limited sample of activity in the quarter, we think would likely lead to extrapolation errors and consistent with our true expectations of this business if we were to break it out separately. We'll start to do so in the third quarter once we have a full quarter of operations.One other item of note, we typically only break out our backlog once a year at year-end and we'll do so again this year. But because our next report will include the Pasolink backlog, we'll go ahead and disclose our Aviat backlog performance without Pasolink one last time.So at the end of Q2, our core backlog was up 24% versus the same time last year. And for further context, we reported at the end of fiscal 2023 that our backlog was up 18% versus the prior year. So in that 6 month interim period, we've increased from 18% to 24%. I think that's all very indicative of a very healthy core business.
And I'm just a little interested here in the adjusted EBITDA guidance. Since Slide 6 shows that Pasolink has a [ zero ] contribution for EBITDA, if I'm reading this right, keeping it to the guidance, the same implies that there's some really good stuff going on with the core Aviat business. Can you comment on that?
Yes, we agree.
Yes, we would agree. If we -- In the absence of the Pasolink transaction, we would be raising the core profitability guidance range. So what I would say is, stay tuned on that as we execute -- perhaps there'll be an update on that later in the year.
And one more question here. On Slide 5, you talked about expecting $140 million contribution from Pasolink. And I'm assuming that since you have sales people on both sides that have to learn new products, that's going to ramp more or less linearly throughout the next 4 quarters, if I got that -- is that about right?
I would say progressively. So we expect our low revenue quarter to be the quarter we're in, and we'll move progressively up over the next 4 quarters. We see $140 million of revenue, and we want to be conservative in saying that we will stepwise go up on that $140 million as we progress. But we are actively working to shorten lead times in our end-to-end cycle time with the Pasolink business. So what we'd like to do is -- we're committed to $140 million. We'd like to say that we will progressively move up as we go through the 4 quarters.But as we bring the Pasolink business into the Aviat operating system, we may modify the way that $140 million will play out. But for current, the way we have it modeled and the way we would ask the investor base to model it is, model it as a progressive step up for now.
Our next question comes from the line of Scott Searle with ROTH MKM.
Congratulations on the record numbers. Maybe just to quickly follow up on the prior question related to Pasolink. I just want to clarify here. We're going to ramp up to $140 million for the year. So we're exiting 4 quarters from now at a number that's above that $35 million. But you're also -- that's reflecting actively managing down lead times within the channel. So it seems like we're off to a better start overall in terms of what you guys are seeing from customers, initial engagements on the NEC front. And then just a follow-up on the cash flow front -- on that front. It sounds like, I think you said $35 million of incremental inventory that came aboard with NEC. It sounds like you're going to be actively working that down as well then. So I'm kind of wondering how you're thinking about incremental cash flow coming out of the deal?
So David will take the cash flow.
From a cash flow perspective, we expect NEC will be positively impact cash in the near term, and by the near term I mean in the next couple of quarters, right? So we acquired over $50 million in ARR with only $12 million in accounts payable. So as that is collected and paid out, that should generate cash. Now we do expect a large working capital adjustment, which is disclosed in the 10-Q, but that will be a fourth quarter item. So net-net, we'll still be positive there. And then in the medium term, which I take to mean the first 18 months of ownership, we'll be able to generate -- the core business of -- the Pasolink business will generate modest cash or modestly positive cash flow, but then we have the inventory reduction that provides substantial upside to it as we work to reduce those inventory levels to -- our target is about 1/3 of what we currently got.
And just that $140 million run rate. I just want to clarify that, that is what you expect contribution from NEC over the next 4 quarters, $140 million ramping from a smaller number to a larger number as we exit that fourth quarter. Is that correct?
That's correct.
And if I could follow up, Dave, on the gross margins. It was a great quarter. It sounds like there was some software benefits in there. I think there's also some new product mix that you called out as well, 11 gigahertz. I know you've been working, you've got some routers and switches that have been factored into the mix. How should we think about gross margins going into the current March quarter? I know it tends to be volatile from quarter-to-quarter, but I assume the trajectory still continues to be on an upward basis, even though I guess we're going to have the first quarter of a full NEC contribution in March. How should we be thinking about gross margins?
So this quarter, it was a record quarter for gross margins for the core Aviat business. And again, that was largely attributable to software and favorable project mix. I wouldn't expect that level of margins to persist in the near term on the core. It does tend to be a little bit lumpy. But we remain confident in our previous guidance of 100 basis points improvement for the full fiscal year versus the fiscal '23 on the core business. So now with Pasolink, we do expect that to be somewhat dilutive to our margins in the near term. And I think if you model gross margins in total to be in the 34% to 37% range for the remainder of fiscal '24, that would be good.And then we expect to drive synergies thereafter, which will drive the Pasolink gross margins further north and mitigate any dilutionary effect that they have.
Lastly, if I could, Pete, just to follow up on your comments on North America. I just want to clarify, not to read into the softness year-over-year. You continue to have a big backlog, it sounds like, on public safety and other fronts related to ARPA. And if I could follow up on the BEAD commentary as well. We've seen some commentary from Calix and others talking about a little bit of a pause, not just related to ACAM, but just kind of digestion and application for those BEAD funds. I know that traditionally has not been a big customer base of yours in terms of wireless ISPs, but I'm wondering if you're seeing any impact or any slowdown whatsoever ahead of those BEAD awards starting to happen in mid to late 2024?
So first, we never thought BEAD was going to impact calendar year '24. So in our script, we basically said, we think BEAD is still on track. We really believe it was going to have an impact, say, 1 year from now. So that's part one. And then part two, I think rational economics are starting to prevail, right? The whole idea of BEAD is to connect the unconnected or underconnected Americans, and for certain deployments in less dense areas, suburbs and rural developments, wireless makes more sense. And -- so we think that the oversubscription to fiber is starting to rationalize, and we think that the opportunity for wireless will be improved.And what I would also talk a little bit more about is the 6 gigahertz frequency. It was -- that's been delayed from the summer of 2023. Now the FCC is saying that, that should happen on March 8, and we think that, when that comes in -- that unlicensed broadband service really comes in, it will pave the way for more like [ way ] backhaul, and we think that's going to have a positive effect on both RDOF and BEAD appropriations. That was maybe more than you bought in [indiscernible] in your question, Scott.
Our next question comes from the line of Erik Suppiger with JMP Securities.
Congrats. First off, can you explain why the Pasolink revenue ramps up? What are the dynamics that are at play that start off small and then pick up? And can you give us some context in terms of how we should anticipate the contribution in the March quarter?
So the reason we are focused on a ramp-up is because we want -- we're -- the business is near to us, and we want to make sure we set expectations and build into it. So it's not any seasonality or any customer dynamics. It's just the way we think. It's going to take us a little time to ramp up the factory, our order management system, our deliveries. So that's the way we want to deal with that. And then David, do you want to answer the range of -- for the next quarter's revenue?
Yes. I think the range for next quarter's revenue should be thought out in the mid-20s kind of a range. Like Pete said, there'll be a ramp-up here. And we're pretty good with that number, and we are going to do what we can to get some upside, but I think that's where you should be.
And Erik, just while we're on this, Scott asked about the ramp, you asked about the ramp. So let's get out the FY '25 revenue range, for modeling purposes ought to be $515 million to $520 million for FY '25. And just, for everybody who's on the call, we're on a July 1 through June 30 cycle.
The last question. You did talk about combining the products as your longer-term road map. How -- What is the time frame in terms of getting the products combined?
I would say that, in -- after 1 year or 2, in the third year of ownership, we can start to see the conversions of hardware. And we -- In the prepared remarks, we talked a lot about the software and the Pasolink customers are eager to migrate to the Aviat's network management software. So that's our first priority. And we would hope that 1 -- [ year 1 ], 1.5 years we will start to be able to deliver that software to the historical NEC customer base. And then in year -- post year 24 months, we can start to see the convergence of hardware.
Our next question comes from the line of Jaeson Schmidt with Lake Street.
I just want to circle back to the gross margin. I know you laid out 34% to 37%, which seems like a little bit better than that kind of 33% initial number. Just curious what are the dynamics driving that? Is it just feeling better about the mix, whether it's product or geography in the core Aviat business or the Pasolink business getting margins lifted quicker than expected? Any color there would be helpful.
Yes. So the 34% to 37% was a combined number, right? So it's going to be -- we're assuming that the Pasolink business is going to be around 30% for this fiscal year. And just doing the math, that would indicate that the core Aviat margins are going to be in the 37% range or so. So we feel pretty good about that. And then we've got a pretty solid synergy road map to improve our cost structure there and get the Pasolink margins moving north here in the not-too-distant future.
And then, Pete, I know in your prepared remarks, you talked about some potential revenue synergies, cross-selling opportunities. Those aren't baked into your targets, but can you just discuss some of the areas or geographies you're most excited about?
So we're most excited about software, and that would be every place other than in the U.S. It's particularly with the Tier 1 customers that came over from NEC to Aviat and [ needed ] -- So that would be part one. And then part two is, we are very excited about Indonesia. And the reason we're excited about Indonesia, and that was really, Smartfren was a representative. So we think that Indonesia is ripe for private networks. It's an industrialized nation that has lots of microwave, but there's -- the Indonesia telecom operators typically deliver the private network services, and this is what the Smartfren press release is about where we can go into Tier 1s in emerging economies and bring the Aviat private network offering and deliver to, say, mining, oil and gas, public safety customers where they had principally been riding on the carrier’s backbone, and the [ #1 ] geography for that kind of application is Indonesia.To sum up -- put it simply, we're most excited about software synergy sales and the region or the country we're most excited about is Indonesia.
And then just the last one for me, and I'll jump back into queue. The India rollout, do you still expect that to happen here in the March quarter and then ramp again in June?
I -- We were pretty confident that it will happen sometime between March 1 and June 30. So there's the quarterly timing on that. So that's what I would say, Jaeson. And I know that can drive a little bit of lumpiness between the March and the June quarter. The good news is we're confident we're engaged in the India customer base, and we're conservative with respect to our timing. So for modeling purposes, put it in the June quarter, but it could happen in the March quarter.
Our next question comes from the line of [ Dave Kang ] with B. Riley.
Going back to Indonesia. So once it gets going, I mean, how big can it become, like maybe 10%, maybe high single-digit?
High single-digits, definitely. 10%, we'll see, but we're not anticipating that at this point.
High single-digits is the right answer, I think, for now.
And then equally, on India, how big can they get?
We would say a…
[ Lower ] than Indonesia?
Yes, a little bit lower than Indonesia.
And then, what about margins from Indonesia and India as well? I mean, are they going to be below? I assume they're going to [ be low ] corporate average.
So look, India, we've said before, is below corporate average. But as we get volume, we think that we can take cost up. The Indonesia business is being driven by the Pasolink product, which is below corporate average. And so I would say for now, that's the way to think about it. But we've said that we would get the Pasolink margin and gross margins from 30% to 33%. And we've also said that when we get to that 33% level, we'll have another vantage point. And then we'll start talking about how far we can go beyond the 33% gross margin level.And that is -- the Indonesia business is principally Pasolink, and I think that's the best color we can give from our vantage point today. Ask the same question in a couple of quarters and hopefully, I'll be able to give you a more favorable answer.
And my last question is, can you just talk about pricing environment, any changes up or down?
Stable.
Our next question comes from the line of Tim Savageaux with Northland Capital Markets.
Congrats on closing the deal. Let's see where to begin here. The backlog commentary. And while I appreciate the growth metrics, we've got a few more questions on that, which is, I think you gave us at last fiscal year-end. Associated with that, 18% gross was a backlog of $289 million, given your book-to-bill commentary in the interim, I assume that's higher, but would love to get as much specifics as I can. I assume we're reasonably over $300 million, but do you have any color or commentary on that?
I think your math there back of the envelope is reasonable as far as the north of $300 million.
We don't have the math broken out in front of us, but it's pretty simple math.
And my simple math points to a pretty darn good book-to-bill coming out of all that as well, I'd say, comfortably over 1. But in that context, you seem to be -- and you typically see seasonal declines in revenues in Q1. Given your kind of implicit Pasolink guide, you seem to be guiding to that again. So that's just sort of typical carrier spending behavior in certain quarters, or what are you seeing in terms of typical seasonality, March down, June up? It sounds like India could help that, but…?
Yes. Just to clarify, you're talking about calendar Q1, our Q3, right?
That is correct.
Yes. I think -- we would agree with your statement, Tim, with that. We hope to do better, but we need to own the Pasolink business a little bit longer to understand the seasonality. And we're hopeful that shortening the cycle time, working the inventory down will lead to faster delivery of product, faster revenue ramps. I think where we're at -- right now, we would agree with your statement, and we hope to improve the business where we could say, well, that pattern will no longer hold. And I think that, that would be -- we'd have a vantage point for the fiscal year '25 to make that statement for -- make a different statement. But your statement for where we are now is most likely correct.
I'll take that given today. Well, I think we might be mixing up Aviat's stand-alone seasonality in March and Pasolink in June. But assuming maybe some degree of uptick in Pasolink revenues as you move into June, I mean, you look to be guiding the stand-alone business to pretty solid growth this year, right, 7%, 8%, something like that.
Yes.
And you look to be guiding it flat next year which is…
Well…
A little -- wait a minute, please, Pete -- which is a little bit [ dissonant ] with some of the bookings and backlog and commentary that we've seen. Now, that assumes that Pasolink gets to a full $140 million, and maybe that's not a good assumption. But there still seems to be a lot of it, and not flat, up 1% to 2%, I guess. And I'm not reading that kind of change in your business. So maybe we can delve into that a little bit deeper?
Yes. For -- We typically guide the next fiscal year in August. And from where we're at now, we want to be conservative. And I wouldn't read -- we came out with the backlog statements. We think the core is healthy. And what the analysts have said to me, if we don't give a number, you'll put the number together on our behalf. So you're right to give us a bit of a hard time on the FY '25 number. This is where we're comfortable. But as time goes on, I would expect us to do better. But that's the number we're comfortable with right now.
Yes. I don't know if that was a hard time, just doing a little math here. A couple more quick ones. So obviously, the gross margins were surprisingly strong, especially given the international mix. You cited a couple of factors, and you're also very strong -- it appeared to be in APAC. It might have been LatAm as well. Can you talk a little bit more about kind of what happened there in that region and how you're able to have high end of the range gross margins with that degree of international mix?
Yes. Like I said -- I think if you look at the region where the software was most beneficial, it was in APAC. And then also in the Americas, Pete mentioned the record store revenues in the first half. That also is margin accretive, as well as we had some favorable easing material input costs. So that provides a bit of a tailwind to us as well. So all those factors combined really kind of a confluence of events.But again, it could be a little bit lumpy, but -- so I think our full year guidance is solid.
And last one from me. You noted R&D up pretty sharply here in the quarter. I assume that's still stand-alone or does it include anything from NEC given when you closed it on the one hand? And on the other, when you talk about incremental spend in R&D, is it from that elevated baseline or some other baseline?
So the R&D does include 1 month worth of NEC additional costs that are contractually spelled out to them. And then, we were up on just an organic basis as well. That's a planned increase as we work to develop the product road map. So it was a little bit lower than we had anticipated in Q1, if you will. But I think we're on track for kind of our full year guidance there, and it's not overspending in any way. It's rationally thought out, and this is what we had planned.
But it sounds like maybe something a little over the Q1 '24 expense baseline…
Yes.
Would be relevant for your incremental guide than Q2 per se, since it's a stub is that fair [ enough ]?
That's fair. Very fair.
Thank you. I would now like to hand the call back over to CEO, Pete Smith, for any closing remarks.
Thanks, everyone, for joining. We look forward to updating you on our continued progress in about 90 days. Be safe. Talk soon.
Thank you for participating. This does conclude today's program, and you may now disconnect.